AMARILLO, TX – DME suppliers operate in a highly regulated environment. Suppliers need to comply with (i) federal anti-fraud laws (e.g., anti-kickback statute and Stark), (ii) state anti-fraud laws that mirror the federal laws, (iii) CMS regulations, (iv) NSC requirements, (v) HIPAA requirements, (vi) published OIG guidance, and (vii) policies of third-party payors. This article focuses on the federal anti-kickback statute (“AKS”) and the federal physician self-referral statute (“Stark”).
AKS
Under the AKS, it is a felony for a person or entity to knowingly or willfully offer, pay, solicit, or receive any remuneration to induce a person to refer an individual for the furnishing, or arranging for the furnishing, of any item or service covered by a federal health care program (FHCP) or to induce such person to purchase or lease or recommend the purchase or lease of any FHCP-covered item or service.
Assume that a DME supplier pays fair market value (“FMV”) compensation to a referral source for legitimate services. The supplier needs to be aware of the “one purpose test” that has been adopted by a number of courts. The one purpose test states that if “one purpose” behind a payment to a referral source is to reward the source for referrals, the AKS is implicated notwithstanding that (i) the main purpose behind the payments is to compensate the referral source for legitimate services and (ii) the compensation is FMV. As such, it is important that the arrangement complies with—or at least substantially complies with— the Personal Services and Management Contracts (“PSMC”) safe harbor to the AKS.
A safe harbor provides a “bright line” test enabling parties to structure arrangements that might otherwise violate the AKS in a way that is protected. If an arrangement does not exactly satisfy all of the elements of a safe harbor, it does not mean that the arrangement violates the AKS. Rather, it means that the arrangement must be examined carefully under the wording of the AKS, court cases, and other published guidance.
The PSMC safe harbor states that the AKS does not prohibit paying an independent contractor, that is also an FHCP patient referral source, for legitimate services as long as the following standards are met: (i) the arrangement must be memorialized in a written agreement that is signed by the parties; (ii) the agreement must specify the services to be provided; (iii) the term of the agreement must be for not less than one year; (iv) the methodology for determining the compensation must be set in advance, be consistent with FMV, and must not take into account the volume or value of referrals or business generated between the parties; (v) the services performed must not involve a business arrangement that violates any state or federal law; and (vi) the services contracted for must not exceed those reasonably necessary to accomplish the business purpose of the services.
The key element of the PSMC safe harbor is (iv), above, addressing the methodology for determining compensation—particularly the piece of the element prohibiting the methodology from taking into account the volume or value of referrals or business generated. It is common in arrangements for the parties to want to institute a per service compensation methodology. However, when the party being paid to perform services is also the source of the referrals leading to those services, there is a risk that a per service compensation methodology will be seen as taking into account the volume or value of referrals or business being generated between the parties. On the other hand, a compensation methodology based on the service provider’s time will carry a lower risk. For example, a compensation methodology set as a fixed dollar amount per hour of time spent, with an hourly rate that represents the FMV for the time of an individual performing the services, will be less likely to incur an AKS enforcement action.
Stark
Under Stark, if a physician (or an immediate family member) has a financial relationship with an entity providing designated health services (“DHS”), including durable medical equipment, the physician may not refer Medicare/Medicaid patients to the entity unless one of the statutory or regulatory exceptions applies. Note that the Stark definition of “physician” includes a number of practitioners (e.g., chiropractors and dentists).
If an arrangement involves the DME supplier paying money to a physician who refers Medicare/Medicaid patients to the supplier, Stark is implicated. Therefore, it is important that the arrangement complies with the Personal Services exception to Stark.
Like a safe harbor under the AKS, a Stark exception provides a “bright line” test enabling parties to structure arrangements that might otherwise violate Stark in a way that is protected. Unlike an AKS safe harbor, however, an arrangement must strictly satisfy all the elements of a Stark exception.
The Personal Services exception states that Stark does not prohibit paying a physician for legitimate services, even if the physician refers Medicare/Medicaid patients for DHS, so long as the following standards are met: (i) the arrangement must be memorialized in a written agreement that is signed by the parties; (ii) the agreement must specify the services to be provided; (iii) the services contracted for must not exceed those reasonably necessary to accomplish the business purpose of the services; (iv) the term of the agreement must be for not less than one year, and if the parties terminate the agreement without cause, they may not enter into the same arrangement during the first year of the original arrangement; (v) the compensation must be set in advance, be consistent with FMV, and must not take into account the volume or value of referrals or business generated between the parties; and (vi) the services performed must not involve a business arrangement that violates any state or federal law.
A compensation methodology using a fixed dollar amount per hour of time spent performing substantive services, with an hourly rate that represents the FMV for the time of an individual performing the services, should be protected under the Personal Services exception.
Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato, PC, 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].
Todd A. Moody, JD, is an attorney with the Health Care Group at Brown & Fortunato, PC, 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. Moody can be reached at (806) 345-6332 or [email protected].
