The prototypical kickback scheme is not difficult to spot: one physician pays another for patient referrals. This is a clear violation of the federal Anti-Kickback Statute, 42 U.S. Code § 1320a–7b (AKS), that anyone with even a passing understanding of the law could easily identify. What becomes more problematic for physicians, employees, and clinical laboratories is where the referring physician is not provided cash in exchange for a referral. Critically, some labs erroneously believe they are playing it safe by offering physicians free or discounted services, among other arrangements. But according to the Department of Justice, these practices still implicate the prohibitions on providing payments in exchange for referrals.

Guidance From the Government

The government’s AKS guidelines are complicated and, though there are safe harbor provisions available under the AKS, the government will not hesitate to prosecute those entities it feels are operating even on the fringes of guidelines from the Centers for Medicare and Medicaid Services (CMS).

To help guide physicians and laboratories through the statutory web of the AKS, the Department of Health and Human Services’ (HHS) Office of Inspector General (OIG) issued a “Special Fraud Alert” on June 25, 2014. In this document, OIG emphasized that “providing free or below-market goods or services to a physician who is a source of referrals, or paying such a physician more than fair market value for his or her services, could constitute illegal remuneration under the anti-kickback statute.”

The consequences for engaging in any violative conduct can be incredibly damaging to a lab. HHS makes clear that if a lab, pursuant to a kickback scheme, submits a claim for a test or procedure that is not medically necessary, it can give rise to liability under the False Claims Act, 31 U.S.C. § 3729 (FCA). This seems an obvious result. But what is less obvious—and perhaps counterintuitive—is that, even if the services are, in fact, medically necessary, a lab can still be found to have submitted a false claim under the FCA. This is because any claim that has been submitted by a lab pursuant to a kickback scheme is inherently a false claim under the law. The government’s reasoning is that, but for the kickback scheme, the patient would not have been provided the service and the government would not have made any payment.

Under the Spotlight

The most recent fraud alert bulletin from OIG highlights two kinds of arrangements in particular that are causes for concern. The first is blood specimen collection, processing, and packaging arrangements. For example, a lab may pay its physician clients for everything from collecting and centrifuging specimens, to packing them for transport. OIG notes that “payments under Specimen Processing Arrangements typically are made on a per-specimen or per-patient-encounter basis and often are associated with expensive or specialized tests.” Since physicians can bill Medicare themselves for processing and packaging specimens for transport, OIG views such arrangements as suspect (See Box).

A second area OIG points to is registry payments, more commonly called observational outcomes databases, wherein a lab pays physicians to collect and submit patient data for research purposes. According to OIG, such arrangements “may be reasonable in certain limited circumstances,” but they can also induce physicians to order unnecessary tests for the purpose of the research, among other problems. Warning signs that a registry arrangement runs afoul of the AKS include, among other characteristics, recommending that physicians order tests with a stated frequency or order multiple medically unnecessary tests; paying physicians on a per-patient or other volume basis; paying physicians at above fair-market value; or covering under the registry arrangement only those tests for which the lab has patents or that it performs exclusively.

What This Means for Labs and Their Employees

The takeaways from the OIG’s guidance are clear. Labs need to closely scrutinize any arrangements with referring physicians. If the lab provides services to physicians at a discount or pays a physician more than fair market value for his or her services, there is a good chance that the lab is exposing itself to liability. Case law also suggests that labs need to closely monitor other methods of remuneration being given to referring physicians. Payments in kind are no less scrutinized than payments in cash.

For employees, it is important to know that you are protected if you disclose concerns about the manner in which your lab is compensating referring physicians. The FCA contains an “anti-retaliation” provision that protects employees from being “discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions” in which those employees have tried to stop their employers from submitting false claims under the FCA and the AKS. Moreover, the FCA provides an incentive program for employees who disclose fraud against the government. This could lead to the whistleblowing employee receiving as much as 30% of any money wrongfully obtained by the employer and recouped by the government.

We also must acknowledge that the AKS and the FCA play important roles in protecting patients, employees, and the government from wrongdoing by healthcare providers. But given the complexity of the statutes, it is not difficult to conceive of a scenario in which a lab finds itself on the wrong side of the guidelines. It is paramount that both employers and employees speak with counsel that specialize in these areas if they have any sense that they may be non-compliant.

Signs of Trouble in Specimen Processing Deals with Physicians

The Office of the Inspector General for the Department of Health and Human Services outlines six characteristics of specimen processing arrangements that may be evidence of unlawful kickbacks.

  • Payment exceeds fair market value for services actually rendered by the party receiving the payment.
  • Payment is for services for which payment is also made by a third party, such as Medicare.
  • Payment is made directly to the ordering physician rather than to the ordering physician’s group practice, which may bear the cost of collecting and processing the specimen.
  • Payment is made on a per-specimen¬≠ basis for more than one specimen collected during a single patient encounter or on a per-test, per-patient, or other basis that takes into account the volume or value of referrals.
  • Payment is offered on the condition that the physician order either a specified volume or type of tests or test panel, especially if the panel includes duplicative tests (e.g., two or more tests performed using different methodologies that are intended to provide the same clinical information), or tests that otherwise are not reasonable and necessary or reimbursable.
  • Payment is made to the physician or the physician’s group practice, despite the fact that the specimen processing is actually being performed by a phlebotomist placed in the physician’s office by the laboratory or a third party.

David Scher is an attorney who focuses his practice on qui tam and whistleblower retaliation cases in California, Maryland, Washington, D.C., and nationally. Mr. Scher is a frequent news commentator and has been interviewed by Forbes.com, Politico, and the Washington Post in all matters of employment law.

R. Scott Oswald is the managing principal of The Employment Law Group. Based in Washington, D.C., Mr. Oswald handles all manner of whistleblower cases, including those litigated under the False Claims Act.