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Understanding the Anti-Kickback Statute

Although the prohibition against kickbacks is among the better-known concepts in health care law, confusion exists at times as to what exactly is prohibited and how to defend a business that is under government investigation for alleged anti-kickback violations.

The Anti-Kickback Statute Explained

The federal anti-kickback statute (“AKS”) prohibits the knowing and willful solicitation, offer, payment or acceptance of any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind:

  1. for referring an individual for a service or item covered by a federal health care program, or
  2. for purchasing, leasing, ordering, or arranging for or recommending the purchase, lease, or order of any good, facility, service, or item reimbursable under a federal health care program.

What Constitutes a Violation?

“Remuneration” under the AKS has been interpreted to include virtually anything of value. Courts interpret remuneration very broadly and apply what has become known as the “one purpose” test. Under this standard, if any part of the purpose of a payment to a physician or referral source by any supplier or provider is an inducement for past or future referrals, the payment is a violation of the AKS.

Examples: cash for referrals, discounts, paying a physician’s wife, disproportional return on investments, airplane tickets, certain marketing commissions etc.

Prior to the Affordable Care Act, alleged misconduct under the AKS had to constitute “bad intent.” The Affordable Care Act modified the anti-kickback statute by clarifying that a person need not have actual knowledge of or specific intent to commit a violation of the AKS, 42 U.S.C. §1320a-7b(h).

This standard is a radical deviation from the Hanlester Network v. Shalala decision, 51 F.3d 1390 (9th Cir. 1995), in which the Ninth Circuit held that the government must prove that the defendant actually knew that he violated the AKS and that he engaged in conduct with the specific intent to violate the law. In practice, the legislative decision to lower the burden of proof for the government in anti-kickback cases now allows prosecutions against people that simply “should have known” that a violation occurred. The government does not need to prove actual knowledge or specific “bad” intent anymore.

What Are the Penalties?

Violations of the AKS are punishable as a felony with a maximum fine of $25,000 and five years imprisonment—per each count. Violation of the AKS is also grounds for substantial civil monetary penalties and/or exclusion from the Medicare program. Because the AKS is intent-based, the government has to show that the alleged illegal payments were made “knowingly and willfully,” although, as noted above, this burden does not require specific intent to violate the AKS. In practice, the government often meets its burden by surrounding facts and circumstantial evidence, such as the existence of a monetary advantage in return for referrals.

What Exceptions Exist?

The Anti-Kickback Statute contains several exceptions. Among them are:

  • Bona Fide Payments to W-2 Employees
  • Safe Harbor Transactions
  • Payments to Purchasing Agents
  • Specified Risk-Sharing Arrangements

If you have questions regarding these exceptions or need documents or contracts prepared that utilize and incorporate these exceptions, you should call the health care defense attorneys of the Oberheiden & McMurrey, LLP for a free and confidential consultation.

How to Minimize Risk in a Joint Venture?

Clearly, not all payments to physicians constitute a violation of the AKS. Especially in so-called physician joint ventures, in which physicians invest in businesses such as a hospital or a pharmacy, experienced healchare compliance lawyers are often able to create AKS-compliant arrangements. In particular, complying with the following recommendations will reduce the risk under the AKS arising out of the physicians’ investment in a venture:

  1. the amount invested by each physician-investor is proportionate to that physician-investor’s interest in the venture;
  2. the terms of investment in the venture are the same for all investors;
  3. there is no requirement of divestiture tied to the level of referrals for services;
  4. the investment is structured to require that all parties share business risk in the venture through the contribution of capital;
  5. remuneration (in the form of distributions) is based on each physician-investor’s ownership interest in the venture and not tied to the volume or value of business generated for the venture; and
  6. physician-investors are required to make a “substantial investment” and to have both control of the venture and distribution of profits proportional to such investment.

To further reduce regulatory risks, the structure, capitalization, and terms of distributions from the venture should be commercially reasonable and represent a fair market value exchange among the participants.

Contact us for a free and confidential consultation.

Carving Out Federal Referrals

A common misconception is that the AKS is not implicated when federal health care program beneficiaries or business generated by federal health care programs are “carved out” of a proposed arrangement.

In Advisory Opinion No. 11-08 (2011) and other advisory opinions, the OIG notes its long-standing concern with arrangements whereby parties “carve out” federal health care program beneficiaries and business generated by federal health care programs from “otherwise questionable financial arrangements.” The OIG further notes that such arrangements “implicate and may violate the anti-kickback statute by disguising remuneration for federal business through the payment of amounts purportedly related to non-federal business,” OIG Advisory Opinion No. 11-08 (2011).

How to Structure Business Deals

One way to comply with the AKS is to structure arrangements and joint ventures in compliance with safe harbors established by the statute, see 42 C.F.R. § 1001.952 et seq. The U.S. Department of Health and Human Services (“HHS”) has promulgated a number of “safe harbor” regulations that specify arrangements that do not violate the AKS, including the following:

  • Investments in Publicly Traded Entities
  • Certain Small Investments
  • Space & Equipment Rentals
  • Personal Services and Management Contracts
  • Sale of Practice
  • Employee Contracts
  • Group Purchasing Organizations

While strict compliance with a safe harbor may provide comfort that an arrangement is unlikely to violate the law, failure to fit within a safe harbor does not mean an arrangement is illegal per se. On the contrary, failure to fit within a safe harbor merely means all the facts and circumstances must be reviewed to determine whether the parties had the requisite intent to violate the AKS. The parties’ intent to comply with a safe harbor would be relevant to a showing that they did not intend to violate the law, see 64 Fed. Reg. 63,518; 63,521 (Nov. 19, 1999).

If you need documents drafted that apply these and other risk-reducing components, you should call the federal anti-kickback attorneys of Oberheiden & McMurrey, LLP for a free and confidential consultation.

Small Investment Safe Harbor

One example of a safe harbor is the small investment safe harbor. The small investment safe harbor protects the return on an investment made to an investor if eight standards are met. One of those requirements is that not more than 40% of the value of each class of investment interests may be held by investors who are in a position to make or influence referrals to, or furnish items or services to, the entity. This is often referred to as the 60-40 Rule, whereby up to 40% of a company is owned by referring physicians and 60% is owned by either non-physicians or physicians that do not refer business to the company.

In that context, the law also demands that not more than 40% of the entity’s gross revenues related to the furnishing of health care items and services come from referrals or business otherwise generated by investors, see 42 C.F.R. § 1001.952(a)(2). In practice, this requirement means that the company will likely need to diversify to secure cash that is not generated by investor referrals.

Further, to avoid preferential treatment of stronger referral sources, the law expects that the terms on which an investment interest is offered to a passive investor who is in a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the entity is no different from the terms offered to other passive investors, see 42 C.F.R. § 1001.952(a)(2).

State Law Anti-Kickbacks

Most, but not all, states have enacted a state law version of the federal anti-kickback statute. California is one such example. The California anti-kickback statute prohibits the offer, delivery, receipt or acceptance by any licensed person (e.g. a physician) of any remuneration as compensation or an inducement for referring patients.

Unlike the federal prohibition, the California (and similar statutes in other states) anti-kickback statute applies to “all payors.” Thus, its application is not limited to federal payment program beneficiaries. Most notably, the AKS prohibition includes commercial insurance payors. A violation of the California anti-kickback statute is punishable by imprisonment and/or by a fine not exceeding $ 50,000 per occurrence, see Cal. Bus. & Prof. Code § 650.

State Law Safe Harbors

While the California anti-kickback statute does not contain the safe harbor provisions found in the federal AKS, the California anti-kickback statute does contain some exceptions to the general prohibition. There is some precedent in California indicating that where an arrangement meets the standards of a federal safe harbor, the state may take a similar view and deem the arrangement compliant with California law, see 89 Ops. Cal.Atty.Gen. 25, 34- 36 (2006) (interpreting Cal. Welf. & Inst. Code § 14107.2).

The California anti-kickback statute provides that it is not unlawful for a physician to refer an individual to a laboratory, pharmacy, clinic or health care facility in which the physician has an investment interest, provided that the physician’s return on investment is “based upon the amount of the capital investment or proportional ownership of the licensee,” and “not based on the number or value of any patients referred.” Referrals that are deemed to be made without a “valid medical need” are not excepted under this provision, see Cal. Bus. & Prof. Code § 650(d).

Defending AKS Charges

When it comes to AKS charges, our team of former federal prosecutors and experienced defense attorneys vehemently protects the interests of individual and corporate clients accused of AKS violations. Common targets of kickback investigations are:

Our number one goal in each AKS representation is to convince the government to keep the investigation limited to civil matters or to drop the case all together and to center on others. As noted above, the AKS has both civil and criminal components, and no one wants to face criminal felony charges. Because of that potentially significant exposure, it is critical to contact the experienced attorneys at Oberheiden & McMurrey, LLP immediately for a free and confidential consultation.

Success Stories

Oberheiden & McMurrey, LLP has obtained no civil or criminal liability results for our clients in OIG investigations, investigations by the Department of Justice, the Department of Defense, the Department of Health and Human Services, the Department of Labor and others in the following service industries:

  • Physician Providers
  • Physician Owned Entities
  • Health Care Marketing Companies
  • Medicare Laboratories
  • Non-Federal Laboratories
  • Medical Device Companies
  • Home Health Care
  • Physical Therapy

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