AMARILLO, TX – Much of health care (traditional Medicare fee-for-service, Medicare Advantage, traditional Medicaid, Medicaid Managed Care, TRICARE, the V.A.) is taxpayer-funded. To protect taxpayer money, there are federal and state laws in place designed to protect such money. These laws prohibit kickbacks and related activities.

The federal anti-kickback statute (“AKS”) prohibits offering, paying, soliciting, or receiving anything of value in exchange for referring (or arranging for the referral of) a patient to a person or entity for any item or service covered by a federal health care program (“FHCP”) or in exchange for purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, or ordering any FHCP-covered item or service.

The Office of Inspector General (OIG) has published a number of “safe harbors.” If an arrangement complies with a safe harbor, the compensation paid under the arrangement does not constitute illegal remuneration in violation of the AKS. If an arrangement does not comply with a safe harbor, it does not mean that it violates the AKS. Rather, it means that the arrangement needs to be carefully analyzed under the wording of the AKS, court decisions, and published OIG guidance.

There is a safe harbor to the AKS that says that it is permissible for a provider/supplier to compensate a bona fide full-time or part-time W2 employee who generates FHCP business for the supplier. Ideally, the employee will receive a base salary plus discretionary bonuses based on a number of factors, one which is the generation of business. The reasoning behind this safe harbor is that the supplier has the obligation to supervise and control its employee, and the supplier is liable for the acts of its employee.

There is not a comparable safe harbor for compensating 1099 independent contractors. A supplier has no duty to supervise and control a 1099 independent contractor, and the supplier is not liable for the acts of a 1099 independent contractor. And so while it is permissible for a DME supplier to compensate a bona fide employee who generates FHCP business to the supplier, it is a violation of the AKS if the supplier compensates a 1099 independent contractor, who generates FHCP business to the supplier, on a production basis. The AKS cuts both ways: the payor of the money (DME supplier) and the recipient of the money (the 1099 independent contractor) are both liable under the AKS.

In 1989 the Department of Health and Human Services (“DHHS”) stated: “We are aware of many examples of abusive practices by sales personnel who are paid as independent contractors and who are not under appropriate supervision. We believe that if individuals and entities desire to pay a salesperson on the basis of the amount of business they generate, then to be exempt from civil or criminal prosecution, they should make these salespersons employees where they can and should exert appropriate supervision for the individual’s acts.”

Also instructive is OIG Advisory Opinion No. 99-03 that addressed a proposed arrangement in which a sales rep for a medical supply manufacturer would be paid a monthly commission based on a percentage of amounts invoiced for products sold pursuant to the sales representative’s efforts. According to the OIG: “Sales agents are in the business of recommending or arranging for the purchase of the items or services they offer for sale on behalf of their principals, typically manufacturers, or other sellers (collectively, “Sellers”).

Accordingly, any compensation arrangement between a Seller and an independent sales agent for the purpose of selling health care items or services that are directly or indirectly reimbursable by a Federal health care program potentially implicates the ant-kickback statute, irrespective of the methodology used to compensate the agent. Moreover, because such agents are independent contractors, they are less accountable to the Seller than an employee. For these reasons, this Office has a longstanding concern with independent sales agency arrangements.” However, the AO did state that in some circumstances, these type of arrangements may be permissible if the sales rep’s contract is structured to fit the Personal Services and Management Contracts (PSMC) safe harbor to the AKS.

A 1099 independent contractor relationship may be established under the PSMC safe harbor if the arrangement complies with specific elements of the safe harbor, including the following: (i) payments to the 1099 independent contractor must be pursuant to a written agreement with a term of at least one year, and (ii) the methodology for calculating the compensation paid to an independent contractor must be set in advance, be consistent with fair market value (“FMV”), and not be determined in a manner that takes into account the volume or value of any referrals or business generated.

The OIG has taken the position that if a 1099 independent contractor paid on a production basis is generating both commercial and federally funded health care program referrals, any arrangement where the independent contractor is paid commissions only for the referrals of commercial patients and is paid nothing for the patients covered by a government program nevertheless violates the AKS. The reasoning is that the commissions for the commercial patients, in reality, also serve as compensation for the patients covered by an FHCP. As stated in OIG Advisory Opinion No. 06-02: “The OIG has a long-standing concern about arrangements pursuant to which parties “carve out” Federal health care program beneficiaries or business generated by Federal health care programs from otherwise questionable financial arrangements. 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.”

The lessons for DME suppliers are the following:

1. It is permissible to pay bona fide W2 part-time or full-time employees, who generate FHCP business, as follows: (i) base salary plus (ii) bonuses (at the discretion of the employer) that are based on a number of factors, including the generation of business.
2. The employment arrangement must be “bona fide,” not a “sham.” For example, assume that (i) a DME supplier and the sales rep sign a written employment agreement, (ii) the supplier withholds taxes from the rep’s paycheck, and (iii) the supplier gives a W2 to the re However, assume that the supplier, in reality, exercises no supervision and control over the rep. It is likely that the this “employment” arrangement will be considered to be a “sham” arrangement … meaning that a government enforcement agency will likely take the position that the rep is, in fact, a 1099 independent contractor of the supplier. This, in turn, will result in a violation of the AKS.
3. A sales rep (who generates patients covered by an FHCP) can be a 1099 independent contractor if the arrangement complies with the PSMC safe harbor.
4. If a 1099 independent contractor sales rep generates both commercial and FHCP patients, the parties cannot avoid violating the AKS by the DME supplier paying commissions only for the commercial patients … and paying nothing for the FHCP patie
5. Assume that the rep is a 1099 independent contractor, is paid production-based compensation, and only generates non-FHCP patients for the DME supplier. In this scenario, the AKS will not apply. However, the parties will need to review the state’s anti-kickback statute. All states have anti-kickback statutes that are similar to the AKS. Some state anti-kickback statutes only come into play when the payor is the state’s Medicaid progra Other state statutes come into play regardless of the payment source.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato, a law firm with a national health care practice based in Texas. He represents pharmacies, infusion companies, HME companies, manufacturers, and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization and can be reached at (806) 345-6320 or [email protected].