False Claims Act lawsuits often hinge on arrangements between healthcare providers and others which implicate the federal Anti-Kickback Statute (“AKS”) or Stark Law (or both laws). While the two laws overlap in some respects and both seek to minimize the noxious effects that financial incentives have on medical decision-making, they also differ in many respects.

Most importantly, for purposes of the False Claims Act, the Department of Justice (“DOJ”) has exhibited a longstanding interest in pursuing whistleblower cases which involve violations of the AKS or Stark Law. Consistent with the public policy underpinnings of the AKS and Stark Law, the DOJ recognizes that the financial relationships prohibited by these laws tend to improperly inject financial benefits into decisions impacting patient care. Such arrangements may result in overutilization of healthcare services and products and poor outcomes for patients. Improper inducements and financial relationships can also create a less-than-level playing field among participants in the market. Improper financial arrangements can provide a competitive advantage to those in the healthcare industry.

The Anti-Kickback Statute

The Federal Anti-Kickback Statute, codified at 42 U.S.C. § 1320a-7b(b), applies to all individuals and companies. The law makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive anything of value (not just money) in order to induce or reward referrals or the generation of business paid for by federal healthcare programs. A federal healthcare claim tainted by a violation of the AKS is, by definition, a false claim for purposes of the False Claims Act. 42 U.S.C. § 1320a-7b(g). While there are certain “safe harbors” to the AKS, the law generally bars the offer or receipt of remuneration for referrals of healthcare services or products paid for by the federal government.

The Stark Law

The Stark Law, codified at 42 U.S.C. 1395nn, prohibits physicians from referring Medicare patients for designated health services to an entity in which the doctor (or an immediate family member) has a financial interest, subject to certain exceptions. The entity receiving a referral is prohibited from submitting (or causing the submission of) a claim if the referral is tainted by a Stark Law violation.

Unlike the Anti-Kickback Statute, conduct need not be “knowing and willful,” and thus the Stark Law provides for strict liability. Further, while the Anti-Kickback statute essentially covers all federally funded healthcare services and products, the Stark Law only applies to claims paid by Medicare and only for certain services (called “designated health services”), which are defined by regulation. 42 CFR § 411.351.

Common Arrangements that May Run Afoul of the Anti-Kickback Statute or Stark Law

The healthcare industry has given rise to a great number of arrangements which may violate the AKS or Stark Law. Decades ago illegal arrangements tended to be in the crude form of money changing hands explicitly in exchange for healthcare referrals. Today parties typically take steps to conceal the true and illicit nature of the relationship. Of course, an attempt to disguise an arrangement that violates these laws does not make it legal. To the contrary, an attempt to conceal the illegality of a given scheme may show that the parties are aware of (and concerned about) the illegality of their conduct.

The following is a nonexhaustive list of arrangements which may be run afoul of the Anti-Kickback Statute or Stark Law along with illustrative examples of such arrangements.

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    Consulting and Speaking fees: Physicians or others in a position to make referrals for healthcare services may be paid by the entity seeking referrals for consulting or speaking services. The individual may be given excessive compensation or paid for work of marginal value in an attempt to reward past referrals or incentivize future referrals from the individual.

    • Example: A medical device company pays physicians to sit on an advisory board. The advisory board does little valuable work and the members tend to be those that serve as robust referral sources for the company.
    • Example: A pharmaceutical company pays physicians to be a part of its speaker program. The speaker events are of negligible utility for the company except to the extent that they provide an opportunity to pay referring doctors for providing speaker services.
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    Gifts of All Sorts: Pharmaceutical companies and other healthcare industry members may provide gifts to physicians or others. This may range from pricy meals to sporting event tickets to free or discounted vacations.

    • Example: A pharmaceutical company routinely invites physicians to dinners at high-end steakhouses or sushi restaurants. While the dinners are nominally to provide a venue for the exchange of clinical information, for example to discuss a new drug, the presentations are cursory, at best. Food and drink are the centerpiece of the evening.
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    Discounts on Rent, Products, and Services: Entities seeking referrals may provide physicians or other referral sources discounted (or even free) rent, products (e.g., electronic medical record software), or services (e.g., consulting or staffing services) in order to induce or reward referrals.

    • Example: A hospital owns real estate and offers to rent space to a referring physician at below fair market value.
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    Research Grants and Similar Clinical Opportunities: A company may invite a healthcare provider to participate in a number of lucrative opportunities related to research or similar clinical endeavors in order to incentivize referrals.

    • Example: A genetic testing lab nominally pays referring physicians for clinical data that the lab claims it will use in a scientific study. Rather than actually using the data for a bona fide scientific use, the arrangement is used compensate physicians for their referrals.
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    Financial Investments: When a referral source enters into an equity or other investment relationship with an entity to which they may refer, the arrangement may violate the law. In the more egregious circumstances, the financial interest may be provided below fair market value.

    • Example: A compounding pharmacy may offer equity interests in its business to physicians that are actual or potential referral sources. The pharmacy pays each physician, for example, $40,000 in dividends each year, which is disproportionate to the price of their equity stake which cost each physician just $10,000 (i.e., the equity was sold at below fair market value).
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    Management Fees and MSOs: Physicians may be paid remuneration related to alleged “management” services provided to an entity to which he or she refers. The fees may be provided not just directly but indirectly via a “management service organization” (“MSO”). The MSO is – at least nominally – created to provide management and other administrative services to a pharmacy, laboratory, or other healthcare entity for a fee. Yet, MSOs involving physicians as investors or managers may be used to mask illegal arrangements.

    In such cases the MSO physician refers patients to the pharmacy or other entity and that entity pays the MSO a “management fee,” although the MSO performs little to no legitimate managerial services. The physician is then paid from the management fee via his or her financial interest in or nominal role at the MSO. The flawed idea is that by adding an additional link in the remuneration chain and disguising the referral fee as a “management fee” regulators may be none the wiser. Such a simple contrivance is unlikely to fool federal investigators and prosecutors.

    • Example: Several physicians become part of an MSO which is contracted and affiliated with a toxicology lab to which the physicians refer patients. Through the MSO, the physicians are paid a fee for purportedly managing the billing of the lab and related administrative services. The “management” fee is, however, no more than a method to reward the physicians for referrals to the lab.
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    Independent Contractor Sales Forces: The federal government has made clear that it is an illegal kickback for healthcare companies to pay independent contractor (“1099”) salespeople on a per referral basis, at least to the extent that the company receives federal healthcare program referrals. Despite the government’s warnings, it remains remarkably common for pharmacies, diagnostic companies, pharmaceutical companies, and others to pay independent contactors commissions based on the referral volume they send to the company.

    • Example: A genetic testing lab pays an independent contractor sales company to market its services to medical offices and obtain referrals for the lab. The lab is paid on a commission basis for each referral it sends to the lab.
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    Copay Waivers and Other Forms of Patient Assistance: In recent years, the federal government has placed within its crosshairs entities that waive patient copays or otherwise take steps to reduce a patient’s financial responsibility for healthcare products or services. When copays are routinely waived or reduced without taking into consideration whether the patients are financially needy enough to justify a discount, the arrangement may give rise to liability.

    • Example: A toxicology testing company routinely waives copays for its tests without considering the actual financial need of its patients.
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    Productivity Bonuses: Healthcare practitioners may be provided financial incentives for referring patients for services provided by entities that have a financial relationship with the practice. These incentives may be called a “productivity bonus.”

    • Example: A pain management physician is provided a bonus based on the number of referrals she makes for services at an ambulatory surgery center (“ASC”) that the pain practice has a financial relationship with.
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    Pass-Through Billing: In some states it remains legal for a physician to purchase tests or other services from another company and then the physician bills those services themselves. If the pass-through arrangement is effectuated in such a way as to simply give the referring physician a slice of the profit, then the arrangement may violate the law. Note that the AKS specifically provides that while one may offer discounts on healthcare services and products, those discounts must be passed on to the federal government, providing an additional compliance hurdle for pass-through billing arrangements. 42 U.S.C. § 1320a-7b(b)(3)(A).

    • Example: In order to obtain business for its higher priced services (e.g. MRIs), an imaging company offers to perform x-rays for physicians at a steep discount ($8) and the physician’s practice can then bill that service on its own. The physician charges federal healthcare programs beyond that amount.
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    Fee Splitting: Where a referring physician shares in the reimbursement obtained by the entity receiving the physician’s referral, AKS and Stark Law implications arise. The fact that a fee split is effectuated pursuant to a seemingly legitimate contract is of no moment if the fee split is being used to induce or reward referrals.

    • Example: A primary care provider enters into a fee splitting arrangement with an orthopedic surgeon where the primary care provider is paid part of the orthopedic surgeon’s fees for patients he refers to that specialist. The primary care provider’s right to the fee is nominally for his work “consulting” on the patient’s health, but the payment is actually an illegal inducement.
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    Professional Component Kickbacks: Many healthcare services are split into two billable items: a technical component (which covers the cost of taking the test as well as other non-physician work) and a professional component (which covers the physician’s work).

    • Example: The professional component for a nerve conduction study is the physician work associated with interpreting the data (i.e., line tracings) and summarizing such findings in a report. The entity receiving the study referral performs both the technical and professional component and then sends back the completed report to the referring provider. The referring doctor is given an illegal “cut” of the professional component (either as a direct payment from the entity receiving the referral or the opportunity to bill the professional component themselves) because the doctor has not actually performed the work associated with the professional component.
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    Above or Below Market Rates: Whenever a referral source is paid more for his or her services than the fair market value of those services (i.e., the price that would be paid between parties not in a position to make and receive referrals), an illegal arrangement may exist. Conversely, in some cases, below market rates may be used to induce referrals (see below regarding swapping) or otherwise give rise to an illegal relationship.

    • Example: A radiology facility may accept referrals from physicians who read their own x-rays (i.e., the referring doctor performs the professional component). The imaging center may bill globally for both the professional and technical component but then remit to the referring physician a payment for his or her professional component work. The professional component payment, however, exceeds the fair market value of such work and is used to incentivize referrals from the doctor.
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    Cross Referrals: Both parties involved in a referral relationship may be in a position to refer patients to one another. If referrals from one party are used to leverage or reward referrals from the other party, the arrangement is unlikely to pass muster.

    • Example: A pain management doctor sends all his patients to a local orthopedic surgeon based on the understanding that the orthopedic surgeon will then send all of her patients to the pain management doctor.
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    Swapping: Swapping occurs where discounts on one component of a business are provided in exchange for referrals related to another component of the business. Given that Medicare or Medicaid may reimburse services at higher rates than that private insurers, it is not unusual for a company to offer discounts on services or products for privately insured patients in order to induce referrals for Medicare or Medicaid patients.

    • Example: A clinical laboratory performs diagnostic work for a hospital at a discount for services covered by private insurance and/or Medicare Part A. In exchange for such a discount, the laboratory receives referrals from the hospital for services covered by Medicare Part B, which are more lucrative.
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    Carve Outs: While not a scheme in and of itself, oftentimes fraudsters will try to carve out federal healthcare program referrals from illegal arrangements like those discussed above. The federal government has made clear that if one is paying illegal remuneration for private insured patient referrals but still receiving referrals for federal healthcare program beneficiaries from the same referral source, the arrangement still violates the law. In other words, carving out federal healthcare beneficiaries does not neutralize an otherwise illegal referral relationship. Carveouts are ineffective because if a physician is being paid for referrals for privately insured patients, they are still incentivized and rewarded (indirectly) for their federal healthcare program referrals. The kickback simply follows a more circuitous route.

    • Example: An imaging company receives referrals from physicians for patients insured by both private insurers and federal healthcare programs. The physicians are paid a sham consulting fee – in reality, a hidden kickback – for each privately insured referral but not for those insured by federal healthcare programs. The arrangement still violates the law because the physician receiving the inducements for the privately insured patients also makes referrals for government program beneficiaries.

Our Firm’s Experience Filing and Litigating Kickback and Stark Law Cases

The law firm of Pietragallo Gordon Alfano Bosick & Raspanti, LLP has decades of experience filing and aggressively litigating whistleblower cases seeking to hold companies and individuals liable under the False Claims Act for violations of the Anti-Kickback Statute and Stark Law. If you possess information related to violations of these laws, we would be happy to speak with you.

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