MEDICARE AND MEDICAID FRAUD AND ABUSE:

THE ANTI-KICKBACK STATUTE

by

William M. Copeland, MS, JD, PhD, FACHE

Introduction

The most familiar Medicare/Medicaid fraud and abuse statute (and the one most relevant to this analysis) is Section 1128B(b) of the Social Security Act (42 U.S.C. r1320a-7b(b)), often referred to as the "Anti-Kickback Statute." The statute prohibits the offer or payment, as well as the solicitation or receipt, of "any remuneration (including any kickbacks, bribe, or rebate)" in exchange for referrals. The prohibited activity is a two way street, with both the payer and the receiver equally culpable.

What constitutes "any remuneration," however, is a gray area. While the statute provides that remuneration includes "any kickback, bribe or rebate," it does not define these terms. Further, there is a prohibition against remuneration "directly or indirectly, overtly or covertly, in cash or in kind." Clearly, direct cash payments in exchange for referrals violate the statute. What is less clear, however, is what constitutes "indirect payments."

The intent of the anti-kickback law is to eliminate payment for referrals of Medicare/Medicaid patients or business that is paid for by those programs. Any payment, including profit distributions, made to a physician or other healthcare provider by an activity to which he, she or it makes referrals of patients or goods or services is suspect. While the statute is primarily aimed at prohibiting payment to physicians for referrals, it is not limited as such and care facilities and their suppliers are not exempt.

There are four specific exceptions to the broad sweep of the general prohibition against remuneration: (1) a discount or price reduction to the provider that is properly disclosed and appropriately reflected in costs claimed or changes made by the provider; (2) payments by an employer to a bona fide employee for employment in the provision of covered items or services; (3) group purchase arrangements established by written contract with full disclosure; and (4) specified limited payment practices, the so-called "safe harbors," under the regulations required by the Medicare and Medicaid Patient and Program Protection Act of 1987 ('the 1987 Act").

Because the anti-kickback statute is extremely broad in its language, its scope is established by judicial interpretation. To date, the courts have interpreted the statute in an expansive manner. If remuneration flows from one party to another and if referrals (or the opportunity to provide goods and services) flow back, the potential for criminal prosecution exists, regardless of the presence of good business reasons for the venture. Thus, even in the case of what those unfamiliar with the statute might consider normal business arrangements, the shadow of criminal sanction remains.

Judicial Interpretation

The leading case applying the anti-kickback statute is United States v. Greber, dealing with payments between a medical diagnostic company that provided holter monitor services and physicians. The company billed Medicare for the monitoring services it performed and forwarded 40 percent of those payments (up to $65 per patient) to the referring physician. The defendant, Dr. Greber, asserted that these payments to referring physicians were "interpretation fees" paid for the initial consultation and for explaining the test results to the patients. He argued that compensation for services actually performed did not violate the anti-kickback statute absent a showing that the only purpose of the fee was improperly to induce future services. The court found that the statute prohibited any financial incentives to physicians that might induce unneeded services: "If one purpose of the payment is to induce future referrals, the Medicare statute has been violated."

Under this broad reading of the statute, any payments from a provider to a referral source could violate federal law even if the payments were primarily intended to compensate the referral source for goods and services actually provided.

In 1989, this broad interpretation was adopted in the Kats and Bay State cases. Kats involved an agreement between a community medical clinic and a diagnostic laboratory to share Medicare payments received for laboratory services provided to patients referred by the clinic to the laboratory. Citing Greber, the federal appeals court held that the anti-kickback statute was violated if one of the purposes of the payment was to induce future referrals, even for professional services. Conviction is proper unless the payments involved were "wholly and not incidentally attributable to the delivery of goods and services."

In Bay State, an executive of a city-owned hospital was charged with receiving illegal remuneration in the form of two automobiles and cash he was paid for services rendered as a consultant to an ambulance company. The government contended he received the cars and money to influence the hospital to award a contract to the ambulance company. Defendants contended that "the government had to show the payments ... were not as compensation for services performed ... or were of substantially more value than the services performed or to be performed ... " The court found the defendants guilty, stating:

The gravamen of Medicare Fraud is inducement. Giving a person an opportunity to earn money may well be an inducement to that person to channel potential Medicare payments toward a particular recipient.

... The statute is aimed at the inducement factor.

The text refers to "any remuneration." That includes not only sums for which no actual service was performed but also those amounts for which some professional time was expended .... That a particular payment was a remuneration (which implies that a service was rendered) rather than a kickback, does not foreclose the possibility that a violation nevertheless could exist.

The First Circuit Court adopted the more expansive reading of the statute in Greber,

"stating that the issue of the sole versus primary reason for payments is irrelevant since any amount of inducement is illegal."

Until recently, there had been no decision dealing with the return on investment in

an entity to which the investor makes referrals. The decision of an administrative law judge at the Department of Health and Human Services ("HHS") and its review by the Administrative Appeals Board (the "Appeals Board") within HHS now provides the guidance that has been lacking.

Hanlester Network is the first case in which any tribunal has defined the

circumstances under which physician ownership in health care providers is prohibited by the anti-kickback statue. It is also the first time the HHS Office of the Inspector General ("OIG") has used its exclusion authority rather than proceeding with a criminal prosecution. Therefore, it provides substantial guidance for interpreting the anti-kickback statute.

The Hanlester Network was the general partner in three clinical laboratory limited partnerships. A management contract with SmithKline Beecham Clinical Laboratories allowed SmithKline to manage the facilities and to refer 90 percent of the tests to its own laboratories. Hanlester then billed for the tests, paid SmithKline a monthly management fee and distributed the profits to the investors, including the physician limited partners.

In the original Hanlester Network case, Administrative Law Judge Steven Kessel

found that the defendants had not violated the anti-kickback statute because there was no agreement to refer. That decision was reversed by the Appeals Board and remanded. On remand, Judge Kessel found, using the criteria provided by the appeals panel, that the defendants had violated the statute. The criteria used by Judge Kessel is very important and very broad.

He concluded that a violation does not require that an offer or payment be conditioned on a referral agreement. Rather, when a party knowingly or willfully offers or

pays remuneration with an intent to influence the person to make referrals, the anti-kickback statute is violated. Because the limited partner physicians were actively encouraged to refer to the partnership labs, the arrangement violated the law.

Physicians were told that their failure to refer would be a "blueprint" for failure of

the labs. The greater number of tests referred, the greater income earned by the physicians. Thus, there was at least an indirect relationship between income and the volume of referrals.

Hanlester sets forth, for the first time, a definition of remuneration. The Appeals Board defines remuneration to encompass even a minimal payment that is intended to influence the reason or judgment of the payee as to referrals. Such a minimal payment violates the statute, even without an agreement to make referrals.

Issues of over-utilization, excessive testing, or inappropriate judgments as the result

of the physician's involvement in the partnership are moot. Judge Kessel states: "The

issue is whether Respondents violated the law by inducing physicians to refer tests, not whether Respondents violated the law by inducing physicians to refer unnecessary or excessive tests."

Judge Kessel concludes on a rather ominous note:

Any provider who invests in enterprises to which he refers business should beware the possibility that he is acting in violation of the law. So should the entrepreneur who organizes such enterprises. Parties who act in disregard of possible violations in the future cannot contend credibly, as have these

respondents, that they acted in an atmosphere of uncertainty.

Judge Kessel's conclusion was underscored by the statement of the DIG on the decision: "[A]s a result of this case no provider will be able to make that claim of ignorance in the future."

Judge Kessel only excluded the clinical labs, not the individual physicians and other investors. Exclusion, in his view, is justified only when conduct shows a "propensity" to engage in unlawful or harmful acts.

The Administrative Appeals Board has reversed that decision in part and imposed exclusions the individuals as well as the entities. While agreeing in principle with Judge Kessel's conclusion, the Appeals Board did not agree that the individuals should not be excluded for the program. It found that the individuals' violation of the anti-kickback law, a criminal statute, creates a strong inference of their untrustworthiness and supports their exclusion.

The Medicare and Medicaid Patient and Program Protection Act of 1987

Given the direction of judicial interpretation, the Medicare and Medicaid Patient and Program Protection Act of 1987 ("the Act") may be viewed as an effort to respond to the concerns of health care providers that many relatively innocuous, or even beneficial, commercial arrangements are technically within the scope of the statute and hence maybe subject to criminal prosecution. The Act modifies criminal provisions by requiring the promulgation of regulations specifying those payment practices that will not be subject to criminal prosecution and that will not provide a basis for exclusion from the Medicare or state health care programs. The Secretary of HHS, in consultation with the Attorney General, is authorized to develop these regulations. Because the definitions of fraud and abuse in the Medicare/Medicaid statute have changed over time, the Act and its regulations attempt to clarify those practices exempt from consideration as fraud and abuse, that is, safe harbors.

Safe Harbor Regulations

On July 29, 1991, HHS issued the first final safe harbor regulations. On November

5, 1992, two additional safe harbors were published that will protect some managed care plans. In addition, seven new safe harbors have been published for public comment in a Notice of Proposed Rulemaking. The purpose of these safe harbors is to define payment practices that will not be subject to criminal prosecution, exclusion, or civil monetary penalties. However, strict compliance with the criteria for each safe

harbor is necessary to obtain immunity under these rules and the practices that are protected are very narrow. Therefore, careful reading and assessment is necessary. A reading of these regulations in their entirety shows that certain recurring themes permeate them. First, remuneration or economic benefit given to a referring physician may not be proportionate to or contingent upon the making of a referral or the ordering of a good or service. Second, that remuneration may not exceed the fair market value of the service, property or investment for which the remuneration is given. Third, wherever possible, the parties should sign a written agreement specifying the manner and extent to which the service, property or investment of the referring physician is to be compensated. Finally, that agreement should be for a term of no less than one year. The concept behind these requirements is to avoid a quid pro quo arrangement.

As noted above, to comply with a safe harbor and escape enforcement, all criteria for the particular safe harbor must be met. However, it is important to note that failure to comply fully with a safe harbor's criteria does not necessarily mean that a particular practice or arrangement violates the anti-kickback statute. In effect, the practical consequence of not meeting the requirements for a safe harbor is to leave the party in much the same position as it was prior to the rules, with one notable difference. Because prosecution requires the specific intent to solicit or receive illegal remuneration, the existence of the rules makes it more difficult to assert a defense of lack of intent. This is one of the key lessons of Hanlester.

Finally, it should be noted that the final rules rely heavily on Bay State for guidance, particularly that "the gravamen of Medicare Fraud is inducement" and that "[T]he statute is aimed at the inducement factor." In other words, relying on Bay State, the DIG takes the position that the payment is not the important element. What is important is an intent to induce.

In the following section, each of the safe harbors is named and those that are pertinent to care facilities are discussed briefly.

Investment Interests

There are two components to the investment interest safe harbor, one for large publicly traded entities and another for certain small entities. There are certain general issues that apply to both.

"Investor" means individuals or entities who or which hold an investment interest, directly or indirectly, in the entity. "Investment Interest" means any type of equity or debt held in the entity, including stock, partnership units, bonds, debentures, notes, or other debt instruments. "Referring Providers" includes any person or entity who refers patients or business or does business with the entity.

The safe harbor distinguishes between "interested investors" and other investors. The latter only seeks return on investment. Doing business with the entity means "an investor who is in a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the entity." Joint ventures between suppliers and nursing homes is an example of an investor who does business with the entity.

Physicians are not the only ones who can make or influence referrals. The preamble makes it clear that hospitals and other providers can do so. Investors who enter into

written stipulations that they will not refer to or otherwise do business with an entity for the life of the venture will have the status of non-interested investors.

Specifically, the safe harbor states that remuneration does not include any payment that is a return on an investment interest, such as a dividend or interest income, made to an invertor as long as all of the applicable standards are met in one of the following two categories of entities:

(1) Investments in entities that are publicly traded with undepreciated net tangible assets in excess of $50 million.

To obtain safe harbor protection under this category of investment, five standards must be met: (i) equity securities must be registered with the SEC; (ii) they must be available to the general public on the same terms; (iii) passive investors cannot be favored over non-investors in the marketing and furnishing of services; (iv) the investment interest cannot be loaned or guaranteed by the entity; and (v) return on investment must be proportional to capital invested.

The first two of these standards speak for themselves. They mandate registered

securities available to the general public. The third standard is applicable only to passive investors; therefore, preferential marketing can be provided to active investors. "Active Investor" means an investor who is responsible for the day-to-day management of the entity and is a bona fide general partner or who agrees in writing to undertake liability for the actions of the entity's agents acting with the scope of their agency. "Passive Investor" is one who is a limited partner in a partnership, a shareholder in a corporation, or holder of a debt security.

Where investors are loaned money from the entity they are adding no real capital to

it. The thrust of the forth standard is to assure that investors provide new needed capital and that the entity is not a sham to pay for referrals.

Finally, if dividend payments are to receive protection, they can only be tied to the number of shares owned by the investor and not to his or her referrals. However, those investors who serve as officers and directors may be compensated at fair market value so long as they are active investors. By definition, active investors must be involved in the day-to-day operations of the company. The standard recognizes that they are not expected to serve without remuneration.

(2) Investments in entities having either active or passive investors.

To obtain safe harbor protection under this category of investment, eight standards must be met: (i) no more than 40 percent of each class of investment may be held by interested investors; (ii) the terms offered to passive investors must be the same as those offered to interested investors (different terms can be offered to active investors); (iii) the terms offered to interested investors must not be related to the previous or expected volume of referrals; (iv) there is no require that a passive investor make referrals or generate business (active investors can be required to refer); (v) passive investors cannot be favored over non-investors in the marketing and furnishing of services (active investors can be favored); (vi) no more than 40 percent of the gross revenue (not just Medicare revenue) of the entity can come from interested investors; (vii) the investment interest cannot be loaned or guaranteed by the entity; and (viii) return on investment must be proportional to capital invested.

As indicated above, some of these standards do not apply to active investors. This is because active investors assume the business risks and therefore are held to a lower standard than passive investors.

The thrust of the standard requiring no more than 40 percent investment by interested investors is to ensure that investors who make referrals, or who are in a position to make referrals, or others who do business with the entity or are in a position to generate business for the entity own significantly less than a majority interest in the entity. Conversely, the standard requires that individuals who are not in a position to make referrals have a legitimate opportunity to invest and that they have an interest of at least 60 percent of all equity or debt investments.

This DIG seeks to curb marketing strategies that discriminate against the passive investor who is not in a position to make referrals and which offer better deals to those who are in a position to make referrals or generate business. The marketing standard focuses on the status of the investor and safe harbor protection where the terms of the investment opportunities depend on the ability of the passive investor to make referrals.

This standard does not apply to active investors because general partners and corporate officers are chosen as a result of their familiarity with the health care field and their presumed ability to make referrals and, on this basis, they are offered different terms than the passive investor.

To be in total compliance with this standard, shares should be offered to non-interested investor on the same terms as the offering to interested investors. In other words, the offering should be made to individuals or entities who are not in a position to make or influence referrals or otherwise generate business on the same terms as to those who are in a position to influence referrals or business.

This standard concerning linking shares to expected referrals also addresses marketing strategies that are discriminatory. Here, however, it is assumed that an investment interest is being offered to an individual or entity who may influence referrals and denies safe harbor protection if the interest is offered on favorable terms based upon the investor's past or expected referrals or on the amount of business that maybe otherwise generated for the entity. This standard applies to both passive and active investors.

The entity is barred from requiring an individual to make referrals as a condition for remaining an investor. While encouragement to make referrals may appear innocuous in nature, investors may feel pressured to make referrals or generate business.

This standard concerning preferential marketing is applicable only to passive investors, therefore, preferential marketing can be provided to active investors.

The standard concerning gross revenue establishes a bright-line rule that return on investment from these entities is protected only so long as no more than 40 percent of the entity's revenue comes from interested investors. This standard, as well as the first standard discussed above, establishes a clear rule that leaves no question where protection ends.

The thrust of the standard is to ensure that revenue in protected ventures comes

from a wider population than from investors' referrals. When coupled with the first standard, it will help assure that profits are distributed to a larger population than simply to referring investors.

As with the first investment interest safe harbor, loans to the investor by the entity add no real capital to it. The thrust of this standard is to assure that investors provide new needed capital and that the entity is not a sham to pay for referrals.

If dividend payments are to receive protection, they can only be tied to the number of shares owned by the investor and not to his or her referrals. Therefore, return on investment must relate to the capital investment of the investor. However, those investors who serve as officers and directors may be compensated at fair market value so long as they are active investors. By definition, active investors must be involved in the day-to-day operations of the company. As indicated above, the OIG recognizes that they are not expected to serve without remuneration.

Space and Equipment Rental

These arrangements are "exempt" provided there is an executed, written agreement that specifies the premises covered by the lease. Access to the space or equipment must be for the total lease period or if it is for periodic intervals, these intervals must be set in advance and be specific as to their schedule, precise length, and exact rent. The lease must be for at least a period of one year and not subject to readjustment on the basis of the number of referrals. Charges must reflect fair market value, be set in advance, and must be determined in a manner that does not take into account the volume or value of referrals and does not reflect the value of being close to the source of referrals.

Personal Services/Management Contracts

These arrangements require an executed agreement specifying the services provided, their schedule and the exact charges. As with space and equipment rentals, the term of the agreement must be at least one year, with compensation set in advance and based on fair market value, not the volume or value of referrals. The services performed must not include counselling or promotion of activities that violate the Act. An agent is defined as anyone, other than a bona fide employee, who has an agreement to perform services for, or on behalf of, a principal.

These three safe harbors, space rental, equipment rental and personal services and management contracts, are very similar, with four of the standards of each almost identical. The requirement that the agreement be in writing is to ensure that the terms are specific and not subject to fluctuation. As for the requirement that the premises, equipment or services be specified in the agreement, the intent is to provide specificity to the agreement.

The OIG objects to percentage or per use agreements between providers in a position to refer because the payments in these arrangements are directly tied to the volume of business or amount of revenue generated, thus providing an improper incentive to refer. However, it is the nature of the relationship between overall volume of use and referrals, that triggers the statute. If the lessor or agent were not in a position to make referrals to the lessee or principal, the statute would not be violated.

This does not mean that percentage and per use leases that are based on overall

volume, versus volume of referrals, are per se violations of the statute. There are legitimate considerations, such as depreciation of equipment, that can motivate these arrangements without them being influenced by referrals.

The OIG is also concerned with abuse resulting from periodic renegotiation of ostensibly short term agreements, in response to changes in referral patterns. Therefore, these agreements must be for a term of at least one year. This requirement restricts the period within which contract terms may not be changed, and not the time within which services under a contract may be performed. So long as the terms of the agreement are not changed during the one year period, the time of performance is not pertinent.

Part-time contractual arrangements and periodic access leases between health care providers are especially vulnerable to abuse because they re subject to modification based on changing referral patterns between the parties. Recognizing that it is not always possible to specify the timing and duration of business arrangements, or the precise compensation involved, the OIG indicates that where the arrangement does not meet the safe harbor, they will be analyzed on a case-by-case basis.

There is no single figure for fair market value. Rather, it contemplates a rental fee falling within a commercial range that is reasonable, without taking into account proximity or convenience to referral sources. Rental charges that take location into account may impermissibly generate referrals or other business.

Counselling or promotion of a business arrangement or other activity that violates the anti-kickback statute is also forbidden. This requirement is aimed at the promoter or consultant that becomes involved in activities that encourage providers and others to violate the statute. An example is the development of an impermissible joint venture arrangement.

Employees

An employer may pay an employee to solicit business. This "safe harbor" applies only to bona fide employer-employee relationships.

Other Safe Harbors

In addition to the safe harbors discussed above there are safe harbors for: (1) group purchasing organizations (2) purchase of a physician's practice, (3) referral services, and (4) discounts and warranties. In my opinion, these safe harbors have little impact on care facilities and will not be discussed in any depth here. In addition, the OIG has published two safe harbors, effective November 5, 1992, dealing with managed care entities. Again, in my opinion, these have little impact on care facilities and will not be discussed here.

Additional Safe Harbors

As indicated above, the Secretary of HHS has published seven additional safe harbors for public comment. These proposed safe harbors are:

investment interests in rural areas;

investment interests in ambulatory surgical centers;

investment interests in group practices composed exclusively of active investors;

practitioner recruitment;

obstetrician malpractice insurance subsidies;

referral agreements for specialty services;

cooperative hospitals service organizations;

These proposed safe harbors are open for comment until November 22, 1993. Recommendations

There are many actions that can be taken to mitigate the prospect of a violation of

the kickback statute. I recommend that counsel advise care and supplier clients to

avoid activities such as:

Marketing investments in entities to organizations or entities in a position to make substantial referrals.

Making it easy for persons or entities in a position to refer to invest by keeping the minimum investment low.

Relating profit distributions to volume of referrals. (However, in Hanlester, one of the findings that sustained the guilty verdict was that profit distributions were indirectly related to the volume of referrals made by partners because profits would increase with increased referrals. Even though payments to physicians were not large, they were sufficient to induce them to refer.)

Telling potential investors that they can expect a high rate of return on their investment. (In Hanlester, physicians were told that they could expect to earn in excess of 50 percent on their investment.)

Telling investors that failure to refer will result in failure of the entity.

Structuring the organization to allow investors to profit from referrals in areas where they cannot bill directly. (In Hanlester, the investments permitted physicians to profit from their Medicare referrals when reimbursement restrictions prohibited them from directly billing for such services.)

"Pharmacy/broom closet" leases. These occur where a supplier or lab rents space from a nursing home that is suitable for little else than a broom closet. Obviously, the space is never used for its contracted purpose.

Ventures where a party to the venture is already engaged in the line of business that is to be engaged in by the venture. (The question is why that party needs to create a venture to continue its business.)

Percentage or per use rentals and leases if at all possible. While these are not per se illegal, "they are rife with abuse."

Sometimes a venture can be restructured to bring it closer in line with the safe harbor requirements. Such restructuring might include:

Admission of third party investors (should be at least 60 percent) who make the same investment and receive the same return as the other venturers even though they will make no referrals to the venture.

Providing goods and service of the venture to customers other than the partners (should be at least 60 percent of revenue).

Engaging in a business undertaking that is significantly different than that of the partners.

All of the above.

Before engaging in a venture or conduct that is questionable, the care provider or supplier should get an unqualified opinion (as opposed to an advisory letter) from a legal consultant who has a significant practice in this area. The opinion should specify that the venture or conduct meets the requirements of the statute, or if it does not, specifies where it does not and defines the risk of undertaking the project without that protection.

Providers and suppliers should also make sure that:

any contracts for services or supplies are set out in writing and signed by the parties;

the contract specifies the services, supplies, space or equipment covered; P1 the contract is for not less than one year;

if the contract is for periodic intervals, it includes as much specificity as possible; and

the contract is for fair market value.

Conclusion

To say that application of the Medicare and Medicaid Anti-Kickback Statute is less than clear would be a gross understatement. Nevertheless, structuring ventures and conducting business so that one is as close as possible to the safe harbors will mitigate the risk of an enforcement action by the DIG or other law enforcement agencies.

One should get good advice for someone who practices in this area and understands its idiosyncracies. It is almost impossible to completely eliminate risk in this area, however, if those risks can be quantified and the activity is conducted in good faith on the advice of counsel, the risks can be mitigated.

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