AMARILLO, TX – In the non-health care space, it is common (and normally legally acceptable) for a company to pay commissions to 1099 independent contractor marketing reps for generating business. The reason that such arrangements are normally acceptable is because taxpayer money is not involved. Health care is a different animal. Much of health care (think Medicare and Medicaid) is taxpayer funded. In order to protect taxpayer money, there are federal and state laws in place designed to protect such money. These laws prohibit kickbacks and related activities.
There is a difference between a W2 employee and a 1099 independent contractor. There is no such thing as a “1099 employee” and there is no such thing as a “W2 independent contractor.” Only a human being can be an employee; an “it” cannot be an employee. In other words, while John Smith can be an employee, John Smith Marketing Group, LLC cannot be an employee.
The federal anti-kickback statute (“AKS”) prohibits offering, paying, soliciting, or receiving anything of value in exchange for referring (or arranging for the referral of) a patient to a person or entity for any item or service covered by a federal health care program (“FHCP”) or in exchange for purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, or ordering any FHCP-covered item or service. There is a safe harbor to the AKS that says that it is permissible for a provider/supplier to compensate a bona fide full-time or part-time W2 employee who generates FHCP business for the supplier. Ideally, the employee will receive a base salary plus discretionary bonuses based on a number of factors, one which is the generation of business.
The reasoning behind this safe harbor is that the supplier has the obligation to supervise and control its employee, and the supplier is liable for the acts of its employee. On the other hand, a supplier has no duty to supervise and control a 1099 independent contractor, and the supplier is not liable for the acts of a 1099 independent contractor. And so while it is permissible for a DME supplier to compensate a bona fide employee who generates FHCP business to the supplier, it is a violation of the AKS if the supplier compensates a 1099 independent contractor, who generates FHCP business to the supplier, on a production basis. The AKS cuts both ways: the payor of the money (the DME supplier) and the recipient of the money (the 1099 independent contractor) are both liable under the AKS.
In 1989 the Department of Health and Human Services (“DHHS”) stated: “We are aware of many examples of abusive practices by sales personnel who are paid as independent contractors and who are not under appropriate supervision. We believe that if individuals and entities desire to pay a salesperson on the basis of the amount of business they generate, then to be exempt from civil or criminal prosecution, they should make these salespersons employees where they can and should exert appropriate supervision for the individual’s acts.”
Also instructive is OIG Advisory Opinion No. 99-03 that addressed a proposed arrangement in which a sales representative for a medical supply manufacturer would be paid a monthly commission based on a percentage of amounts invoiced for products sold pursuant to the sales representative’s efforts. According to the OIG: “Sales agents are in the business of recommending or arranging for the purchase of the items or services they offer for sale on behalf of their principals, typically manufacturers, or other sellers (collectively, “Sellers”). Accordingly, any compensation arrangement between a Seller and an independent sales agent for the purpose of selling health care items or services that are directly or indirectly reimbursable by a Federal health care program potentially implicates the ant-kickback statute, irrespective of the methodology used to compensate the agent. Moreover, because such agents are independent contractors, they are less accountable to the Seller than an employee. For these reasons, this Office has a longstanding concern with independent sales agency arrangements.” However, the AO did state that in some circumstances, these type of arrangements may be permissible if the sales rep’s contract is structured to fit the Personal Services and Management Contracts (“PSMC”) safe harbor to the AKS.
Although a 1099 independent contractor relationship may be established under the PSMC safe harbor, such an arrangement must comply with the specific elements of the safe harbor, including the following: (i) payments to the 1099 independent contractor must be pursuant to a written agreement with a term of at least one year, and (ii) the methodology for calculating the compensation paid to an independent contractor must be set in advance, be consistent with fair market value (“FMV”), and not be determined in a manner that takes into account the volume or value of any referrals or business generated.
The OIG has taken the position that if a 1099 independent contractor paid on a production basis is generating both commercial and federally funded health care program referrals, any arrangement where the independent contractor is paid commissions only for the referrals of commercial patients and is paid nothing for the patients covered by a government program, nevertheless violates the AKS. The reasoning is that the commissions for the commercial patients, in reality, also serve as compensation for the patients covered by an FHCP. As stated in OIG Advisory Opinion No. 06-02: “The OIG has a long-standing concern about arrangements pursuant to which parties “carve out” Federal health care program beneficiaries or business generated by Federal health care programs from otherwise questionable financial arrangements. Such arrangements implicate and may violate the anti-kickback statute by disguising remuneration for Federal business through the payment of amounts purportedly related to non-Federal business.”
The lessons for DME suppliers are the following:
- It is permissible to pay bona fide W2 part-time or full-time employees, who generate FHCP business, as follows: (i) base salary plus (ii) bonuses (at the discretion of the employer) that are based on a number of factors, including the generation of business.
- The employment arrangement must be “bona fide,” not a “sham.” For example, assume that (i) a DME supplier and the sales rep sign a written employment agreement, (ii) the supplier withholds taxes from the rep’s paycheck, and (iii) the supplier gives a W2 to the re However, assume that the supplier, in reality, exercises no supervision and control over the rep. It is likely that the this “employment” arrangement will be considered to be a “sham” arrangement … meaning that a government enforcement agency will likely take the position that the rep is, in fact, a 1099 independent contractor of the supplier. This, in turn, will result in a violation of the AKS.
- A sales rep (who generates patients covered by an FHCP) can be a 1099 independent contractor if the arrangement complies with the PSMC safe harbor.
- If a 1099 independent contractor sales rep generates both commercial and FHCP patients, the parties cannot avoid violating the AKS by the DME supplier paying commissions only for the commercial patients … and paying nothing for the FHCP patie
- Lastly, let’s say that the rep is a 1099 independent contractor, is paid production-based compensation, and only generates commercial patients for the DME supplier. In this scenario, the AKS will not apply. However, the parties will need to review the state’s anti-kickback statute. All states have anti-kickback statutes that are similar to the AKS. Some state anti-kickback statutes only come into play when the payor is the state’s Medicaid progra Other state statutes come into play regardless of the payment source.
Jeffrey S. Baird, JD, 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. 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].
AAHOMECARE’S EDUCATIONAL WEBINAR
Billing Nonassigned: Steps to Replace Lost Income
Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato & Noel Neil, ACU-Serve
Tuesday, October 15, 2024
1:30-2:30 p.m. CENTRAL TIME
DME suppliers, like other health care providers, are being squeezed by traditional Medicare and Medicare Advantage (“MA”). In the traditional Medicare space, an example of this is the loss by DME suppliers of the 75/25 blended rates. To offset, at least in part, the decrease in reimbursement from traditional Medicare, DME suppliers should look seriously at billing traditional Medicare beneficiaries on a nonassigned basis. The movement to billing nonassigned is aided by the willingness of aging Baby Boomers to pay cash for “Cadillac” products, as opposed to being relegated to accepting “Cavalier” products when the DME supplier takes Medicare assignment. Billing nonassigned means that the Medicare beneficiary pays cash up front to the DME supplier and is directly reimbursed by Medicare. This program will discuss the multiple issues arising out of billing on a nonassigned basis, including the following: (i) What does it mean to bill non-assigned? (ii) If the supplier bills an item nonassigned, can the supplier set the price without limitation? (iii) Must the supplier submit a claim to Medicare so that the beneficiary can be reimbursed? (iv) Can the supplier sell a capped rental item for cash? (v) Does the supplier need to obtain documentation supporting medical necessity? (vi) Is the supplier at risk of having to repay Medicare and/or the beneficiary in the event of a subsequent audit?
Register for Billing Nonassigned: Steps to Replace Lost Income on Tuesday, October 15, 2024, 1:30-2:30 p.m. CT, with Jeffrey S. Baird, Esq. and Noel Neil.
Members: $99
Non-Members: $129
AAHOMECARE’S EDUCATIONAL WEBINAR
Negotiating Managed Care Contracts
Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato & Laura Williard, American Association for Homecare
Tuesday, November 5, 2024
1:30-2:30 p.m. CENTRAL TIME
Approximately 50% of Medicare beneficiaries are signed up with Medicare Advantage Plans (“MAPs”), while approximately 70% of Medicaid beneficiaries are signed up with Medicaid Managed Care Plans (“MMCPs”). These percentages are increasing. MAPs and MMCPs work essentially the same way: (i) the government health care program contracts with a “Plan” that is owned by an insurance company; (ii) the Plan signs up patients; (iii) the Plan signs contracts with hospitals, physicians, DME suppliers and other providers; and (iv) the government program pays the Plan that, in turn, pays the providers. In order to serve MAP and MMCP patients, DME suppliers must sign managed care contracts. In so doing, the supplier needs to be careful. Not only must the contract provide sufficient reimbursement to the supplier, but the contract will have some “trap” provisions that may be harmful to the supplier. This program will discuss the most important provisions that are contained in managed care contracts, such as covered services, medical necessity, passive amendments, incorporation of collateral documents, set-off, remedy for delay in payment, and payment forfeiture for late claims. The program will discuss how the supplier can negotiate with Plans; and the discussion will point out the provisions that are often non-negotiable and the provisions that are open to negotiation.
Register for Negotiating Managed Care Contracts on Tuesday, November 5, 2024, 1:30-2:30 p.m. CT, with Jeffrey S. Baird, Esq. and Laura Williard.
Members: $99
Non-Members: $129
