AMARILLO, TX – In last Monday’s Wall Street Journal, there was a front page article entitled “A Fast-Growing Medical Lab Tests Anti-Kickback Law.” This article is a “real life” example of how the Medicare anti-kickback statute affects health care providers and suppliers. The lessons taken from the article are equally applicable to DME suppliers.

According to the article, Health Diagnostic Laboratory, Inc. “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 article states that HDL built its business selling tests to measure “biomarkers” that help physicians predict heart disease. The article points out that “HDL bundles together up to 28 tests it performs on a vial of blood, receiving Medicare payments of $1,000 or more for some bundles.”

The article states that 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. According to the article, HDL is being investigated by the Department of Justice. The article quotes an HDL spokesperson who says that HDL’s fee to physicians fairly compensates the physicians for the labor cost of handling blood that goes beyond the $3 that Medicare pays for each blood draw.

The article then quotes a former federal prosecutor who states that such $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 article points out that HDL is cooperating with the investigation.

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 that 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 specified exceptions.

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

And so the challenge for HDL is to overcome the argument that one of the reasons for the $20 per blood sample payment is to reward physicians for referrals.

What is going on with HDL is relevant to arrangements that DME suppliers may want to enter into. For example, 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.

Another example may involve a sleep lab owned by Dr. Jones. The 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. And still another example may involve Dr. Jones referring patients to the DME supplier for lower back braces. The supplier will keep braces “on consignment” at Dr. Jones’ office. The DME 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 Dr. Jones on a “per patient” basis. This is what HDL appears to be doing as well. The payments by the DME supplier to Dr. Jones will vary based on the number of referrals from Dr. Jones to the supplier. The same appears to be true with the HDL arrangement; the amount of money paid by HDL to a physician will vary based on the number of referrals from the physician to HDL. A governmental agency would likely take the position that while the payments by the DME supplier to Dr. Jones may be for legitimate services, “one purpose” behind the payments is to reward Dr. Jones for referrals.

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 Medicare 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 DME supplier to Dr. Jones 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 Dr. Jones’ services.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato PC, 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].