On Wednesday, May 29, 2024, the Department of Justice issued the following press release:

Spinal device manufacturer Innovasis Inc. (Innovasis) and senior executives Brent Felix and Garth Felix agreed to pay a total of $12 million to resolve allegations that they violated the False Claims Act by paying kickbacks to spine surgeons to induce their use of Innovasis’s spinal devices. Brent Felix is the founder, President and Chairman of the Board of Innovasis, which is headquartered in Utah. Garth Felix served in various leadership roles for Innovasis, including as the company’s Chief Financial Officer.

“Payments from medical device manufacturers intended to influence a physician’s judgment about which medical devices or supplies to select are illegal,” said Principal Deputy Assistant Attorney General Brian M. Boynton, head of the Justice Department’s Civil Division. “When medical devices are used in surgical procedures, patients deserve to know that their device was selected based on quality-of-care considerations and not on improper payments from manufacturers.”

“The integrity of our healthcare system is dependent upon physicians’ recommendations being motivated by patient health,” said U.S. Attorney Leigha Simonton for the Northern District of Texas. “Any time we learn that physician recommendations are being corrupted by improper financial inducements, we will seek to hold those involved accountable.”

“Improper financial arrangements can compromise medical judgment and adversely influence the medical decision-making process,” said Special Agent in Charge Jason E. Meadows of the Department of Health and Human Services Office of Inspector General (HHS-OIG). “These arrangements have no place in our healthcare system, and we will continue working with our federal partners to pursue such allegations.”

The Federal Anti-Kickback Statute prohibits offering or paying anything of value to induce referrals of items or services covered by Medicare and other federally funded programs. The statute is intended to ensure that medical providers’ judgments are not compromised by improper financial incentives.

The settlement announced today resolves allegations that from Jan. 1, 2014, through Dec. 31, 2022, Innovasis provided improper remuneration to seventeen orthopedic surgeons and neurosurgeons to induce them to use Innovasis spinal implants, devices and other equipment in medical procedures the physicians performed on Medicare beneficiaries, in violation of the Anti-Kickback Statute. The improper remuneration was allegedly provided in the form of consulting fees, intellectual property acquisition and licensing fees, registry payments and performance shares in Innovasis, as well as travel to a luxury ski resort, lavish dinners and holiday parties for surgeons, their office staff and family members. For example, Innovasis allegedly paid physicians for consulting services at rates far in excess of fair market value or, in some cases, for work that was never actually performed. Similarly, the company allegedly paid physicians far in excess of fair market value to acquire or license purported intellectual property for which Innovasis never obtained any valuation prior to purchase and thereafter never used for meaningful product development. Innovasis also paid physicians to attend a company-sponsored conference held at a luxury resort in Deer Valley, Utah, which included the cost of travel, lodging and high-end meals, among other things. During the relevant period, Brent Felix, along with his brother Garth Felix, allegedly controlled or otherwise directed Innovasis’s operations, strategic decisions, and the agreements with surgeons who allegedly received improper remuneration from Innovasis.

The civil settlement includes the resolution of claims brought under the qui tam or whistleblower provisions of the False Claims Act by Robert Richardson, a former Regional Sales Director for Innovasis. Under those provisions, a private party can file an action for false claims on behalf of the United States and receive a portion of any recovery.

DME Suppliers can draw the following lessons from the Innovasis settlement:

When a DME supplier enters a financial/ownership arrangement with a referring physician, the supplier needs to be aware of the restrictions and prohibitions of the federal anti-kickback statute (“AKS”), federal physician self-referral statute (“Stark”), the applicable state anti-kickback and physician self-referral statute, and the state’s Medical Practice Act (a set of laws specific to physicians). A “financial or ownership” arrangement can include (i) the DME supplier paying a referring physician for services (e.g., as a Medical Director), (ii) the supplier spending money to entertain the referring physician, (iii) the supplier renting space in a building owned by a referring physician, (iv) the supplier paying a physician to present an education program, and (v) the physician having an ownership interest in the DME supplier.

Stark
Under Stark, unless the arrangement meets an exception, a physician may not refer a Medicare or Medicaid patient to a DME supplier if the referring physician or a member of his/her immediate family has a financial (i.e., ownership or compensation) relationship with the supplier. Under Stark, an immediate family member includes (i) husband or wife; (ii) birth or adoptive parent, child, or sibling; (iii) stepparent, stepchild, stepbrother, or stepsister; (iv) father-in-law, mother-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law; (v) grandparent or grandchild; and (vi) spouse of a grandparent or grandchild.

Overall:

• If a DME supplier is compensating a physician (or immediate family member of the physician) directly or indirectly or otherwise giving anything of value to a physician/immediate family member, Stark will construe the parties to have a “financial” relationship.
• Likewise, if a physician/immediate family member has an ownership interest in a DME supplier, no matter the amount of the interest, Stark will construe the parties to have a “financial” relationship.
• If a DME supplier and a physician/immediate family member have a financial relationship, the physician cannot refer Medicare or Medicaid patients to the supplier unless the arrangement complies with a Stark exception. Stark broadly defines “refer” as the physician simply ordering DME for the patient.

AKS
Stark has a number of exceptions, but no safe harbors. On the other hand, the AKS has a number of safe harbors. Essentially, a safe harbor is the same thing as an exception. If an arrangement that a DME supplier enters into with a physician, hospital or other referral source complies with a safe harbor, then as a matter of law the arrangement does not violate the AKS. If an arrangement does not comply with a safe harbor, it does not mean that the arrangement violates the AKS – rather – it means that the arrangement needs to be carefully analyzed in light of the wording of the AKS, court decisions, and guidance from the Office of Inspector General (“OIG”).

An important safe harbor is the Personal Services and Management Contracts (“PSMC”) safe harbor. It allows a provider/supplier to pay compensation to a referral source if a number of elements are met, including: (i) the compensation is for substantive services, (ii) the compensation is the fair market value (“FMV”) equivalent of the services, and (iii) the methodology for calculating the compensation is fixed one year in advance. For example:

• It is permissible for a DME supplier to pay a referring physician for speaking at a conference sponsored by the supplier. And the supplier can cover the physician’s out-of-pocket expenses. The arrangement needs to comply with both the PSMC safe harbor to the AKS and the Personal Services exception to Stark. The PSMC safe harbor and Personal Services exception essentially say the same thing. The compensation must be the FMV equivalent of the physician’s time to prepare for, and speak at, the conference. The expenses to be reimbursed must be reasonable. At the end of the day, while the physician will be fairly reimbursed, he/she will not make a great deal of money speaking at the conference. Where DME suppliers find themselves in trouble is when they pay excessive fees to physicians ostensibly for presenting education programs. In reality, such fees are a kickback.
• It is permissible for a DME supplier to enter into a Medical Director Agreement (“MDA”) with a physician. The MDA needs to comply with both the PSMC safe harbor to the AKS and the Personal Services exception to Stark. Among other requirements, (i) the supplier must pay FMV compensation to the physician for his/her actual services rendered as a Medical Director and (ii) the methodology for compensating the physician must be fixed one year in advance. Where DME suppliers find themselves in trouble is when they pay excessive fees to physicians ostensibly for serving as Medical Directors. In reality, such fees are a kickback.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato, PC, a law firm based in Texas with a national health care practice. 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].

Jacque K. Steelman, JD is an attorney with the Health Care Group at Brown & Fortunato, PC, a law firm based in Texas with a national health care practice. She represents pharmacies, infusion companies, HME companies, manufacturers, and other health care providers throughout the United States. Steelman can be reached at (806) 345-6316 or [email protected].