For many years, healthcare providers – particularly children’s hospitals – took comfort in a belief held widely throughout the healthcare industry that the Stark Law did not apply to Medicaid. That belief has now been challenged by several district court cases involving alleged False Claims Act violations, most recently in U.S. v. All Children’s Health System.

This case was recently settled for $7 million dollars, but not before the U.S. District Court for the Middle District of Florida issued an opinion containing some alarming statements regarding the applicability of the Stark Law to Medicaid. This same District Court had already issued an earlier opinion in the case of U.S. v. Halifax Hospital Medical Center that dealt with similar issues, but appeared to leave the door open to further fact-finding by indicating that the Stark/ Medicaid allegations were merely sufficient to withstand the hospital’s motion to dismiss. However, in the All Children’s opinion, the court provided additional analysis regarding the Stark/ Medicaid issue and appeared to take a firmer position than the position taken in the Halifax opinion.

The All Children’s case involved an alleged False Claims Act violation, which the qui tam relator argued was caused by the submission of Medicaid claims rendered false due to All Children’s violation of the Stark Law. The underlying Stark Law violation was alleged to have occurred as a result of All Children’s compensation relationships with its employed physicians, which the qui tam relator claimed were in excess of fair market value. All Children’s submitted a motion to dismiss, which argued that a False Claims Act violation could not be predicated on Stark Law violations if the only claims at issue were Medicaid claims. In support of this argument, All Children’s cited many of the same source materials that have been historically relied on by others in the health care industry when taking the position that the Stark Law does not apply to Medicaid, including the actual text of the Stark Law, its implementing regulations, and commentary published by the Centers for Medicare & Medicaid Services (“CMS”).

The court denied All Children’s motion to dismiss and, in doing so, appeared to wholly reject the argument that the Stark Law does not apply to Medicaid.  The court held that even though the Stark Law and its regulations only reference Medicare claims, the reach of the Stark Law is extended to Medicaid claims through Section 1903(s) of the Social Security Act, which prohibits the federal government from making federal financial participation (“FFP”) payments to state Medicaid programs for claims that would have been prohibited under Medicare due to the Stark Law.

Even though Section 1903(s) only appears on its face to apply to the FFP payment obligation of the federal government, the court held that a provider’s act of “certifying compliance with the Stark Amendment to ensure that CMS pays FFP for Medicaid claims that violate the Stark [Law] would be a violation of the False Claims Act in the same manner that certifying compliance for full reimbursement under Medicare would be.”

In light of this opinion, it has become clear that the application of Stark to Medicaid is no longer just a theoretical question for health care providers to ponder, particularly for providers who are subject to the jurisdiction of the Middle District of Florida.

If they have not already done so, children’s hospitals and other providers with significant Medicaid patient populations would be wise to structure their financial relationships with referring physicians to comply with applicable exceptions to the Stark Law.

In addition, these providers will need to carefully evaluate any potential Stark violations that may arise in the future with respect to these relationships. It appears CMS may not currently be willing to accept disclosures involving Medicaid claims under its Self-Referral Disclosure Protocol, which may make it difficult for providers wanting to resolve these issues through a self-disclosure process.

It remains to be seen whether the current trend of case law applying the Stark Law to Medicaid will continue, or whether CMS will step up and provide additional guidance on the issue. What is clear, however, is that providers need to reassess the conventional belief that Stark does not apply to Medicaid in light of these recent developments, and make necessary adjustments to their financial relationships with physicians as a result.