51 F.3d 1390 (9th Cir. 1995), 93-55351, Hanlester Network v. Shalala

Docket Nº:93-55351.
Citation:51 F.3d 1390
Party Name:The HANLESTER NETWORK, et al., Plaintiffs-Appellants, v. Donna E. SHALALA, Secretary of the Department of Health and Human Services, Defendant-Appellee.
Case Date:April 06, 1995
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

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51 F.3d 1390 (9th Cir. 1995)

The HANLESTER NETWORK, et al., Plaintiffs-Appellants,


Donna E. SHALALA, Secretary of the Department of Health and

Human Services, Defendant-Appellee.

No. 93-55351.

United States Court of Appeals, Ninth Circuit

April 6, 1995

Argued and Submitted July 11, 1994.

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Patric Hooper, W. Bradley Tully, Hooper, Lundy & Bookman, Inc., Los Angeles, CA, for all plaintiffs-appellants other than plaintiff-appellant

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Melvin Huntsinger, M.D.; Martin Krawiec, Fullerton, CA, for plaintiff-appellant Melvin Huntsinger, M.D.

Larry J. Goldberg and John J. Meyer, Inspector Gen. Div., Dept. of Health and Human Services, Washington, DC, for defendant-appellee.

Appeal from the United States District Court for the Central District of California.

Before: POOLE and REINHARDT, Circuit Judges, and TANNER, [*] District Judge.

TANNER, Senior District Judge:

Plaintiffs/appellants appeal the district court's grant of summary judgment in favor of the Secretary, and denial of plaintiffs/appellants motion for summary judgment.

The issues presented are whether appellants violated the provisions of the Medicare-Medicaid anti-kickback statute by (1) offering or paying remuneration to physician limited partners to induce the referral of program-related business to limited partnership laboratories, or (2) soliciting or receiving remuneration "in return for" referrals by virtue of their management agreement with Smithkline BioScience Laboratories (SKBL), and whether the Secretary of the Department of Health and Human Services (Secretary) erred in excluding appellants from Medicare and Medicaid participation for various periods due to alleged violations of the Medicare/Medicaid anti-kickback statute, 42 U.S.C. Sec. 1320a-7b(b).

In order to resolve these issues, we must determine (1) whether the Secretary properly interpreted the Medicare/Medicaid anti-kickback statute in the context of health care joint ventures, (2) whether the statute is unconstitutionally vague as applied to the facts of this case, and (3) whether appellants knowingly and willfully committed the acts which are alleged to violate the anti-kickback statute. We have jurisdiction pursuant to 42 U.S.C. Sec. 1320a-7(f)(1) and 405(g). We AFFIRM in part and REVERSE in part.


In 1987, The Hanlester Network (Hanlester), a California general partnership, was formed. The original general partners in Hanlester were the Hanlester Corporation, James A. Padova, M.D., Inc., a California medical corporation, Gene Tasha, and Ned Welsh. 1 The Hanlester Corporation owned the majority interest in the Hanlester Network prior to 1989.

Kevin Lewand served as President of Hanlester until January 1989, while Tasha served as Vice President of Operations, Patricia Hitchcock served as Hanlester's Vice President of Marketing until November 1988, and Welsh served as Vice President, Business Development, and a general partner at Hanlester. Welsh ceased being a general partner or executive in Hanlester in the summer of 1987. In January 1989, the Hanlester Corporation sold its interest in the Hanlester Network to Tasha, and was renamed the Keorle Corporation.

On April 9, 1987, Hanlester and SKBL entered into a master laboratory service agreement. In that agreement, SKBL agreed to provide laboratory management services to all joint venture laboratories in which Hanlester had an ownership interest. 2 Hanlester had exclusive authority to make all management decisions for Placer, PPCL, and Omni.

Between March 1987 and March 1988, Hanlester issued private placement memoranda offering limited partnership shares in PPCL, Placer, and Omni. The purpose of the private placement memoranda was to offer limited partnership shares in joint venture laboratories. Hanlester marketed limited partnership shares, and offered investors

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partnership shares in Omni, Placer, and PPCL for a minimum three shares at $500 each. On July 27, 1987, SKBL entered into a laboratory management agreement with PPCL. The agreement required PPCL to provide the services of a licensed Medical Director, and to pay SKBL a monthly management fee of $15,000 or 80% of all net cash receipts, whichever was greater. 3 Hanlester and SKBL entered into a laboratory support services agreement in which Hanlester would set up and service client accounts for PPCL.

Subsequently, SKBL executed laboratory management agreements with the other Hanlester laboratories under which SKBL agreed to supervise their administrative and operational activities; provide and compensate all staff to operate them; provide and maintain all lab equipment not already provided by the labs; and to conduct all billing and collection activities for them. In accordance with these agreements, 85 to 90% of tests physicians ordered from the Hanlester labs were performed at SKBL facilities in California.

Hanlester was notified by the Inspector General (I.G.) of the Department of Health and Human Services (DHHS) in December 1989 that he had determined that the Hanlester respondents (hereafter referred to as appellants) had violated Sec. 1128B(b)(2) of the Social Security Act (the Act) by offering and paying remuneration to physician-investors to induce them to refer laboratory tests to the three Hanlester laboratories. The Hanlester appellants were also told they had violated Sec. 1128B(b)(1) of the Act by soliciting and receiving payments from SKBL in return for referrals of lab tests, and that it would be proposed that all of the appellants be excluded from the Medicare and state health care programs under Sec. 1128(b)(7) for varying periods of time. 4 The Hanlester appellants requested a hearing on the proposed exclusions before an Administrative Law Judge (ALJ). 5 An evidentiary hearing was conducted and the ALJ issued his initial decision March 1, 1991. The ALJ concluded that appellants Hanlester, PPCL, Placer, and Omni violated Sec. 1128B(b)(2) through the actions of their agent, Patricia Hitchcock, while Lewand, Tasha, Welsh, Huntsinger and Keorle had not. The ALJ also concluded that none of the appellants knowingly and willfully solicited or received any remuneration for referring program-related business in violation of Sec. 1128B(b)(1) of the Act. The ALJ declined to impose permissive exclusions from Medicare or Medicaid based on the violations. The I.G. then appealed to an Appellate Panel of the Departmental Appeals Board (DAB), alleging error in nine of the ALJ's 227 findings and conclusions. On September 18, 1991, the DAB reversed all findings excepted to by the I.G., remanded the matter to the ALJ for further proceedings consistent with its determination concerning the applicable legal standard, and instructed the ALJ as to the factors to consider in determining whether an exclusion ought to be imposed.

In its March 1992 Decision on Remand, the ALJ found that all nine appellants had violated Sec. 1128B(b)(2) of the Social Security Act by knowingly and willfully offering or paying remuneration to physicians to induce them to refer program-related business. The ALJ also found that all appellants except Welsh and Huntsinger violated Sec. 1128B(b)(1) by knowingly and willfully soliciting or receiving remuneration in return for referring program-related business. The ALJ further concluded that permissive exclusions under Sec. 1128(b)(7) were necessary for some, but not all appellants. 6

In the DAB's July 1992 Final Decision, the DAB affirmed the ALJ's findings and conclusions with respect to the violations by appellants, but vacated his decision not to impose exclusions on all appellants. Hanlester appealed

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to the district court and moved for summary judgment, and the Secretary cross-claimed for summary judgment. The district court granted the Secretary's motion for summary judgment, and denied appellants' motion for summary judgment. Appellants timely appealed.

I. Standard of Review

We review the decision of the district court affirming the Secretary's final decision de novo. Gamer v. Secretary of Health and Human Services, 815 F.2d 1275, 1278 (9th Cir.1987). Summary judgment is appropriate if, viewing the evidence in the light most favorable to the non-moving party, there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). We must affirm if the Secretary correctly applied the law, and the Secretary's findings are supported by substantial evidence. Brawner v. Secretary of Health and Human Services, 839 F.2d 432, 433 (9th Cir.1988). In reviewing the evidence, this court must examine the administrative record as a whole. Davis v. Heckler, 868 F.2d 323, 326 (9th Cir.1989).

II. Analysis

This is the first instance in which physician self-referral joint ventures have been challenged under the Act, and in which the Act has been applied to arrangements other than kickbacks, bribes, or rebates, as a basis for excluding persons from participation in Medicare/Medicaid programs.

Nothing in the language of the statute itself prohibits joint venture arrangements. We must, therefore, look to the legislative history, the Act's purpose and context to determine whether such arrangements violate the statute.

The Statute

Congress, concerned with escalating fraud and abuse in the Medicare-Medicaid system, amended the misdemeanor anti-kickback statute in 1977 to strengthen the government's ability to prosecute and punish fraud...

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