AMARILLO, TX – In September, I wrote an article entitled, Medicare Anti-Kickback Statute – Real World’ Case. In the article, I discussed a front page Wall Street Journal (WSJ) story entitled, “A Fast-Growing Medical Lab Tests Anti-Kickback Law.”

According to the September WSJ story, Health Diagnostic Laboratory, Inc. (“HDL”) “transformed itself from a startup incorporated in late 2008 into a major lab with $383 million in 2013 revenues, 41% of that from Medicare.” The September WSJ article further pointed out:

• HDL built its business selling tests to measure “biomarkers” that help physicians predict heart disease. HDL bundes together up to 28 tests it performs on a vial of blood, receiving Medicare payments of $1,000 or more for some bundles.
• Until June 2014, HDL paid $20 per blood sample to most physicians ordering its tests. For some physician practices, payments totaled several thousand dollars per week.
• The Department of Justice (“DOJ”) has been investigating HDL to determine if the physician payments violate the Medicare anti-kickback statute.
• HDL took the position that the fee to physicians fairly compensate the physicians for their labor cost of handling blood. On the other hand, a former federal prosecutor was quoted as saying that the $20 per blood sample payments “could give doctors an incentive to order unnecessary tests.” According to the former federal prosecutor, “the real question is whether money was paid to get the referral of Medicare patients.”

The Medicare anti-kickback statute, 42 U.S.C. 1320a-7b(b), provides for criminal penalties for any person or entity that solicits, receives, offers or pays any remuneration to a person/entity to induce the person/entity to refer an individual for Medicare-covered items or services, or to purchase, lease, order, or arrange for or recommend purchasing, leasing, or ordering any Medicare-covered item or service, subject to certain exceptions.

Courts have enumerated the “one purpose” test. This provides that if “one purpose” behind a payment to a referral source is to reward the person/entity for referrals, then the anti-kickback statute is violated notwithstanding that the primary purpose for the payment is to compensate for legitimate services.

Now for the conclusion….or epilogue. There is a March 24, 2015 article in the WSJ entitled “Lab Settles Probe of Fees for Doctors.” The article states the following:

• A lab that has collected large sums from Medicare has reached a tentative agreement with the Justice Department to pay nearly $50 million to settle a civil investigation into whether payments it made to physicians amounted to kickbacks.
• In confirming the tentative settlement, HDL nevertheless states: “We have consistently sought to comply with all applicable legal and regulatory requirements.”
• In the settlement, HDL will not admit to wrongdoing, but will nevertheless enter into a five year corporate integrity agreement (“CIA”) with the OIG.
• At issue in the DOJ investigation was HDL’s practice of paying physicians $20 for each sample of blood they sent to HDL for testing. Large laboratory companies, such as Quest Diagnostics, Inc., do not pay such fees. They operate blood-draw sites and sometime place technicians in physician practices (physicians receive no compensation for the blood draw).
• HDL took the position that the payments were fair compensation for the labor cost of processing and handling blood. It said such payments were a common practice among the cardiac biomarker laboratories that are HDL’s competitors. Nevertheless, HDL ceased the practice in the summer of 2014.
• Tonya Mallory was the CEO and a co-founder of HDL. She resigned after the September 2014 WSJ article was published. In a statement before she resigned, Ms. Mallory said HDL “has consistently complied with all applicable laws.”

There are several lessons for DME suppliers. The first lesson is the “duck” test: “If it looks like a duck, sounds like a duck, and walks like a duck……then it is a duck.” Even the casual observer would see right through the argument that HDL was paying legitimate compensation to physicians for legitimate services.

The second lesson is that if a DME supplier is engaging in a fraudulent activity, then a number of people know about it. The HDL investigation was precipitated by a “whistleblower.” The third lesson is that once the federal government has a supplier in its cross-hairs, it is virtually impossible for the supplier to come out of it unscathed. Fourth, if “your brain tells you that an arrangement is OK, but if your stomach tells you otherwise, then trust your stomach and ignore your brain.” All of us are capable of rationalizing a dishonest decision…..however, “our stomach never lies.” And fifth, the DME supplier needs to understand how broad the anti-kickback statute is.

Here are some examples:
• For each patient that Dr. Jones refers to the DME supplier, the supplier may want to pay Dr. Jones $100 to provide a written summary of the patient’s condition and the type of service that Dr. Jones wants the supplier to give to the patient.
• A sleep lab may refer obstructive sleep apnea patients to the DME supplier for CPAPs and related supplies. The supplier may want to pay the sleep lab $100 each time that the sleep lab spends time with the patient to show him how to use the CPAP, and how to clean and replace the disposables.
• The DME supplier will have a “loan closet” at Dr. Jones’ office for lower back braces. The supplier may want to pay Dr. Jones $100 each time that Dr. Jones spends time with the patient to show him how to use and adjust the brace.

The challenge with these three examples is that the DME supplier is paying the referral source on a “per patient” basis. This is what HDL did. In our examples, the payments by the supplier to the referral source will vary based on the number of referrals from the referral source to the supplier. The same was true with the HDL arrangement. In our three examples, a government agency would likely take the position that while the payments by the DME supplier to the referral source may be for legitimate services, “one purpose” behind the payments is to reward the referral source for the referrals.

In our examples, the safest course of action for the DME supplier is to entirely fit (or at least substantially fit) the arrangement into the Personal Services and Management Contracts safe harbor to the anti-kickback statute. Among other requirements, (i) the parties must enter into a written agreement with a term of at least one year; (ii) the compensation paid by the supplier must be fixed one year in advance (e.g., $12,000 over the next 12 months); and (iii) the compensation must be the fair market value equivalent of the referral source’s services.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato P.C., a law firm based in Amarillo, Tex. He represents pharmacies, HME companies, 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].