AMARILLO, TX – Health care providers, including DME suppliers, have restrictions imposed on them that non-health care providers do not have.
A major reason for the restrictions is that much of health care is paid for by tax dollars. There are laws in place designed to protect the expenditure of tax dollars.
This is where the concept of a “kickback” comes in. If a physician orders a product or service because the patient really needs the product, and if the patient is covered by a federal health care program (“FHCP”), then tax dollars are being spent wisely. However, if a physician orders a product or service because the physician will profit from doing so, then tax dollars are not being spent wisely.
This brings us to the federal anti-kickback statute (“federal AKS”) and the Employee Safe Harbor. The federal AKS is not limited to physicians. Rather, it applies to anybody and everything: physicians, nurses, hospital discharge planners, marketing reps, marketing companies, taxi drivers, kindergarten teachers, etc.
The federal AKS says that a DME supplier cannot give anything of value (money, golf clubs, trip to Cabo, etc.) to a person or company in exchange for (i) the person/company referring patients to the supplier for products/services covered by an FHCP, (ii) the person/company “arranging for” the referral of patients to the supplier for products/services covered by an FHCP, or (iii) the person/company recommending the purchase of products/services covered by an FHCP.
In short, the federal AKS does not want to see anybody…or anything…getting paid for generating a payment by an FHCP.
Having said this, the government recognizes the importance of providers being able to engage in legitimate marketing arrangements. The Office of Inspector General (“OIG”) has issued a number of “safe harbors.” A safe harbor is a hypothetical fact scenario. If an arrangement meets all of the requirements of the safe harbor, then as a matter of law the federal AKS is not violated.
If an arrangement does not meet all of the requirements of a safe harbor, it does not mean that the arrangement violates the federal AKS. Rather, it means that the arrangement needs to be closely analyzed under the wording of the federal AKS, court decisions, and other published guidance.
Regarding utilization of a marketing rep, there are two applicable safe harbors. The first one is the Personal Services and Management Contracts (“PSMC”) safe harbor. This is the safe harbor that applies to a DME supplier entering into a contract with a 1099 independent contractor marketing rep. Among other requirements, the PSMC safe harbor states: (i) the supplier and marketing rep must sign a written agreement with a term of at least one year; (ii) the methodology for compensating the rep must be fixed one year in advance; and (iii) the compensation paid to the rep must be the fair market value (“FMV”) equivalent of the rep’s services. A safe way to compensate the independent contractor rep is on a fixed annual fee basis (e.g., $36,000 over the next 12 months…or $3000 per month).
Another safe way to compensate the independent contractor rep is by the hour. Compensation to the rep cannot be directly or indirectly tied to the business generated by the rep for the DME supplier. For example, the supplier cannot pay commissions to the independent contractor rep.
Now let us reverse course and talk about a marketing rep who is a full-time or part-time W2 employee of the DME supplier. An employee is a totally different animal from an independent contractor. Apples and oranges…Venus and Mars.
The supplier is required to supervise and control the actions of the W2 employee marketing rep. If the employee rep’s actions result in damages to someone, the employer (the DME supplier) is liable for the damages.
Because of this potential liability, the employer is motivated to supervise and control the actions of the marketing rep. Conversely, the supplier is not required to supervise and control the actions of the 1099 independent contractor marketing rep. The supplier is not liable for the actions of the independent contractor marketing rep.
Because the employer is liable for the actions of the W2 employee marketing rep, as a general rule, the law allows the employer to pay production-based compensation (e.g., commissions) to an employee marketing rep. The law assumes that the employer is motivated to ensure that its employee marketing rep does not “step over the line.” This is where the Employee Safe Harbor comes in. It states that an employer (e.g., the DME supplier) can compensate a bona fide employee marketing rep for generating patients (including patients purchasing products/services covered by an FHCP) for the employer.
As discussed in the preceding paragraph, it is the general rule that the employer can pay production-based compensation to the employee marketing rep. The term “general rule” is used because there are a few federal court decisions that indicate that an employee marketing rep cannot be engaged solely in marketing; he/she must also be engaged in providing health care services. The authority of these cases is limited to the jurisdictions in which they were rendered.
Because of the existence of these cases, a conservative approach is for the DME supplier to pay the employee rep a base salary plus discretionary bonuses based on the rep achieving certain metrics such as (i) adhering to the employer’s policies and procedure, (ii) whether the employee is a team player with fellow employees, (iii) whether the referral sources (that the rep works with) provide positive feedback about the rep, and (iv) generation of business by the rep. The discretionary bonuses will not have a direct correlation to the business generated by the employee rep.
The key is for the rep to be a bona fide employee, not a sham employee. Let us say that (i) the DME supplier and rep enter into a detailed and well drafted Employment Agreement, (ii) the supplier withholds taxes from the rep’s paychecks, and (iii) the supplier issues a W2 to the rep. Notwithstanding the above steps, if the facts do not support the rep being an employee, then the rep will be construed to be an independent contractor.
And if the DME supplier is paying production-based compensation to the rep (who the supplier calls an “employee”), but if the facts indicate that the supplier is not exercising sufficient control and supervision to justify the rep being an employee, then the law will construe the rep to be an independent contractor…and the production-based compensation will cause the arrangement to violate the federal AKS. It does not matter what the DME supplier calls the rep; what matters is how the arrangement actually works.
Court Decisions
A number of courts have discussed whether a person is a bona fide employee … or is in reality an independent contractor.
A bona fide employee is “any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee.” 42 C.F.R. 1001.952(i). “Simply stated, the Bona Fide Employment Exception provides that the normal prohibition on payments to induce referrals does not apply where the payments are made to a (for lack of a better word) legitimate employee.” U.S. v. Halifax Hosp. Med. Ctr., LEXIS 167882, at *23 (M.D. Fla. 2013).
“[W]hether an individual is an employee or an independent contractor is generally a question of fact for the jury to decide.” Herr v. Heiman, 75 F.3d 1509, 1513 (10th Cir. 1996). However, “in cases…where evidence of the movant’s status as an independent contractor is ‘so one-sided,’ the movant ‘must prevail as a matter of law.’” Joint Tech., Inc. v. Weaver, 567 F. App’x 585, 588 (10th Cir. 2014) (citing Herr v. Heiman, 75 F.3d 1509,1513 (10th Cir. 1996)).
Whether an individual is a bona fide employee has been expressly exempted from matters on which the OIG may issue Advisory Opinions, so there is little guidance from the OIG. Courts consider all of the circumstances of the relationship between the parties in determining employee status. “No one factor is determinative; ‘all of the incidents of the relationship must be assessed and weighed.’” U.S. v. Robinson, 505 F. App’x 385, 387 (5th Cir. 2013).
“Whether a worker is an ‘employee’ is based on ‘the hiring party’s right to control the manner and means [of the work],’ which is determined by considering the following factors:
the skill required; the source of the instrumentalities and tools; the location of the work; the duration of the relationship between the parties; whether the hiring party has the right to assign additional projects to the hired party; the extent of the hired party’s discretion over when and how long to work; the method of payment; the hired party’s role in hiring and paying assistants; whether the work is part of the regular business of the hiring party; whether the hiring party is in business; the provision of employee benefits; and the tax treatment of the hired party.
U.S. v. Vernon, 723 F.3d 1234, 1271 (11th Cir. 2013) (citing Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 323-24, (1992)(discussing the common law list for determining whether a worker qualifies as an employee under the Employee Retirement Income Act)).
The Tenth Circuit relied on the above-referenced Darden factors in holding that the lower court did not err in awarding summary judgment based on independent contractor status of a worker whose compensation was not subject to taxes or withholding, was paid on a commission basis, and was ineligible for employee benefits. Joint Tech., Inc. v. Weaver, 567 F. App’x 585, 588 (10th Cir. 2014).
“Factors relevant to determining if an employment relationship is bona fide include the manner of payment, whether the work is part of the employer’s regular business, and the employer’s control over work hours.” U.S. v. Sanjar, 876 F.3d 725, 747 (5th Cir. 2017) (citing U.S. v. Robinson, 505 F. App’x 385, 387 (5th Cir. 2013)). In Sanjar, the Fifth Circuit held that a rational juror could have found that workers were not bona fide employees where they were “called . . . employees by certain witnesses, were paid per referral, sought referrals on their own, and kept no regular office hours.” Sanjar at 747.
In Robinson, the Fifth Circuit found that the employer “did not have sufficient control over the manner and means of the work performed” by two workers to characterize the relationship as a bona fide employment relationship where (i) there was no evidence the employer provided training or direction to the workers on marketing; (ii) there was no evidence that the workers received payments to advertise or market the employer’s products; (iii) referrals were obtained from leads and sources that were not provided by the employer; (iv) the workers used their own personal and professional contacts to obtain referrals; (v) the employer did not require the workers to keep regular office hours; and (vi) the workers did not have offices at the employer’s location. 505 F. App’x 385, 387-88.
In Eggleston, the Sixth Circuit commented that, in that case, the government and worker agreed that bona fide employment should be “measured by” three factors—the employer’s control over the worker’s work hours, whether the worker’s duties are as part of the employer’s regular business, and the manner of payment to the workers. U.S. v. Eggleston, 823 F. App’x 340, 346 (6th Cir. 2020) (citing Darden). Reviewing those factors, the Court agreed with the government that there was not sufficient evidence for the jury to find the worker was a bona fide employee because the employer “exercised little to no control over how she went about her work,” where the worker testified (i) she rarely went into the employer’s office except to pick up a check or attend the occasional meeting; (ii) her work was “merely an extension of what she previously did on her own, for free;” (iii) she turned in time sheets; (iv) she was issued a 1099; and (v) she claims to have been paid on an hourly basis, but her pay was in $1,100 increments (a per-patient fee testified to by another witness). Id.
Jeffrey S. Baird, Esq., is chairman of the Health Care Group at Brown & Fortunato, 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].
AAHOMECARE’S EDUCATIONAL WEBINAR
Buying and Selling a DME Supplier: Steps to Succeed
Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato & Tom A. Knapp, Esq., Brown & Fortunato
Tuesday, July 25, 2023
1:30-2:30 p.m. CENTRAL TIME
When a person/entity intends to buy … or sell … a DME supplier, there are a number of documentation and regulatory issues that must be addressed. The seller must take a number of steps to make itself more attractive. The buyer and seller need to decide whether the transaction will be an asset or stock sale. The parties will need to engage in multiple transactional steps: mutual nondisclosure agreement, letter of intent, stock purchase agreement/asset purchase agreement, and other closing documents. The buyer will need to engage in three types of due diligence: financial, corporate and regulatory. And the parties will need to meet a number of regulatory requirements such as submitting change of ownership notifications. This program will discuss all of these (and other) issues associated with the purchase and sale of a DME supplier.
Register for Buying and Selling a DME Supplier: Steps to Succeed on Tuesday, July 25, 2023, 1:30-2:30 p.m. CT, with Jeffrey S. Baird, Esq., and Tom A. Knapp (pictured), Esq., of Brown & Fortunato.
Members: $99
Non-Members: $129