Indicting of Lawyers in a Medicare Kickback Case

A MAJOR FEDERAL prosecution in Kansas involving alleged kickbacks paid by hospitals to referring physicians has taken an unusual turn that has both criminal defense lawyers and health lawyers across the country paying very close attention. The U.S. Attorney's Office in Wichita has obtained indictments not only of the hospital executives and physicians allegedly involved in the kickback scheme, but also of two local attorneys who represented the hospitals. Three other health care attorneys have been named as unindicted co-conspirators.

Background

The long-running investigation stems from business arrangements between the Blue Valley Medical Group, operated by two osteopathic physicians, who were brothers, Ronald and Robert LaHue, and five hospitals in Missouri and Kansas. Blue Valley specialized in providing medical services to patients at numerous nursing homes and, when the need arose, referred those patients to specific hospitals for inpatient and outpatient services.

The five hospitals involved entered into agreements with Blue Valley ostensibly requiring the LaHues to provide "consulting" services. According to the government, however, the LaHues provided no such services, and the payments called for under these agreements were merely kickbacks to the LaHues in return for their referral of patients to the hospitals. According to the indictment, the arrangements commenced in 1984 and continued until 1995, and payments by the five hospitals to the LaHues during that period totaled nearly $2.2 million.

Baptist Medical Center, in Kansas City, Mo., apparently had the most extensive business arrangements with the LaHues. Baptist is alleged not only to have made sham consulting agreements over the years to pay the LaHues for referrals, but it agreed to refer specimens for testing to the LaHue-owned Johnson County Medical Laboratories and then split laboratory fees with the LaHues.

Baptist also allegedly deployed one of its administrators and several of its own employees to work at the laboratories, eventually at no cost to the LaHues; extended a $143,000 line of credit to the LaHues; forgave $65,000 owed by them to Baptist from the laboratory fee-splitting arrangements; and eventually bought the LaHues' interests in the Johnson County Medical Laboratories, as well as White's Medical Laboratories, which was owned by Robert LaHue. All of this, according to the indictment, constituted remuneration for maintaining the flow of nursing home patients from the LaHues' practice to Baptist.

The government began its investigation of these arrangements in 1992. In September 1997, Baptist reached a record civil settlement with the government by which Baptist agreed to pay $17.5 million in fines to settle its investigation. The government claimed that among other things, Baptist had paid the LaHues about $1.4 million in kickbacks in return for referrals of patients worth $42 million in Medicare and Medicaid payments to Baptist.

In July 1996, another hospital, Bethany Medical Center in Kansas City, Kans., had settled its own investigation by paying $1.2 million in connection with its consulting services agreements with the LaHues. As part of these settlements, both hospitals agreed to cooperate fully with the government's ongoing investigation. As of this writing, the three remaining hospitals involved in these arrangements have not settled with the government.

The administrator Baptist had provided to Blue Valley Medical Group, and who had been responsible for approaching hospitals to negotiate the referral arrangements in question, earlier pleaded guilty to soliciting a kickback from another facility, Liberty Hospital, which refused to become involved in the arrangement. The administrator served a 5-month prison sentence in a federal penitentiary.

The criminal case against the LaHues began in June 1997 when a federal grand jury returned a 45-page, 63-count indictment against them.¹ The indictment contained seven counts of bribery, 53 counts related to money laundering and one count of conspiring to defraud the United States of more than $2 million, the total amount allegedly paid to the LaHues by the five hospitals. The indictment also contained one count of conspiring to file false Medicare and Medicaid claims, with the government alleging that physician visits to nursing home patients that had been billed to Medicare and Medicaid, were actually provided by licensed physician assistants, or individuals with no medical licensure at all.

Finally, Dr. Robert LaHue was charged with one count of witness-tampering for allegedly threatening a physician assistant who objected to the use of unlicensed unsupervised personnel. The U.S. Attorney obtained an order freezing some $287,000 of Dr. Robert LaHue's assets, based on the money-laundering counts. Only the LaHues were named in the initial indictment.

The Indictment Unravels

This first indictment began to unravel in January when U.S. District Court Judge John Lungstrum ruled that the restraining order would be lifted because there was no evidence that the frozen assets of Dr. Robert LaHue were in any way tied to the money that had allegedly been laundered. At the government's request, Judge Lungstrum then dismissed all 52 of the money-laundering counts.

Two months later, in March, Judge Lungstrum proceeded to dismiss the seven bribery counts, holding that in order to violate the federal program bribery statute cited in the indictment, 18 USC Sec.666, a person or institution has to have been the direct recipient of a federal benefit of $10,000 or more a year. He held that this statute made patients, rather than providers such as the LaHues, the beneficiaries of the federal benefits covered (Medicare Part B). As such, he concluded that the government had used the wrong statute.

When the government moved for reconsideration of the decision to dismiss the bribery counts, Judge Lungstrum denied that motion as well, stating that the government could have proceeded under the Medicare anti-kickback law, 42 USC Sec.1320a-7b, which prohibits any form of remuneration to induce the referral of Medicare or Medicaid patients. The government then filed an appeal of the dismissal of the bribery counts with the Tenth Circuit Court of Appeals. That appeal is likely to be heard this fall.

Rather than await the results of the appeal, however, the government, in May, obtained a new 38-page indictment against the LaHues under the already mentioned Medicare anti-kickback law.² Instead of bribery, the new indictment contained seven counts of soliciting kickbacks from hospitals in return for referring Medicare patients there for services, one count each of conspiring to defraud the United States of $2 million and to file false claims and the one count of witness-tampering against Robert LaHue. The LaHues' attorneys countered by moving to consolidate the new charges with the remaining charges from the earlier indictment.

Then in July, the grand jury returned a 54-page superceding indictment against the LaHues that added five more individuals as defendants.³ Three executives (including a former president) of Baptist Medical Center⁴ and of its corporate parent, Health Midwest, together with two lawyers, Ruth Lehr and Mark Thompson, who had represented Baptist and Health Midwest, were accused of conspiring to offer and pay bribes to the LaHues. Lehr and Thompson had earlier been compelled to testify before the grand jury despite their assertion of the attorney-client privilege and work-product doctrine.⁵

The indictment accuses attorney Lehr, a solo practitioner who represented Baptist as far back as 1984, of conspiring with the co-defendant Baptist executives to cause Baptist and other hospitals to pay bribes and other remuneration to the LaHues for referring patients by: . . . [creating] a sham "consulting agreement" for St. Joseph's Hospital in Wichita, Kansas, to conceal the fact that St. Joseph Hospital would be paying for patient referrals. Thereafter [the LaHues] and others would use this same sham "consulting agreement" to establish similar relationships with other hospitals.⁶

Lehr allegedly also modified a 1989 proposal to St. Joseph's "to eliminate express references to patient referrals, for the purpose of concealing the fact that the hospital would be paying for patient referrals."⁷

The indictment alleges that, in 1986, Lehr: . . . discussed [with the Baptist executives] new ways to structure relations between Baptist Medical Center and [the LaHues] which would assure the continued referral of nursing home patients to Baptist Medical Center, and which would conceal the fact that Baptist Medical Center was paying [the LaHues] for the referral of patients.⁸

The indictment cites a 1989 letter sent by Lehr to two of the Baptist executives whom the government alleges provided advice to the LaHues on "how to draft proposals for other hospitals which would conceal the fact that the hospitals were paying [the LaHues] for the referral of patients."⁹ The indictment quotes from Ms. Lehr's letter, in part:

The proposal has been changed significantly from the form prepared earlier by Tom, although the substance is much the same . . .

With respect to the general fraud and abuse considerations, you will note that this proposal makes no reference to nursing home patient referrals or the potential for such referrals. In fact, it contains a provision disclaiming any intent to create a referral system.

It is absolutely essential that we adopt . . . referral neutral language in describing the proposal . . . [I]t is absolutely essential that there be no documentation of any intent to refer patients for services or items for which Medicare or Medicaid might pay.¹⁰

As for attorney Thompson, a member of a local law firm, the indictment alleges that he: . . . wrote a letter to another attorney, and copied the letter to [Baptist's President], in which he discussed services [the LaHues] were already providing their nursing home patients "which could be utilized to justify compensation from the Medical Center to the Medical Group."¹¹

Thompson is also accused of drafting an employment agreement between Baptist and the LaHues in 1992¹² and of drafting another agreement in 1994 whereby Baptist would forgive certain indebtedness of the LaHues in exchange for "charity care" the LaHues allegedly were already giving certain nursing home patients.¹³ Thompson is further implicated in developing proposals for Baptist to buy Johnson County Medical Labs "while still maintaining a stream of laboratory income to Blue Valley Medical Group"¹⁴ and "in developing a mechanism whereby Baptist Medical Center purchased the assets and assumed a lease of White's Medical Laboratory."¹⁵

'Nothing in Writing'

The indictment goes on to allege that, in 1992, Thompson informed Baptist that its relationship with Blue Valley Medical Group needed to be radically restructured, that the terms of the restructuring should be arrived at in face-to-face meetings, and "that nothing in writing should be exchanged by the parties until the terms of restructuring have been decided."¹⁶ Soon after, Thompson and an unidentified individual (presumably another attorney for Baptist) allegedly instructed Baptist's President and others at Baptist "to use attorneys to make as many communications privileged as possible concerning [the LaHues]."¹⁷

Both Lehr and Thompson are accused of:

• ...facilitating the offer and payment of monetary bribes and other remuneration by crafting sham agreements to conceal the fact that Baptist Medical Center was paying for patient referrals . . .¹⁸
• ...[preparing] contracts, legal analyses, and other documents designed to fraudulently conceal that the monetary bribes and other remuneration were being paid to [the LaHues] for the purpose of obtaining the referral of patients and to aid their co-conspirators in avoiding regulatory scrutiny.¹⁹
• concealing "that payments were being made to induce patient referrals by proposing, creating and entering into sham 'consulting agreements' which intentionally omitted language indicating that [the LaHues] would refer patients to [Baptist], thereby making it appear that [Baptist] paid [the LaHues] for performing certain specified services when in fact, the services were not provided and the hospital did not require performance."²⁰

The indictment also alleges that the two attorneys had a discussion in 1991 in which Lehr allegedly informed Thompson that an agreement between Baptist and the LaHues' was a "clean-up deal," that the LaHues' motive when they were at another hospital was to "sell old folk referrals," that Ms. Lehr had "stopped Baptist from purchasing Blue Valley Medical Group because the practice was not there and 'they were scum'" and that she "did not know what they did for their money."²¹ Neither attorney is implicated in the false claims or witness-tampering counts.

A trial date has been set for January 1999, but that timetable is likely to be further delayed. This month, the U.S. Attorney's office opened a new offensive by moving to disqualify the LaHues' longtime defense attorneys on the grounds of three potential conflicts of interest: that the lawyers will become "unsworn witnesses" at the trial and may have to be called by the defense as witnesses to certain contract negotiations, conferences and written communications involving the LaHues and the indicted Baptist executives; that Baptist is paying for the legal expenses of the three indicted Baptist executives and the two indicted lawyers; and that the defendants may have entered into joint defense agreements.

The government has proposed allowing the LaHues' defense lawyers to continue to counsel them outside the courtroom but not as trial counsel.

In its motion papers, the government also identified several unindicted co-conspirators, including Baptist's director of medical staff development, and three more lawyers: the vice president for legal affairs at Baptist's corporate parent, Health Midwest, as well as two independent health lawyers, one of whom is himself a former United States Attorney for another district.

Because of the extraordinarily broad wording of the anti-kickback law, the government appears to have a credible case against the LaHues and the indicted Baptist executives based on the facts disclosed thus far. The indictment of the two attorneys may be a strategic move by the government to blunt the Baptist executives' likely defense that they acted in reliance on advice from their outside counsel. Whether the government is able to prove beyond a reasonable doubt that the indicted attorneys participated in the conspiracy is another question. According to Larry McCormick, special agent in charge of the FBI's Kansas City Division:

The attorneys were the people who performed the legal services for [the hospitals] and were involved in drawing up the agreements with the LaHue brothers. Therefore, they were chaged as part of the scheme.²²

One of the best-known fraud prosecutors, Assistant U.S. Attorney James Sheehan in Philadelphia, has been quoted in support of the view that attorneys may be prosecuted for their involvement in fraud by providers:

There are certain situations in which the object of the conspiracy cannot be accomplished without the assistance of a lawyer. So, when that occurs, where the lawyer is a conscious and active participant in the scheme, the lawyer should not enjoy protection not available to the other participants.²³

Criminal defense lawyers are justifiably concerned over this case, which they consider to be the latest government assault on the confidentiality of the attorney-client relationship. Health care lawyers, who are routinely called on to help structure business arrangements and to draft documents compliant with all of the fraud and abuse laws, are watching this case with great interest to see if it is an aberration, or if the government is planning to expand the range of individuals it is targeting in its all-out war on health care fraud. Where formerly their liability exposure may have been limited to professional malpractice, they now have to be concerned about potential criminal liability as well.

The stage is set for a protracted, high-stakes battle.

Francis J. Serbaroli is a partner at Cadwalader, Wickersham & Taft.

1. United States v. Robert C. LaHue et ano., Case No. 97-20031-01-JWL, U.S. District Court, District of Kansas, Indictment filed June 11, 1997.
2. United States v. Robert C. LaHue et ano., Case No. 98-20030-01-JWL, U.S. District Court, District of Kansas, Indictment filed May 7, 1998.
3. United States v. Dan Anderson et. al., Case No. 98-20030-JWL, U.S. District Court, District of Kansas, Superceding Indictment filed July 15, 1998. (This superseding indictment is referred to as the "indictment").
4. The Baptist executives.
5. That 17-month saga is itself a case study in the crime-fraud exception to assertions of the attorney-client privilege and the work-product doctrine. See, In re: Grand Jury Subpoenas, Jane Roe and John Doe. Intervenor v. United States, 144 F3d 653 (Ct. App. 10th Cir., May 15, 1998).
6. Indictment at p. 15.
7. Id. at p. 32.
8. Id. at p. 25.
9. Id. at p. 29.
10. Id. at p. 30.
11. Id. at p. 21.
12. Id. at p. 25.
13. Id. at p. 26.
14. Id. at p. 27-28.
15. Id. at p. 28.
16. Id. at p. 31.
17. Id.
18. Id. at p. 2.
19. Id. at p. 10.
20. Id. at p. 17-18.
21. Id. at p. 30.
22. 2 BNA Health Care Fraud Report, No. 15, July 29, 1998, p. 563.
23. Quoted in "Counsel or Co-conspirator?" Modern Health Care, July 27, 1998, p. 14.

This article is reprinted with permission from the September 30th issue of the New York Law Journal © 1998 NLP IP Company.