The hospital entities of Sanford Health, Sanford Medical Center and the Sanford Clinic (collectively, Sanford) of Sioux Falls, South Dakota, have agreed to pay $20.25 million to resolve False Claims Act (FCA) allegations that they knowingly submitted false claims to federal health care programs, including Medicare, Medicaid and TRICARE, resulting from violations of the Anti-Kickback Statute and medically unnecessary spinal surgeries. The Anti-Kickback Statute prohibits offering, paying, soliciting or receiving remuneration to induce referrals of items or services covered by Medicare, Medicaid and other federally funded programs.

The lawsuit, captioned Bechtold v. Asfora, No. 4:16-cv-04115-LLP (D.S.D.), was brought by two Sanford surgeons, Carl Dustin Bechtold and Bryan Wellman, under the whistleblower or qui tam provision of the FCA, which allows private parties to bring suit on behalf of the government.  Whistleblowers are entitled to bring lawsuits on behalf of the government and may receive a percentage of any recovery won. In this case, the whistleblower physicians will receive $3.4 million of the settlement proceeds for their efforts in bringing this case to the attention of the government.

The 111-page complaint, which was originally filed under seal in August 2016, alleged that Sanford knew that one of its top neurosurgeons, Wilson Asfora, was improperly receiving kickbacks from his use of implantable devices, including bullet cages used for spinal fusion procedures and Samba Screws used to fuse the sacroiliac joint in the pelvis, provided by his physician owned distributorship (POD), Medical Designs, as well as other medical device companies. The two whistleblowers further alleged that Asfora was selling medical devices to Sanford for surgeries he performed, resulting in an unlawful economic incentive for him to use, and overuse, the devices on unwitting patients.

In July, the government filed a motion to intervene in the case, which was granted and unsealed by a federal judge one day later.

According to the complaint, Sanford and its executive team received numerous warnings from the physician whistleblowers and others about Asfora's alleged kickback scheme and was aware of the heightened compliance risks associated with PODs. Asfora's physician colleagues also repeatedly warned Sanford that Asfora was performing medically unnecessary procedures, such as spinal fusions, involving the devices in which he had a substantial financial interest to scores of Medicare and Medicaid patients. As alleged, Sanford repeatedly failed to take corrective measures, and the physicians had no choice but to bring their grave concerns to the federal government "as a last resort" by filing the whistleblower complaint and fully cooperating with the government's investigation.

The United States further alleged that, despite these repeated warnings, Sanford continued to employ Asfora, continued to allow him to profit from the devices he used in surgeries performed at Sanford, and continued to submit claims to federal health care programs for these surgeries, including procedures that were medically unnecessary. The suit also alleged that Sanford and Asfora billed Medicare and other federal programs for care that was never even provided.

Sanford announced that it was suspending the purchase of devices sold by Asfora's device companies and terminated Asfora from the hospital system in July.

As explained in the complaint, Asfora's devices are "physician preference devices," meaning "there are comparable devices on the market that are similarly indicated and can perform just as well or better …"  The complaint alleges that Asfora, the sole owner of Medical Designs, is the only spine surgeon in America who uses bullet cages and Samba Screws. No one else at Sanford or elsewhere uses the bullet cages, claim the plaintiffs, because "technology has advanced" and "in large part, has rendered the bullet cage obsolete."

PODs are described by the government as "physician-owned entities that derive revenue from selling, or arranging for the sale of, implantable medical devices ordered by their physician-owners for use in procedures the physician-owners perform on their patients at hospitals or ambulatory surgical centers." The structure of these complex business relationships continues to evolve, including physician-owned manufacturing companies and group purchasing organizations.  In recent years, PODs have been subjected to heightened regulatory scrutiny and oversight because of the potential for abuse, fraud, and conflicts of interest. More specifically, lack of transparency raises concerns about Department of Health and Human Services' ability to ensure that providers don't violate the anti-kickback statute, the Stark law governing physician self-referrals, patient safety and quality of care.

One of the primary criticisms of PODs is that ownership may affect physicians' clinical decision-making, such as influencing them to perform unnecessary surgeries or to choose a device in which they have a financial interest rather than another device that may be more appropriate for the patient. Thus, the future of PODs remains highly uncertain.

In conjunction with the civil settlement, the government entered into a corporate integrity agreement (CIA) with Sanford, requiring that Sanford maintain a compliance program, implement a risk management program, and hire an Independent review organization to review its Medicare and Medicaid claims. Moreover, the CIA also requires compliance-related certifications from the board of directors and key executives at Sanford, increasing individual accountability.

Sanford also agreed to cooperate with the Department of Justice in the prosecution its case against Asfora, Medical Designs, and several other medical device companies.

The settlement is believed to be one of the largest in the U.S. District Court for the District of South Dakota. Notably, Sanford paid the federal government $625,000 in 2014 to settle a prior whistleblower lawsuit over "consulting fees" paid to Asfora and another surgeon from May 2010 through April 2011 as kickbacks to encourage and induce the use of Asfora's bullet cages.

The claims resolved by the settlement are allegations only, and there has been no determination of liability. Sanford denies any liability or wrongdoing in connection with the settlement.

It is a South Dakota case. But, it does illustrate how health care providers have to be careful as to what they do and how they do it if they wish to avoid incurring large, negative, financial and other legal consequences for their actions.

—Rachel E. Lusk, an associate at the firm who focuses on health law and health care litigation, assisted with preparing this article.

Vasilios J. Kalogredis is chairman of Lamb McErlane's health law department. He represents many medical and dental groups and thousands of individual physicians and dentists.