Safe Harbor Law in Healthcare
Safe Harbor Law in Healthcare Explained
Safe Harbor Law Team Lead
Former DOJ Attorney
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Safe Harbor Law Team Lead
Contact Nick directly 
Safe Harbor Law Consultant
Former FBI Special Agent
Safe Harbor Law Consultant
Former HHS-OIG Assistant Special Agent-in-Charge
In healthcare, a safe harbor is a recognized exception to the Anti-Kickback Statute. While the Anti-Kickback Statute prohibits financial relationships between referral sources and business partners in general, safe harbors offer avenues to structure the exchange of remuneration in a legal fashion. Safe harbors are regulations issued in intervals since 1991 by the Office of Inspector General (OIG) of the U.S. Department of Health and Human Services (HHS). Safe harbors are regulated in 42 C.F.R. Sect. 1001.952 and include the following concepts:
- Investment interests in publicly traded companies and small private entities
- Renting and leasing of space
- Renting and leasing of equipment
- Personal services and management agreements
- Employee compensation arrangements
- Sale of physician practice with separate standards for sales of practices from physician to physician or from physician to hospital and other entities
- Referral services such as vendor agreements
- Discounts for buyers, sellers, and offerors not acting as sellers
- Group purchasing organization that receives payment from a vendor for goods or services
- Practitioner recruitment
- Investments in group practices and solo practices
- Referral arrangements for specialty services
- Certain price reductions
- Electronic health records items and services involving non-monetary goods and services
Advantage and Use of Safe Harbors in Healthcare
Safe harbor compliance protects from federal civil and criminal prosecutions as well as from civil money penalties and possible exclusion from participation in Medicare, Medicaid, and other federally funded health programs. While a failure to comply with all elements and criteria of an applicable safe harbor does not automatically render the arrangement illegal, deviations from safe harbors do provide law enforcement greater prosecutorial discretion to investigate and possibly prosecute the participants. Of critical importance in such an analysis is the intent that the parties had or displayed surrounding and executing the arrangement. Because the safe harbor originates as an exception to the Anti-Kickback Statute, which is a criminal statute based on intent, the intent of the involved parties can become the decisive factor in determining the lawfulness of the venture.
In case an arrangement violates the Anti-Kickback Statute and falls outside a safe harbor, the case can quickly turn into a criminal investigation. Violations of the Anti-Kickback Statute constitute felonies, and, as such, can result in severe monetary fines as well as incarceration. Furthermore, anyone convicted of violating the Anti-Kickback Statute will be excluded from reimbursement for serving federally funded patients.
What Is the Small Investor Safe Harbor?
Safe harbor regulations describe financial arrangements involving referring physicians in which, although the transaction technically implicates the anti-kickback statute, it does not actually violate the law. These safe harbor arrangements are specifically excluded from the definition of illegal remuneration. Among the most prominent exception to the anti-kickback statute is the safe harbor for investment interests in small entities, regulated at 42 C.F.R. 1001.952(a)(2). The following is a brief introduction of this so-called “Small Investor Safe Harbor.”
Terminology
Under section 1877, a physician may not refer a Medicare patient for certain designated health services to an entity with which the physician or an immediate family member of the physician has a financial relationship unless an exception applies. In this context, the following definitions and explanations apply.
- Designated Health Services (“DHS”). In order to implicate Stark Law, a physician’s referral must be for a designated health service, which is defined to include referrals for laboratories, physical and occupational therapy, radiology, radiation therapy, durable medical equipment, parenteral and enteral nutrients, equipment, devices, supplies, orthotics, prosthetics, home health, outpatient prescription drugs, and inpatient and outpatient hospital services.
- Financial Relationship. A financial relationship includes both ownership or investment interests as well as compensation arrangements, see 42 C.F.R. Sect. 411.354(b)(1).
One of the most commonly used exceptions to physician self-referral restrictions and the anti-kickback laws is the so-called small investment safe harbor. The safe harbor is hereby designed to legitimize financial relationships between referring physicians and businesses. The next section introduces the eight elements of the small investment safe harbor.
Eight Conditions
(1) No more than 40 percent of the value of the investment interests of each class of investment interests may be held in the previous fiscal year or previous 12-month period by investors who are in a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the entity.
(2) The terms on which an investment interest is offered to a passive investor, if any, who is in a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the entity must be no different from the terms offered to other passive investors.
(3) The terms on which an investment interest is offered to 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 must not be related to the previous or expected volume of referrals, items or services furnished, or the amount of business otherwise generated from that investor to the entity.
(4) There may not be any requirement that a passive investor, if any, make referrals to, be in a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the entity as a condition for remaining as an investor.
(5) Any investor must not market or furnish the entity’s items or services (or those of another entity as part of a cross referral agreement) to passive investors differently than to non‑investors.
(6)No more than 40 percent of the entity’s gross revenue related to the furnishing of healthcare items and services in the previous fiscal year or previous 12-month period may come from referrals or business otherwise generated from investors.
(7)The entity or any investor (or any agent thereof) must not loan funds to or guarantee a loan for 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 if the investor uses any part of such loan to obtain the investment interest.
(8) The amount of payment to an investor in return for the investment interest must be directly proportional to the amount of the capital investment (including the fair market value of any pre-operational services rendered) of that investor.
The Role of the OIG
The Anti-Kickback Statute is an intent-based criminal statute. By that definition, the legality of any arrangement remains largely dependent on what the parties intended to do under their agreement. The OIG itself can provide guidance through the use of Special Fraud Alerts, Advisory Opinions, and through the explained safe-harbor process. Complying with safe harbor provisions assure compliance. However, the OIG is clear that non-compliance with safe harbors does not ipso iure and automatically render a business venture unlawful. Non-compliance with safe harbors would, however, invite a detailed look at the facts and circumstances of the arrangement in question. Nonetheless, it is important for a joint venture to meet as many of the safe harbor elements as possible to maximize compliance.
Healthcare Client Representation: Regulatory Compliance and Defense
Oberheiden, P.C. is a nationwide law firm that represents healthcare clients in the area of regulatory compliance and defense against government investigations. Our team consists of several former federal healthcare prosecutors that bring government insights to the table and that know how to structure an arrangement without raising the government’s attention. By the same token, those clients that are subject to a government healthcare investigation know they can rely on our healthcare fraud defense experience and our proven track record of avoiding criminal charges.
What Is the Discount Safe Harbor?
The Anti-Kickback Statute (AKS) is a criminal law that prohibits the knowing and willful payment or receipt of any form of remuneration to influence (i) the referral of an individual for an item or service for which payment may be made by a federal healthcare program or (ii) the purchase, lease, order, or arrangement for or recommendation to purchase, lease, or order any good, facility, service, or item for which payment may be made by a federal healthcare program. See 42 U.S.C. § 1320a-7b(b).
Availability of the Discount Safe Harbor
One of the recognized safe harbors to the Anti-Kickback Statute is “a discount or other reduction in price obtained by a provider of services or other entity under [Medicare or Medicaid] if the reduction in price is properly disclosed and appropriately reflected in the costs claimed or charges made by the provider or entity.” See 42 C.F.R. 1001.952(h). A classic example is where a distributing company contracts with suppliers to purchase products to then sell those products to other entities. Typically, the distributing company serves as a wholesaler or a group purchasing organization. If the distributing company receives a discount on those products or if the buyers from the distributing company receive a discount, the discount safe harbor may be implicated.
Unprotected Discounts
However, Pursuant to 42 C.F.R. 1001.952(h), a discount does not include: (i) cash payment or cash equivalents (other than certain rebates); (ii) supplying one good or service without charge or at a reduced charge to induce the purchase of a different good or service, unless the goods and services are reimbursed by the same federal healthcare program using the same methodology and the reduced charge is fully disclosed to the federal healthcare program and accurately reflected where appropriate, and as appropriate, to the reimbursement methodology; (iii) a reduction in price applicable to one payer but not to Medicare, Medicaid or other Federal healthcare programs; (iv) a routine reduction or waiver of any coinsurance or deductible amount owed by a program beneficiary; (v) warranties; (vi) services provided in accordance with a personal or management services contract; or (vii) other remuneration that is not a reduction in price for items or services.
Practical Considerations
In practice, it is advisable to document the pricing for the products in question as well as any discount on those products. For example, parties should collect the invoice and the underlying contract to have documentation supporting the existence and nature of the discount as well as the negotiation steps that led to a discount. At a minimum, a well-drafted written contract between supplier and hospital/purchaser needs to be in place. With respect to the amount of discount, both parties must ensure that the final (discounted) amount does not significantly differ from the estimated fair market value. Thus, to avoid anti-kickback scrutiny, the discounted amount has to be commercially reasonable and has to be negotiated at arms-length. Furthermore, buyers, sellers, and other parties must comply with certain disclosure and reporting requirements. Parties need to be particularly wary of any discount deals that involve multiple products or multiple payors and treat those products and payors in disparate fashions.
What Constitutes a “Safe Harbor” in an Anti-Kickback Statute Investigation?
In a federal investigation under the Anti-Kickback Statute (AKS), a key defense strategy will often be to assert a statutory or regulatory safe harbor. As explained by the U.S. Department of Health & Human Services’ (DHHS) Office of Inspector General (OIG), “[t]he ‘safe harbor’ regulations describe various payment and business practices that, although they potentially implicate the Federal anti-kickback statute, are not treated as offenses under the statute.”
The Anti-Kickback Statute is extremely broad. Under the AKS, a healthcare provider or third party can face civil or criminal prosecution for “offering, paying, soliciting or receiving anything of value to induce or reward referrals or generate Federal healthcare program business.” Since this has the potential to proscribe many types of transactions that do not have potential negative implications for patients or the potential to result in improper payments from federal healthcare benefit programs such as Medicare, Medicaid, and Tricare, Congress and DHHS have delineated various “safe harbors” that insulate transactions from AKS prosecution.
Example Safe Harbors under the Anti-Kickback Statute
There are numerous safe harbors under the Anti-Kickback Statute, many of which are extremely detailed and technical in nature. When engaging in transactions with potential AKS implications, it will often be in the healthcare providers’ and other entities’ best interests to structure these transactions with a specific safe harbor in mind. But, even if you did not consider the AKS and are now facing a federal investigation, you may still be able to find a safe harbor that protects you.
Some of the most commonly used safe harbor provisions under the Anti-Kickback Statute include the following:
1. Bona Fide Employment Relationship
Bona fide employment relationships qualify for safe harbor protection under Section 1128B of the Social Security Act (which is home to the Anti-Kickback Statute). As explained by the OIG, the AKS “exempts from its reach ‘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.'” For the purposes of the AKS, employment status is determined based upon the applicable common law principles that typically evaluate factors such as:
- The level of control the employer exerts over the employee;
- The timing and method of payment (e.g., bi-monthly paychecks as opposed to invoicing); and
- The location and tools or equipment used by the employee during work hours.
2. Personal Service Arrangements
Personal service arrangements that do not qualify as bona fide employment relationships qualify for safe harbor protection under the Anti-Kickback Statute if they satisfy seven specific conditions outlined in Section 1128B. These conditions are:
- A written and signed agency agreement;
- Provisions in the agency agreement covering all of the services to be provided for the term of the agreement;
- Provision for services that do not violate state or federal law;
- A contract term of one year or longer;
- Scheduling of the services to be provided if they are not to be performed on a full-time basis;
- Compensation that is consistent with an arm’s length transaction and that does not take into account the quantity or quality of referrals between the parties; and
- The services covered under the agreement are no more than are reasonably necessary to accomplish the parties’ commercially reasonable business purpose.
3. Lease or Rental of Office Space or Equipment
The safe harbor regulations under the Anti-Kickback Statute contain near-identical provisions insulating office space and equipment rental agreements that satisfy certain conditions. A lease or rental agreement will not trigger AKS liability if:
- The parties have a written and signed lease or rental agreement that specifies the premises or items covered by the lease;
- The term of the lease is for not less than a year;
- The aggregate rental charge is set in advance consistent with fair market value and does not take into account “the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid, or all other Federal healthcare programs;”
- The lease or rental agreement specifies the schedule for the lease or rental; and
- The scope lease or rental agreement is no greater than is reasonably necessary for commercial purposes.
4. Referral Services
Despite the Anti-Kickback Statute’s express intent to prohibit payments for referrals, payments of “remuneration” to referral services are permitted under certain circumstances. The “referral services” safe harbor provides:
“‘[R]emuneration’ does not include any payment or exchange of anything of value between an individual or entity (‘participant’) and another entity serving as a referral service (‘referral service’), as long as all of the following four standards are met –
“(1) The referral service does not exclude as a participant in the referral service any individual or entity who meets the qualifications for participation.
“(2) Any payment the participant makes to the referral service is assessed equally against and collected equally from all participants and is based only on the cost of operating the referral service, and not on the volume or value of any referrals to or business otherwise generated by either party for the other party for which payment may be made in whole or in part under Medicare, Medicaid, or other Federal healthcare programs.
“(3) The referral service imposes no requirements on the manner in which the participant provides services to a referred person, except that the referral service may require that the participant charge the person referred at the same rate as it charges other persons not referred by the referral service, or that these services be furnished free of charge or at reduced charge.
“(4) The referral service makes the following five disclosures to each person seeking a referral, with each such disclosure maintained by the referral service in a written record certifying such disclosure and signed by either such person seeking a referral or by the individual making the disclosure on behalf of the referral service –
“(i) The manner in which it selects the group of participants in the referral service to which it could make a referral;
“(ii) Whether the participant has paid a fee to the referral service;
“(iii) The manner in which it selects a particular participant from this group for that person;
“(iv) The nature of the relationship between the referral service and the group of participants to whom it could make the referral; and
“(v) The nature of any restrictions that would exclude such an individual or entity from continuing as a participant.”
5. Group Purchasing Organizations
Certain transactions between vendors and group purchasing organizations (GPO) are exempt from Anti-Kickback Statute liability as well. In order to qualify for safe harbor protection, (i) the GPO must have a compliant written agreement in place with the vendor, and (ii) the GPO must submit written disclosures to DHHS.
Other safe harbor provisions under the Anti-Kickback Statute apply to transactions and relationships including (but not limited to):
- Discounts
- Investment Interests
- Management contracts
- Practitioner recruitment
- Price reductions
- Sale of healthcare practice
- Waivers of copayments, coinsurance, and deductibles
- Warranties
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Anti-Kickback Statute Compliance: Do You Need to Secure Protection under an Anti-Kickback Statute Safe Harbor?
Compliance with the Anti-Kickback Statute can be difficult and the consequences of failure to comply can be extreme. Any time parties base the legality of a healthcare transaction on a safe harbor and anytime the Anti-Kickback Statute may apply, it is strongly recommended to consult with experienced attorneys to make sure the transaction will not draw the attention of law enforcement. If your healthcare practice or business is under investigation for alleged violations of the Anti-Kickback Statute, you need experienced legal representation. Dr. Nick Oberheiden is an experienced healthcare fraud defense law attorney who is seasoned in AKS investigations. To learn more about the safe harbor protections you may have available, call Oberheiden, P.C. at 888-680-1745 or request a free consultation with Dr. Oberheiden online now.
Nick Oberheiden represents clients on both corporate compliance and in federal healthcare investigations. Dr. Oberheiden’s profound healthcare law understanding has allowed him to achieve no civil and no criminal liability results for physicians and healthcare executives in proceedings before the Office of Inspector General (OIG), the Department of Health and Human Services (HHS), the Department of Justice (DOJ), and the Department of Labor (DOL), and he has defended Stark Law, False Claims Act, and Anti-Kickback cases across the country.
