DaVita, a leading dialysis services provider, has agreed to one of the largest healthcare settlements of 2014. The Department of Justice announced that DaVita will pay $350 million to resolve allegations that the company violated the False Claims Act by paying kickbacks to induce physicians to refer patients to DaVita-owned dialysis centers to receive treatment for end-stage kidney disease.
According to the DOJ press release, between March 1, 2005 and February 1, 2014, “DaVita identified physicians or physician groups that had significant patient populations suffering renal disease and offered them lucrative opportunities to partner with DaVita by acquiring and/or selling an interest in dialysis clinics to which their patients would be referred for dialysis treatment.” DaVita also allegedly entered into non-compete agreements with physicians to prevent them from referring patients to other clinics.
Before the government got involved, the suit was initially filed by David Barbetta, who was previously employed by DaVita as a Senior Financial Analyst in DaVita’s Mergers and Acquisitions Department. The original complaint gets into detail about the kickbacks, alleging that DaVita induced physician referrals by:
- (1) Buying shares in dialysis centers owned by physicians for above-market rates;
- (2) Selling physicians shares in existing DaVita dialysis centers for below-market rates;
- (3) Giving physicians kickbacks masked as profits from joint ventures; and
- (4) Paying physicians to refrain from building competing dialysis centers.
Regarding the first point, HHS-OIG has provided commentary on the purchase of a physician practice in a position to make referrals by an entity that receives referrals from that practice. In a December 22, 1992 Opinion Letter, OIG cautioned that the purchase of a physician practice by a hospital “as a means to retain existing referrals or to attract new referrals . . . implicate[s] the anti-kickback statute because the remuneration paid for the practice can constitute illegal remuneration to induce the referral of business reimbursed by the Medicare or Medicaid programs.” The opinion notes: “to the extent that a payment exceeds the fair market value of the practice or the value of the services rendered, it can be inferred that the excess amount paid over fair market value is intended as payment for the referral of program-related business. “
According to the complaint, “[t]he prices DaVita pays for dialysis centers it buys, and similarly its charges for centers it sells, violate this restriction. An elementary feature of the marketplace is that participants try to sell their goods and services for as much as possible, and buy goods and services as cheaply as possible (i.e., Buy Low / Sell High).” But, the complaint states that “DaVita’s approach to dialysis center joint ventures turns this dynamic on its head. DaVita deliberately pays more than fair market value for dialysis centers and joint-venture shares it buys from physicians in a position to refer business to the centers, and regularly charges cut-rate, below market prices when it sells shares of dialysis centers to physicians.”
Much of the complaint goes through specific mechanisms DaVita uses to “game” its valuation projections. “When DaVita sells centers to physicians, it uses the algorithms that decrease the value of the centers, thus decreasing the purchase price to the physicians,” the complaint argues. “Conversely, when it buys centers from physicians, DaVita tends to use only the algorithms that increase the values of centers, thus increasing the price paid to the physicians.” They allege that the “manipulative application of these algorithms, as standard practice, leads to the occasional over-valuing of the centers DaVita buys, and the systematic undervaluing of the centers it sells.”
OIG does have an 8-step safe harbor that would exempt such investment interests from the anti-kickback statute. (42 CFR 1001.952 (a)(2)). Key to this case, the complaint alleges the following actions, which would cause the interests to be outside the specific safe harbor:
- Physicians who refer business to the joint venture own more than 40% of the entity. DaVita had a policy which stated that “DaVita should attempt to own at least 60% and have controlling rights” for any joint venture. The complaint alleges that some physician groups owned a greater portion than the safe harbor allowed. (Safe Harbor Step 1)
- The complaint alleges that physicians were generally only offered the opportunity to join in a joint venture with DaVita if they have referred patients to DaVita centers in the past, or are in a position to do so in the future. This would violate Step 3.
- Finally, when DaVita sold a portion of its interest in a center at below market price, or purchased a portion at above market price, the physicians ended up owning a higher percentage of the true value of the center than their relative capital contribution. Step 8 requires that profit distributions to physicians not be “directly proportional to the amount of the capital investment (including the fair market value of any pre-operational services rendered) of that investor.
The government synthesized the relator’s complaint into a three part allegation of a kickback scheme. First, DaVita would target physician groups with significant patient populations suffering from renal disease and then gather information as to whether that group was a “winning practice.” DOJ notes that DaVita considered one such practice was “winning” because the physicians were “young and in debt.” Second, DaVita would target that group with an opportunity to enter into a joint venture involving DaVita’s acquisition of an interest in dialysis clinics owned by the physicians, and/or DaVita’s sale of an interest in its dialysis clinics to the physicians. These deals allegedly were outside of fair market value. Third, DaVita would enter into non-compete agreements to bind the physician group from referring patients to competing dialysis clinics.
As part of the settlement, DaVita also agreed to a $39 million civil forfeiture based upon conduct related to two specific joint venture transactions entered into in Denver, Colorado. Additionally, DaVita has entered into a Corporate Integrity Agreement with the OIG which requires it “to unwind some of its business arrangements and restructure others, and includes the appointment of an Independent Monitor to prospectively review DaVita’s arrangements with nephrologists and other health care providers for compliance with the Anti-Kickback Statute.”
DaVita released an announcement following the settlement:
We are proud of our commitment to compliance over our 15-year history. We have worked incredibly hard to get things right and it is our belief there was no intentional wrongdoing.
We believe this settlement is the right thing for our teammates, partners and shareholders. It allows us to move forward with heightened clarity and transparency, both with regulators and our physician partners. As part of the settlement we will undo 11 joint venture transactions covering 26 of our 2,119 clinics.
DaVita Kidney Care will be subject to an independent monitor to oversee certain future joint ventures. The agreement also includes a repayment to the government and a provision requiring executive certification of quarterly and annual compliance reports.
View DaVita’s Corporate Integrity Agreement (page 53 for the responsibilities of the independent monitor).