AMARILLO, TX – The federal anti-kickback statute (“AKS”) makes it a felony to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce a person or entity to refer an individual for the furnishing or arranging for the furnishing of any item or service reimbursable by a federal health care program (e.g., Medicare, Medicare Advantage, Medicaid, Medicaid Managed Care, TRICARE), or to induce such person to purchase or lease or recommend the purchase or lease of any item or service reimbursable by a federal health care program.

Almost all DME suppliers understand that the AKS applies to scenarios where a federal health care program (“FHCP”) patient is directly involved. For example, if a 1099 independent contractor marketing rep provides marketing services for a DME supplier…and if the the rep markets to a physician…and if the physician, in turn, refers an FHCP patient to the supplier…and if the supplier pays a commission to the rep…then it is obvious that the AKS is implicated. That is, the rep has “arranged for” for the furnishing of a Medicare-covered item to the patient. Let us look at another example. If the DME supplier takes a physician on a Las Vegas trip…and the physician refers an FHCP patient to the supplier…then the AKS is clearly implicated.

These are examples of the “downstream” reach of the AKS. By “downstream,” I mean that the person receiving “something of value” from the DME supplier refers (or arranges for the referral of) the FHCP patient to the supplier. The FHCP patient is at the tail-end of the stream. But now let us switch gears and look at the “upstream” application of the AKS. Specifically, does the AKS apply when “there is no particular patient in sight” when one party provides something of value to another party? The answer is “yes.” Look at the italicized portion of the description of the AKS, above. And then let us look at two scenarios:

• A DME supplier agrees to actively promote a manufacturer’s products. In return, the manufacturer agrees to provide discounted pricing to the supplier. The supplier promotes the manufacturer’s products through a general marketing campaign not directed towards any particular patients (e.g., website, television, newspaper). And so at the time that the supplier promotes the manufacturer’s products, and at the time that the supplier pays discounted prices to the manufacturer, there no particular patient on the horizon. This scenario nevertheless implicates the AKS because the supplier is induced to purchase products from the manufacturer that are reimbursable by an FHCP.
• A manufacturer agrees to actively promote a DME supplier. Such promotion is not directed towards any particular patients. For example, the manufacture can pay for television ads that promote the manufacturer’s products…but also promote the supplier. In return, the supplier agrees to purchase products exclusively (or primarily) from the manufacturer. At the time that the manufacturer promotes the supplier, and at the time that the supplier purchase products from the manufacturer, there is no particular patient on the horizon. As in the preceding scenario, the AKS is implicated because the supplier is induced to purchase products from the manufacturer that are reimbursable by an FHCP.

These two scenarios fall within the italicized language, above. But then the question becomes: Is there any published authority that supports the “upstream” application of the AKS? The answer is “yes.” The following are three examples:

OIG Advisory Opinion No. 98-2
The proposed arrangement addressed in AO 98-2 involved a wholesaler that would receive volume-based rebates from a drug manufacturer with the wholesaler also agreeing to provide some “promotional support” for the manufacturer’s products. The arrangement in AO 98-2 only involves a drug manufacturer and a wholesaler and does not involve any parties that submit claims to FHCPs. The OIG’s analysis about whether the proposed arrangement could implicate the AKS states that the proposed arrangement potentially implicates the AKS because “the wholesalers will be offered remuneration in the form of a price reduction to induce them to purchase [FHCP-covered products] and to induce them to recommend or arrange for their customers to purchase such products from the wholesalers. [And] some of these customers may receive reimbursement under a Federal health care program.” In other words, the OIG concluded that an entirely upstream arrangement could violate the AKS.

Mason v. Medline Industries, Inc., 731 F. Supp. 2d 730 (N.D. Ill. 2010)
This court decision addresses a qui tam (whistleblower) suit brought against a medical-surgical supply manufacturer. The decision does not directly address whether the conduct at issue involved a prohibited kickback. Rather, it addresses the issue of whether the False Claims Act can be violated if the activity constituting an illegal kickback occurred upstream from the party that submitted the claim. The opinion specifically refers to an example of the manufacturer paying a middleman to influence county hospitals to purchase items from the manufacturer, for which the hospitals would then submit claims/cost reports to FHCPs. The court held that the hospital’s claims/cost reports could be false claims. What is noteworthy is that the only way the court could reach that conclusions is by accepting the proposition that the upstream remuneration allegedly provided to the middleman could constitute an illegal kickback.

OIG Exclusion Authority
When promulgating regulations related to its authority to exclude health care providers from participating in FHCPs, the OIG initially said it would not exercise its exclusion authority against manufacturers or distributors that do not submit claims to the programs for the items they supply. 57 Fed. Reg. 3271, 3300 (Jan. 29, 1992). But later, the OIG reversed course and stated “that such exclusions should be undertaken, when warranted by the conduct of such entities, notwithstanding the administrative burdens.” 63 Fed. Reg. 46676, 46678 (Sep. 2, 1998). While this relates specifically to OIG exclusion authority, that authority is closely connected to the AKS, and it indicates the government’s willingness and intention to apply the AKS and civil monetary penalties to upstream actors.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato, PC, a law firm based in Amarillo, Texas. He represents pharmacies, infusion companies, HME companies and other health care providers throughout the United States. Mr. 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].