Exploring Limits Of Anti-Kickback Law Employee Safe Harbor

March 5, 2018 | Geoffrey R. Kaiser | Compliance Investigations & White Collar | Health Services

The federal Anti-Kickback Statute contains a statutory exception or “safe harbor” providing that the AKS will not apply to “any amount paid by an employer to an employee (who has a bona fide employment relationship with such employer) for employment in the provision of covered items or services.” 42 U.S.C. 1320a-7b(b)(3)(B) (emphasis added). Similarly, the parallel regulatory exception states that prohibited remuneration under the AKS “does not include any amount paid by an employer to an employee, who has a bona fide employment relationship with the employer, for employment in the furnishing of any item or service for which payment may be made in whole or in part under Medicare, Medicaid or other Federal health care programs.” 42 CFR § 1001.952(i) (emphasis added).[1]

There is a view shared by some compliance professionals that the employee safe harbors permit employers to do that which the AKS fundamentally prohibits — i.e., pay for referrals. They reason that, in enacting the safe harbor protecting compensation paid to bona fide employees, Congress intended to permit this otherwise unlawful practice in the context of the employer-employee relationship, relying on the supervisory function of the employer to curb any abusive practices and essentially imposing no limits on payment practices in this setting.[2] As discussed below, however, it is far from clear that this is a safe or wise interpretation.

Conflicting Case Law

Case law is conflicting. Some courts interpret the AKS safe harbor as protecting traditional employment relationships that would allow compensation paid to employees for personally performed services reimbursable under a federal health care program, including incentive compensation tied to such services, but not compensation divorced from services that is paid solely for directing referrals to a particular provider.[3] In contrast, two federal district court decisions in the Fifth Circuit[4] have ruled that bona fide employees may be paid solely for referrals without violating the AKS, but these rulings arguably conflict with a ruling of the Fifth Circuit,[5] making their validity, even within the Fifth Circuit, open to question.

Another decision from the Middle District of Florida contains language that is sometimes cited in support of the view that the employee safe harbor permits referral payments, but the facts of that case involved incentive payments tied to personally performed physician services, making reliance on that decision to justify an employer’s unrestricted right to pay referral fees suspect.[6] A decision from the Eastern District of Pennsylvania, involving a durable medical equipment company that allegedly paid its employees cash incentives to generate Medicare referrals, did not reach the issue, but commented in a footnote that such payments might be covered by the employee safe harbor since the employees did not only generate referrals, but also provided other covered items and services.[7] Other courts, in varying degrees and circumstances, have rejected efforts to use the employee safe harbor to protect referral payments.[8]

Brief History of the Anti-Kickback Statute

In order to better understand the scope and limits of the employee safe harbor, it makes sense to begin with a review of the AKS itself. The AKS was first enacted through the Social Security Amendments of 1972 in order to combat fraud and abuse in the Medicare and Medicaid programs.[9] The legislative history makes clear that these provisions were intended to strengthen the legal framework for combating practices that had “long been regarded by professional organizations as unethical, which are unlawful in some jurisdictions, and which contribute significantly to the cost of the [Medicare and Medicaid] programs.”[10]

The AKS was amended in 1977 to make violations a felony, bolstering the penalties against “illegal practices by some individuals who provide services under Medicare and Medicaid” which “contribute significantly to the cost of the programs.”[11] The amendments expanded the AKS’s reach to cover “any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or kind,” id. (emphasis added), and were motivated by a rise in various health care fraud and abuse activities, including financial incentives to induce referrals of program business, medically unnecessary services and the “steering” of patients to “particular” providers, thus violating the “policy of freedom of choice.”[12] The U.S. Department of Health and Human Services was mandated, through legislation passed in 1987, to promulgate regulations establishing additional “safe harbors” for business arrangements and payment practices that would not be subject to prosecution under the AKS.[13] By statute, in considering whether to protect a particular payment practice under a “safe harbor,” HHS is directed to consider a number of factors, including:
A) “patient freedom of choice among health care providers”;
B) “competition among health care providers”; and
C) the “existence or nonexistence of any potential financial benefit to a health care professional or provider which may vary based on their decisions” whether “to order a health care item or service … or … arrange for a referral of health care items or services to a particular practitioner or provider.”[14]

HHS was further authorized by statute to issue advisory opinions on matters related to the AKS, including as to “[w]hat constitutes prohibited remuneration within the meaning of Section 1320a-7b(b).” In 1997, additional amendments made the AKS applicable, not just to Medicare and Medicaid, but to all health care programs receiving federal funding.[15]

Legislative history thus indicates that the AKS was enacted to remove the corrupting effects of kickbacks in health care by outlawing behavior designed to game the system by using financial incentives to direct patient referrals to a particular health care provider and away from other providers rendering the same type of care. In this regard, the HHS Office of Inspector General has observed that such pernicious behavior increases risks associated with “overutilization, increased program costs, corruption of medical decision-making, patient steering and unfair competition.”[16]

Agency Interpretations of the Employee Safe Harbor

The employee safe harbor of the AKS contains two clauses. The first requires that the employee receiving the compensation be in a bona fide employment relationship (a concept which HHS is barred by statute from analyzing).[17] The second clause requires that the compensation at issue be paid for employment in the furnishing or provision of covered items and services. Satisfying the former requirement without satisfying the latter requirement will not trigger the safe harbor’s protections. Advisory opinions issued by HHS consistently interpret the second clause of the safe harbor as requiring that the compensation under review be paid to the employee for furnishing covered items or services, and not merely for referrals.[18]

Moreover, a new safe harbor promulgated by OIG for free or discounted transportation services that became effective on Jan. 6, 2017, provides that an organization offering qualifying transportation may not compensate drivers or others involved in arranging the transportation on a per-patient basis. The safe harbor contains no exception for drivers or others who might otherwise be bona fide employees of organizations offering such services. The absence of such an exception is arguably another sign that, in the view of OIG, the employee safe harbor does not protect payments to employees purely for directing referrals to their employers. Likewise, the U.S. Department of Justice has argued in AKS prosecutions around the country that the employee safe harbor does not protect compensation paid solely to induce referrals of items or services reimbursed under the Medicare or Medicaid programs.[19]

Such a view would be consistent with the limits of other regulatory safe harbors that protect certain common business arrangements from prosecution under the statute. Thus, for example, the safe harbors for space and equipment leasing arrangements permits a medical provider to lease equipment or office space, provided the rent is consistent with fair market value and is not determined in a manner that takes into account the volume or value of patient referrals.[20] A safe harbor for management contracts and personal services similarly permits a medical practice to contract with an organization for administrative services, or a provider for personal services, provided the compensation paid is fair market value and, once again, is not determined based on the volume or value of any patient referrals generated for the practice.[21] Other safe harbors contain similar language to ensure that business relationships protected under the safe harbors are not used as a cover to purchase referrals in violation of the AKS.[22]

Some who advocate for a more expansive view of the employee safe harbor have pointed to OIG commentary in the original safe harbor regulations which, in the context of a bona fide employee-employer relationship, seemingly approved of an employer’s right “to pay an employee in whatever manner he or she chose for having that employee assist in the solicitation of program business” and, further, suggested that salespersons could be paid “on the basis of the amount of business they generate,” including “on a commission basis.”[23] However, it would be risky to rely on that commentary alone as the basis for dispensing with the safe harbor’s second clause — which although not referenced in the commentary, must be assumed — that any compensation paid, however such a payment may be structured, must be tied to the “furnishing” or “provision” of a reimbursable item or service, and not paid solely for referrals made to a particular provider. The cited commentary is consistent with paying a range of incentives to physicians based on personally performed services, such as, for example, by allowing participation in bonus pools generated wholly or partly from their services.

Similarly, nonphysician salespersons marketing items such as durable medical equipment, medical devices or pharmaceuticals may be viewed as “furnishing” reimbursable items and thus entitled, under the safe harbor, to receive financial incentives, including commission-based compensation. This is a more plausible interpretation of the commentary, given that the agency’s fully fleshed-out position on the meaning of the employee safe harbor has been stated several times in the decades since those initial comments through advisory opinions that HHS issued opining on “what constitutes prohibited remuneration within the meaning” of the AKS, as it is statutorily mandated to do. As noted, those advisory opinions indicate that, in the view of HHS, it is a condition of applying the employee safe harbor that employees be paid for furnishing a covered item or service, and not simply for directing referrals to particular providers.

The text of the safe harbor itself, moreover, is not congruent with the view that compensation may be paid to employees solely for referrals. Both the statutory and regulatory safe harbors require by their terms that the remuneration paid for which protection is sought, be for employment in furnishing or providing covered items and services. Referrals themselves, however, have been held not to constitute a reimbursable item or service, and thus payments for referrals arguably do not fall within the literal scope of the safe harbor.[24] Additionally, a no-holds-barred interpretation of the safe harbor that might permit an organization to circumvent the AKS prohibition against paying for referrals through the simple expedient of hiring co-conspirators as W-2 employees and then paying them partly or entirely on a per-patient referral basis would be difficult to reconcile, both, with the underlying purpose of the AKS to prohibit kickbacks in health care, and with canons of statutory construction that counsel against interpreting statutory exceptions in a manner that swallows the general rule.[25]

In conclusion, from a compliance standpoint, at least until the rules governing compensation under the employee safe harbor are clarified through further case law development or legislative action, the right approach to the employee safe harbor is not to assume that it protects everything an employer decides to do in compensating its employees, even if those employees are bona fide. Instead, one should always attempt to tie compensation formulas in some way to the employee’s personally performed services and to carefully avoid formulas that reward an employee purely for referrals in a manner that is entirely divorced from the reimbursable services furnished by that employee. Subjecting compensation formulas to a critical legal review will be essential to mitigate risk in this area.

Geoffrey R. Kaiser is a partner at Rivkin Radler LLP in Uniondale, New York, in the firm’s compliance, investigations and white collar and health services practice groups.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] The Stark Self-Referral Law, which prohibits physicians from making referrals for the furnishing of certain designated health services to an entity with which the physician has a prohibited financial relationship, similarly contains an employee compensation exception. See 42 U.S.C. § 1395nn; 42 C.F.R. § 411.357(c). However, unlike the AKS employee safe harbor, the Stark exception has detailed requirements that explicitly prohibit compensation that is “determined in a manner that takes into account (directly or indirectly) the volume or value of any referrals by the referring physician.” 42 C.F.R. § 411.357(c)(2)(ii). This article focuses only on the AKS safe harbor, which is not drafted with the same precision as the Stark exception.

[2] There is commentary in the regulations adopting the employee safe harbor indicating that OIG was willing to extend safe harbor protection to employee compensation because it was “confident that the employer-employee relationship is unlikely to be abusive, in part because the employer is generally fully liable for the actions of its employees and is therefore more motivated to supervise and control them.” (56 Fed. Reg. 35952; July 29, 1991): Final rulemaking promulgating the 10 original safe harbor provisions.

[3] See, e.g.,Obert-Hong v. Advocate Health Care, 211 F.Supp.2d 1045, 1050-51 (N.D. Ill. 2002) (employee safe harbor protects “typical hospital-physician employment relationships,” provided that compensation arrangements are “based on personally performed services” and are not “directly related to referrals”).

[4] Wall v. Vista Hospice Care Inc., 2016 WL 3449833 (N.D. Tex. June 20, 2016); United States v. Crinel, 2015 WL 3755896 (E.D. La. June 16, 2015).

[5] United States v. Jackson, 220 Fed. Appx. 317 (5th Cir. 2007) (affirming conviction under the AKS based on payments made to employee for patient referrals, where referral compensation was paid in separate checks from employee’s regular payroll checks).

[6] Baklid-Kunz v. Halifax Hospital, 2013 WL 6196562 at *1-2 (M.D. Fla. Nov. 26, 2013) (interpreting the safe harbor to permit employee compensation paid to induce referrals on facts showing that incentive compensation paid to physician employees was derived from a bonus pool that included revenues generated from and distributed on the basis of the “personally performed services” those employees).

[7] See Hericks v. Lincare Inc., 2014 WL 1225660 at **13-14, n.17 (March 25, 2015 E.D. Pa.).

[8] See, e.g., U.S. v. Borrasi, 639 F.3d 774, 781 (7th Cir. 2011) (rejecting safe harbor because part of payments was intended to induce patient referrals “even if the payments were also intended to compensate for professional services”); U.S. v. Starks, 157 F.3d 833, 836, 839 (11th Cir. 1998) (rejected safe harbor because payments were “only for referrals and not for any legitimate service for which the Hospital received any Medicare reimbursement”); U.S. v. Luis, 966 F. Supp. 2d 1321, 1330-31 (S.D. Fla. 2013) (Huck, J.), aff’d, 564 Fed.Appx. 493 (11th Cir. 2014), vacated and remanded on other grounds, 136 S.Ct. 1083 (2016) (rejected safe harbor, ruling that it “will only apply when payments made to an employee compensate the employee for furnishing or providing covered items or services or items or services payable by Medicare, not simply for referring patients”); Mittal v. U.S., 2005 WL 2036023 at *12 (S.D.N.Y. Aug. 24, 2005) (rejected safe harbor, noting that “there would not be an employment relationship for the provision of goods and services covered by Medicare” where recipient was paid only for referrals).

[9] See Pub. L. No. 92-603, §242(b), 86 Stat. 1329, 1419 (1972).

[10] H.R. Rept. No. 92-231 at p. 107 (1971).

[11] H.R. 95-393 at p. 48 (1977); Pub. L. 95-142, 91 Stat. 1175 (1977).

[12] Id. at pp. 44-48 (emphasis added).

[13] See 42 U.S.C. §1320a-7d(a).

[14] 42 U.S.C. §1320a-7d(a).

[15] 42 U.S.C. §1320a-7b(f), as amended by Pub. L. No. 104-191, §204, 110 Stat. 1999-2000 (1996).

[16] Discussion of AKS purposes on OIG website, at http://oig.hhs.gov/compliance/physician-education/01laws.asp.

[17] See 42 U.S.C. 1320a-7(d).

[18] See Advisory Opinion No. 12-08, 2012 WL 4753655 (analyzing proposed compensation arrangement between a physician and an independent diagnostic testing facility providing home sleep testing services in which facility would pay physician to read and perform sleep studies and perform administrative duties and, after assuming physician would be bona fide employee, concluding arrangement was protected under safe harbor because the physician “would be compensated for furnishing a service for which payment may be made in whole or in part under Medicare, Medicaid or other Federal health care program”) (emphasis added); Advisory Opinion No. 04-09, 2004 WL 5701854 (proposed arrangement between geriatric practice group and referring primary care physicians under which the latter would provide consulting services at an hourly rate was protected under employee safe harbor because, assuming bona fide status of employee, physicians would be paid “for the furnishing of covered items and services”; noting that AKS “disfavors payment structures that tie compensation, even for services, to patients referred by the compensated party” but creates exception where services are furnished by bona fide employees); Advisory Opinion No. 00-02, 2000 WL 35747412 (determining hospital’s payment of compensation to nonphysician employees for cost-saving suggestions based on a percentage of the savings realized by the hospital would likely not implicate the AKS because most employees did not have authority to implement the cost-savings suggestion for which they would receive payment and the terms of the program would not reward employees for recommending particular vendors, but realizing “some payments … might implicate the anti-kickback statute if the requisite intent to induce referrals were present”) (emphasis added); Advisory Opinion No. 98-9, 1998 WL 35287764 (proposed arrangement under collective bargaining agreement, whereby nurses would receive additional compensation based on the number of union members and dependents admitted to hospital as inpatients over set periods, was protected under employee safe harbor because, assuming bona fide status of nurse employees, they would be paid for performing covered “nursing and other health care related services,” the extra compensation was “tied to aggregate admissions and not to specific admissions or services,” and to be eligible to receive the money, a nurse could not be “in a position to refer patients to the Hospital”) ).

[19] United States v. Kuchipudi, Case No. 13 CR 312 (N.D. Ill. 2016), “Government’s Response to Defendant’s Consolidated Post-Trial Motions,” at pp. 5, 6-7, 9 (May 18, 2016); United States v. Mansaour Sanjar, Case No. H-11-861-S (S.D. Texas 2014), “United States Motion in Limine to Exclude Defendants’ Reference to the Anti-Kickback Safe Harbors,” 2014 WL 10917456 (S.D.Tex. Feb. 7, 2014) at pp. 1-2; United States v. Crinel, Case No. 15-61 (E.D. La. May 12, 2015),“Government Opposition to Motion to Dismiss,” at pp. 5-10; United States v. Hoor Naz Jafri, 2013 WL 5656191, at pp. 1-2, Case No. 12-73 (M.D. La. Oct. 4, 2013),“Government Opposition to Motion to Dismiss,” at pp. 5-10.

[20] 42 CFR § 1001.952(b), (c).

[21] 42 CFR § 1001.952(d).

[22] See, e.g., Investment interests also are protected under conditions specifically limiting the control of investors who are in a position to make or influence patient referrals and to ensure that investment interests are offered on terms that do not vary based on an investor’s ability to refer and do not require such referrals. 42 CFR § 1001.952(a), (r). Similar protections are found in many other safe harbors, consistent with the mandate that safe harbors preserve patient choice and industry competition, while preventing use of financial incentives to steer referrals to particular providers. See, e.g., 42 CFR § 1001.952 (e)-(h), (k), (n), (o), (s)-(y), (bb).

[23] 54 FR 3088, 93 (Jan. 23, 1989); see also 56 FR 35952, 53, 81 (July 29, 1991).

[24] See, e.g., U.S. v. Starks, 157 F.3d at 839, supra (in making referrals, defendants “were not providing covered items or services” and payment for referrals was “not for any legitimate service for which the Hospital received any Medicare reimbursement”).

[25] U.S. v. One (1) Palmetto State Armory PA-15 Machinegun, 822 F.3d 136, 140-41 (3d Cir. 2016) (“Interpreting the statute so as to include this exception would thereby swallow the rule.”); In re Woods, 743 F.3d 689, 699 (10th Circ. 2014) (“Flowing from this interpretive principle — that we must construe [statutory] exceptions narrowly — is the related concept that exceptions must not be interpreted so broadly as to swallow the rule.”); see also Commissioner of Internal Revenue v. Clark, 489 U.S. 726, 739 (1989) (“In construing [statutory] provisions … in which a general statement of policy is qualified by an exception, we usually read the exception narrowly in order to preserve the primary operation of the provision.”); Piedmont & N. Ry. Co. v. Interstate Commerce Commission, 286 U.S. 299, 311-12 (1932) (statute “was remedial legislation, and should therefore be given a liberal interpretation; but for the same reason exemptions from its sweep should be narrowed and limited to effect the remedy intended.”); A. Philip Randolph Institute v. Husted, 838 F.3d 699, 708 (6th Cir. 2016) (refusing to adopt a statutory interpretation that would “ignore the traditional rule of statutory construction dictating that exceptions to a statute’s general rules be construed narrowly” and deciding to “err on the side of giving maximum effect to the prohibition clause’s general rule”); Torres v. McDermott Inc., 12 F.3d 521, 526 (5th Cir. 1994) (exceptions to remedial statutes carving out that which would otherwise be included “are to be strictly construed”).

Reprinted with permission from the March 5, 2018 issue of Law360. Further duplication without permission is prohibited.  All rights reserved.

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