ABA Section of Business Law
ABA Section of Business Law
Business Law Today
May / June 2000
Anti-kickback anxiety How a criminal statute is shaping the health-care business
By STANLEY A. TWARDY and MICHAEL P. SHEA
I t’s Friday afternoon. The office phone rings, and you answer. At the other end is a health-care client. She starts talking about a new deal. She tells you the opposing party has raised a legal question and, hence, the call to you. You’re listening with half a mind, the other half still wandering over the green lawns of the golf course, the white sands at the beach, or whatever weekend destination lies ahead.
Then the client says something that jolts you from your reverie: "And they’re saying that the arrangement would violate the anti-kickback law and we could be prosecuted for health-care fraud." Whoa! You swallow hard and say something like, "Could you run that last part by me again?"
This scenario is becoming familiar to business lawyers across the country, as waves from the government’s war on health-care fraud ripple into the world of business. The anti-kickback statute, one of the most potent weapons in the government’s arsenal, is not only generating criminal prosecutions; it is also changing the way deals are done in the health-care arena. Indeed, the statute’s impact in the boardroom may be even greater than in the courtroom because deal makers cannot afford to rely on the statute’s criminal-intent standard, which limits its reach in criminal prosecutions. For business lawyers and their clients, the statute has become a formidable obstacle that must be carefully circumnavigated in structuring transactions.
The anti-kickback statute criminalizes the "knowing and willful" offer, payment, solicitation or receipt of "any remuneration (including any kickback, bribe or rebate)" "in return for" or "to induce" the referral of or arranging for business paid for by a federal health-care program. 42 U.S.C. § 1320a-7b(b). Violators face imprisonment, criminal and civil fines as well as exclusion from federal health-care programs.
Congress has amended the statute several times since its adoption in 1972, often in response to protests that the broad prohibition against "remuneration" would outlaw many beneficial arrangements between health-care providers. For example, Congress has exempted certain arrangements from prosecution, and has required the Office of the Inspector General of the Department of Health and Human Services (OIG) to create additional safe harbors by regulation and provide "advisory opinions" to parties seeking guidance. See 42 U.S.C. §§ 1320a-7b(b)(3); 1320a-7b note; 1320a-7d(b).
In recent years, the government has invoked the broad prohibition against "remuneration" to target common business arrangements, such as product discounts, marketing agreements and home health-management deals. See for example, United States v. K. Glenn Shaw , No. 99-CR-10044 (D. Mass. Feb. 10, 1999) ("bundled" discounts, that is, discounts on one product linked to purchases of another product); OIG Advisory Opinion No. 98-4 (April 22, 1998)(marketing agreement between a doctor’s practice and a medical-management company); United States v. Kimberly Home Health Care Inc., No. 99-CR-494 (S.D. Fla. 1999) (sale of home-health agencies to a hospital in exchange for the right to manage those agencies for the hospital).
Novel applications of the statute to seemingly legitimate transactions will likely mushroom now that courts are allowing private parties to seek civil penalties for anti-kickback violations using the False Claims Act. See for example, United States ex rel. Thompson v. Columbia/HCA Healthcare Corp. , 20 F. Supp.2d 1017 (S.D. Tex. 1998).
This aggressive enforcement trend has heightened anxiety among health-care providers, many of whom are calling on business lawyers to insulate their deals from liability. That has been a mixed blessing — unleashing a stream of new business while creating a minefield where a misstep can land counsel in the midst of a criminal investigation. Just ask Mark Thompson and Ruth Lehr, two lawyers who were acquitted last year after a widely publicized prosecution alleging that they had structured sham transactions for their hospital client as part of a conspiracy to violate the anti-kickback statute. See United States v. Anderson , Case No. 98-20030-01/07 (D. Kan. 1998).
The anxiety stemming from the government’s anti-kickback offensive is shaping the behavior of health-care providers and their lawyers across the country. Some illustrations:
• Doctor recruitment — Faced with a tight labor market, health-care providers, like other businesses, must compete intensely to attract employees, including doctors. But unlike other businesses, health-care providers can no longer blithely woo candidates with relocation allowances, bonuses and other perks, lest these items be seen as illegal inducements. Hiring practices that were once common and accepted — and still are in other industries — such as annual compensation adjustments and exclusivity agreements, must now be restructured or eliminated.
The OIG recently commented that "our experience over the past few years has shown that practitioner recruitment is an area frequently subject to abusive practices." 64 Fed. Reg. 63518, 63543 (Nov. 19, 1999). That should serve as a warning to health-care executives and other recruiters of doctors, who must now review, formalize and document hiring practices to an extent unknown in most other industries if they wish to avoid government scrutiny.
• Rental arrangements — The health-care industry is also being forced to reexamine arrangements between suppliers of health-care products that rent space in doctor-owned offices. In a recent "Fraud Alert," the OIG said that these arrangements — including for example, rental fees paid by a prosthetics supplier to store its devices in a "consignment closet" in a doctor’s office — "may be disguised kickbacks to the doctor-landlord to induce referrals." Special Fraud Alert, February 2000, at 1.
For a large medical equipment supplier, however, monitoring such arrangements to ensure they are implemented lawfully can be difficult and costly, because these arrangements are often informal and involve small amounts of money paid to a large number of widely dispersed customers and approved by independent sales agents.
Some companies are trying to deal with the problem by changing the way they compensate sales agents (for example, by severing the link between commissions and volume of federally subsidized business), instituting periodic audits, and establishing top-to-bottom training programs. See for example, Corporate Integrity Agreement Between Office of Inspector General and Fresenius Medical Care Holdings Inc., Jan. 18, 2000. Other companies may find that the safest course is to avoid these arrangements altogether, for example, by renting space in a nearby office building.
• Seeking shelter in safe harbors — Aggressive enforcement of the anti-kickback statute is leading business lawyers to scour the OIG’s "safe harbor" regulations in the hope of finding exemptions to fit the needs of their health-care clients. The safe harbors make certain arrangements per se lawful and immune from prosecution regardless of the parties’ intent.
Although the failure to qualify for a safe harbor does not make an arrangement illegal, in the current enforcement environment, health-care clients are increasingly demanding the certainty of safe harbors. An arrangement must satisfy each element of a particular safe harbor to be protected.
Thus, at least for the cautious client, the effect of the safe harbors is to mandate intricate structures for a broad range of health-care transactions. For example, a provider seeking to joint venture with a pharmacy or medical-equipment company to ensure a reliable source of high-quality supplies may have to tailor the deal to track the "investment interests" safe harbor, which requires compliance with eight separate criteria for nonpublic investments. See 42 C.F.R. § 1001.952 (a).
There are also detailed (and generally narrow) safe harbors for doctor recruitment and rental arrangements, as well as other common health-care transactions, all of which impose complex structures on what might otherwise be simple transactions. See id. § 1001.952(b)(space rental; six criteria), (c)(equipment rental; six criteria), and (n)(doctor recruitment; nine criteria).
• Boilerplate — When drafting agreements between health-care providers, many business lawyers now include disclaimers inspired by the anti-kickback statute, such as: "X and Y agree that the fee has been determined as a result of arm’s-length negotiation and is fair and reasonable for the services of X. No amount paid hereunder is intended to be, nor shall be construed as, an inducement or payment for referral of or recommending referral of, patients of X to Y, or by Y to X."
It is debatable whether such a provision really protects clients (or their lawyers), particularly if the government sees it as an attempt to provide cover for kickback activity. Also, such a provision may foreclose the argument that the parties were unaware of the statute or its applicability to their deal, which remains a viable defense in some jurisdictions. See Hanlester Network v. Shalala, 51 F.3d 1390 (9th Cir. 1995). Nonetheless, the business client’s understandable yearning for comfort will likely sustain the demand for such provisions.
• Legal opinions — Fear about the statute is leading health-care clients to demand formal legal opinions blessing their deals. In the wake of Anderson, some business lawyers may balk at giving such opinions; and of course they should refrain from doing so if they have reason to believe that the parties intend to use a superficially legitimate agreement to camouflage kickback activity.
But at least in theory, an opinion that a transaction complies with the statute should give the parties a strong "advice-of-counsel" defense in the event the government questions the deal. Another possibility is to condition the deal on obtaining an advisory opinion from the OIG approving the arrangement.
• Breaking deals — Health-care providers are also invoking the anti-kickback statute to escape from deals. The argument in these cases is that a particular contractual provision violates the statute and is therefore illegal and unenforceable. See for example, Feldstein v. Nash Community Health Services Inc., 51 F. Supp.2d 673 (E.D.N.C. 1999); Polk County v. Peters, 800 F. Supp. 1451 (E. D. Tex. 1992). "[T]he policy against aiding in the enforcement of an illegal contract is such that a party that has inserted an illegal provision for its own benefit may nevertheless defend against a suit for breach of contract on the basis of the illegality." 800 F. Supp. at 1456. The risk of making such an argument, however, is that the government will view it as an admission of criminal liability.
• Client relations — Anderson reminds us that lawyers must protect themselves from their clients. If nothing else, the case will boost the numbers of memos to the file written by lawyers who advise health-care clients. Another self-protection measure is to detail in any written advice the factual basis for any conclusions, including all representations by the client. Nonetheless, ethical rules bar a lawyer from rendering legal advice based on factual statements from clients that the lawyer does not reasonably believe to be true. ABA Commission on Ethics and Professional Responsibility, Formal Op. 335 (1974).
Perhaps most important, the business lawyer should keep in mind that all written advice may one day have to withstand the scrutiny of a prosecutor — either because the client decides to cooperate and waive the attorney-client privilege or because a court finds that the crime-fraud exception to the privilege applies.
The OIG’s advisory opinion program has done little to calm anxiety about the statute. The program was supposed to provide certainty and predictability by allowing parties to request an opinion on the statute’s application to a proposed arrangement. But in reality, each time the agency issues an opinion, it illustrates anew the vast scope of the statute and the difficulty of anticipating its applicability.
Thus, the OIG has found that the statute applies to a wide variety of health-care arrangements — from a hospital’s policy of waiving copayments (Advisory Op. No. 99-6) to a pricing arrangement for therapeutic mattresses intended for nursing-home patients (Advisory Op. No. 99-3) to an agreement between a self-insured employer health plan and a managed-care organization to provide podiatry benefits for the employer’s retirees (Advisory Op. No. 99-9).
The broad and sometimes unanticipated sweep of the statute imposes monitoring and transaction costs on health-care clients, who must continually update their practices to stay abreast of an evolving regulatory scheme.
To complicate matters further, the agency has said in many cases that although the statute applies, it should not be enforced because the proposed arrangement would not increase costs to federal health-care programs. See for example, Advisory Op. No. 99-5 (Though it fell within literal terms of the statute, the OIG would not target an arrangement where a city imposed a "participation fee" on ambulance companies wishing to become municipal providers. It felt "the imposition of a fee should not increase the risk of over utilization or cost to federal health-care programs").
It is hard to fault the OIG for trying to focus the statute on cost containment, which was the principal legislative intent. But this type of opinion does nothing to ease concerns about the statute’s predictability, and is really another sign that it is too broad, that is, that the prohibition against remuneration cannot be applied literally lest it ensnare harmless or even beneficial business arrangements.
The OIG’s opinions have left health-care providers and their lawyers to ponder not only whether an arrangement falls under the statute but also whether the statute is likely to be enforced. The latter judgment is especially delicate because it depends on all the usual intangibles, such as the priorities of the local U.S. attorney and the personality of the particular prosecutor involved, plus the uncertainties of the aggressive new enforcement climate.
Advising clients also entails the sometimes-difficult prediction whether a particular
arrangement will increase federal program costs or result in overutilization, which seem
to be
the two lodestars guiding the OIG’s enforcement discretion. Some practices, such as
fees tied to the volume or value of referrals, are obvious drains to payors. But other
arrangements, such as certain joint ventures involving doctors and agreements between
doctors and medical-management companies, hold out both the prospect of enhancing
efficiency and quality of care and the possibility of increasing referrals.
In practice, it may turn out that one possibility is realized while the other is not, but that may only become clear through hindsight. At the time the deal is struck, the provider and its lawyer may be hard pressed to anticipate the cost of the arrangement. In such situations, it may be worth engaging a cost analyst or similar expert and documenting his or her advice.
The requirement that the government prove criminal intent to establish a violation of the statute does not offer much comfort to parties involved in a business deal. The intent element of the statute, which is generally not addressed in OIG advisory opinions, is two-fold. The government must prove both that the defendant made or solicited the payment "knowingly and willfully" and that it did so "to induce" or "in return for" referring or arranging for program-subsidized business.
These requirements often loom large in criminal prosecutions, with the parties sparring over the defendant’s knowledge and purpose. But the business client’s desire for certainty and comfort rules out relying solely on the parties’ intent to safeguard a transaction.
In addition, while some of the parties involved in a transaction may have honorable motives, others may not, and the business lawyer is not privy to all of the contemporaneous evidence of intent that is created at the time of the deal. A lone e-mail from a mid-level executive about the expected revenue benefits of a deal may be enough to arouse the government’s suspicions. In addition, if the client has consulted a lawyer about the statute, he or she already knows of its existence and potential applicability, which forecloses a defense that he or she was not acting "knowingly and willfully."
Finally, recent cases have eroded the protection provided by the "willfulness" requirement in some jurisdictions, see for example, United States v. Starks , 157 F.3d 833 (11th Cir. 1998) (government must show only that a defendant acted with a "bad purpose," not that he or she had knowledge of violating the statute), and other cases have held that a defendant violates the statute even if he or she acts with several purposes, only one of which is to induce referrals, see for example, United States v. Greber, 760 F.2d 68 (3d Cir. 1985) (defendant violates statute if even one of his or her purposes was inducement).
Prosecutors have become the new regulators of the health-care industry. The government’s anti-kickback offensive has created an approved (if narrow and awkward) set of business structures from which health-care providers deviate at their peril. Moreover, the boundaries of the set are blurry and evanescent. All of this poses an unparalleled challenge to the business lawyer seeking to advise the health-care client.
In today’s enforcement environment, the business lawyer would do well to treat the anti-kickback statute akin to a strict liability regime for arrangements between health-care providers that fall outside the safe harbors and run any discernible risk of increasing costs to federal health-care programs.
Twardy is a partner at Day, Berry & Howard in Stamford, Conn. Shea is an associate at the Hartford, Conn. office of the same firm.
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