There are legitimate reasons why a durable medical equipment (DME) supplier may want to pay a referral source, such as a physician, hospital or long-term care facility. For example, if a referral source provides substantive services for a DME supplier, then it makes sense for the supplier to pay fair market value (FMV) compensation to the referral source for the services. However, the DME supplier needs to be careful.
As discussed below, even if a supplier pays FMV compensation to a referral source for substantive services, the arrangement can run afoul of the federal anti-kickback statute (AKS). The key is for the arrangement to fit within (or substantially fit within) the Personal Services and Management Contracts and Outcomes-Based Payment Arrangements (PSMC) safe harbor to the AKS.
The AKS prohibits a DME supplier from paying (or offering to pay) or receiving (or asking to receive) anything of value in exchange for:
- the referral of a patient covered by a federal health care program (FHCP)
- arranging for the referral of an FHCP patient or
- recommending the purchase of a product or service covered by an FHCP.
Several federal circuits have adopted the “one purpose” test. This states that if one purpose behind paying a party is to reward the party for referrals, the AKS is violated, notwithstanding that the main reason for payments is to pay for legitimate services.
Because of the breadth of the AKS, the Office of Inspector General (OIG) has published a number of safe harbors. If an arrangement falls into a safe harbor, the compensation paid under the arrangement does not constitute illegal remuneration in violation of the AKS. If an arrangement does not fall into a safe harbor, it does not mean that the arrangement violates the AKS. Rather, it means the arrangement needs to be carefully examined in light of the language of the statute, court decisions and other published guidance.
The PSMC safe harbor allows a DME supplier to pay a referral source for legitimate service on condition that all of the elements of the safe harbor are met. Before Jan. 1, 2021, it was difficult for a supplier to fully comply with the PSMC safe harbor, with two particularly challenging elements. One was the requirement that compensation be fixed a year in advance. The second was the requirement that if the payee renders services on a sporadic or part-time basis, the schedule of such services must be spelled out in the agreement.
Effective Jan. 1, 2021, the PSMC safe harbor was modified to give providers and suppliers more flexibility in furnishing products and services to FHCP patients. The sporadic or part-time requirement was removed. More importantly, instead of requiring the parties to the arrangement to fix the compensation one year in advance, the modified version requires the parties to fix the methodology for calculating the compensation one year in advance. This opens up the possibility of the compensation being on an hourly basis or, perhaps, on a per-unit-of-service basis.
The shift to “methodology of calculation” might cause a supplier to develop a false sense of security. A supplier might take the position that the compensation to a referral source for services can, without question, be on a “per-patient” or “per-encounter” basis. However, this is a slippery slope. There is a risk that compensation to a referral source on a “per” basis is tied to referrals from the referral source. For example, in the United States of America, et al., ex rel. Dr. Kuo Chao v. Medtronic PLC, et. al., as part of a procedural ruling, the court stated that even some FMV payments will qualify as illegal kickbacks, such as when the payer has considered the volume of reimbursable business between the parties in providing compensation and otherwise intends for the compensation to function as an inducement for more business. The Court stated that under the AKS, “neither a legitimate business purpose for the arrangement nor an FMV payment, will legitimize a payment if there is also an illegal purpose (i.e., inducing federal health care program business.)”
OIG Advisory Opinion
The OIG issued Advisory Opinion No. 22-09 in which it said a “per service” compensation would likely violate the AKS.
Proposed Arrangement
The party requesting the opinion (requestor) operates a network of clinical laboratories. Under the proposed arrangement, the requestor would enter into contracts with hospitals (the contract hospitals), pursuant to which the requestor would pay the contract hospitals on a per-patient encounter basis to collect, process and handle specimens (services) that are then sent to the requestor’s laboratories for testing. The requestor would bill FHCPs for the testing.
OIG’s Opinion
The OIG determined that the proposed arrangement would implicate the AKS because it would involve remuneration from a laboratory to a party that is able to make referrals to the laboratory paid for, in whole or in part, by an FHCP. Where an individual presents to a contract hospital without a laboratory specified on the order, the hospital could refer specimens from that individual to the requestor for reimbursable testing. Because of the per-patient encounter fees paid by the requestor for the services, contract hospitals have a financial incentive to direct specimens to the requestor. The proposed arrangement would not be protected by the PSMC safe harbor because the per-patient encounter compensation methodology would take into account the volume or value of referrals or other business generated for which payment may be made in whole or in part under an FHCP.
Applicability to DME Suppliers
The Medtronic PLC ruling and the OIG advisory opinion provide guidance to DME suppliers. For example, assume that a referring physician serves as a medical director for a supplier. While a credible argument can be made that fixed annual compensation (e.g., $6,000 over the next 12 months) or hourly compensation (e.g., $300 per hour) is appropriate under the PSMC safe harbor, assuming it is FMV, there is a risk that such an argument cannot be made for compensation that is a fixed dollar amount per patient chart review.
As another example, assume a DME supplier enters into a contract with a marketing company. Assuming the compensation is FMV, it is appropriate for the supplier to pay the marketing company on a fixed annual fee basis or on an hourly basis. On the other hand, the AKS will likely be violated if the compensation is a fixed dollar amount for each FHCP patient who purchases or rents a covered item from the DME supplier.
The Jan. 1, 2021, modification to the PSMC safe harbor is helpful. But it still does not allow parties to enter into an arrangement that common sense dictates is a kickback.
