Moving the HME Industry Forward


Avoiding Kickbacks – Guidance from Two Cases

by Jeffrey S. Baird, JD • September 18, 2017

AMARILLO, TX – Within certain legal parameters, a DME supplier can make payments to physicians. For example, if the supplier and physician enter into a legitimate Medical Director Agreement, then the supplier can make payments to the physician. If a physician will provide bona fide education services for the supplier, then the supplier can pay fair market value (“FMV”) compensation to the physician.

Likewise, a DME supplier can pay a marketing rep for generating patients – including Medicare patients – so long as legal guidelines are met.  For example, if the rep is a bona fide W-2 employee, then the supplier can pay commissions to the rep.  On the other hand, if the rep is a 1099 independent contractor, then a number of requirements must be met, including the requirement that the compensation be fixed one year in advance and is the fair market value (“FMV”) equivalent of the rep’s services.

In entering into these types of arrangements, the DME supplier must avoid violating the Medicare anti-kickback statute (“AKS”) and the federal Stark physician self-referral statute (“Stark”).

• AKS – It is a felony for a supplier to give anything of value to a person/entity in exchange for (i) the person/entity referring a patient  (covered by a government health care program such as Medicare, Medicare Advantage, Medicaid and TRICARE) to the supplier, or (ii) arranging for the referral of a patient (covered by a government health care program) to the supplier, or (iii) recommending the purchase or lease of a product/service covered by a government health care program. Because the AKS is so broad, the Office of Inspector General (“OIG”) has published a number of “safe harbors.” A safe harbor is a hypothetical fact situation such that if an arrangement fits within the hypothetical fact situation, then as a matter of law the arrangement does not violate the AKS. If an arrangement does not fall within a safe harbor, then it does not mean that the arrangement violates the AKS; rather, it means that the arrangement must be closely scrutinized under (i) the language of the AKS, (ii) other published OIG guidance, and (iii) court decisions interpreting the AKS. A number of courts have enumerated the “one purpose test,” which states that if “one purpose” behind a payment is to influence referrals, then the AKS is violated notwithstanding that the primary purpose behind the payment is to pay for legitimate services. The safe harbor that applies to payments to physicians and 1099 reps is the Personal Services and Management Contracts safe harbor (“PSMC safe harbor”). Among other requirements, (i) the parties must enter into a written contract with a term of at least one year; (ii) the compensation must be fixed one year in advance (e.g., $18,000 over the next 12 months, or $1500 per month); and (iii) the compensation must be the FMV equivalent of the services rendered.

• Stark – A DME supplier can be subjected to civil monetary penalties (“CMPs”) if (i) the supplier has a financial relationship with a physician (compensation or ownership arrangement) and (ii) the physician refers Medicare and Medicaid patients to the supplier. There are a number of exceptions to Stark, including the Personal Services exception. This Stark exception says essentially the same thing as the PSMC safe harbor to the AKS.

First Case
In the first case, a federal grand jury in Connecticut indicted Jeffrey Pearlman, a former sales manager for Insys Therapeutics, Inc. According to a Department of Justice (“DOJ”) statement, Mr. Pearlman allegedly used bogus educational events as a “cover” for paying kickbacks to physicians in exchange for their increased prescriptions of Subsys, a spray version of the opioid fentanyl. The DOJ alleges that Mr. Pearlman and Insys sales representatives arranged sham “speaker programs,” that were billed as gatherings of physicians to educate them about Subsys. In reality, according to the DOJ, the events – usually held at high-end restaurants – mostly consisted of friends and co-workers who lacked the ability to prescribe the drug, and there was no educational component. According to the DOJ, the “speakers” were physicians who were paid fees ranging from $1000 to several thousand dollars to attend the dinners. The indictment says that these payments were kickbacks to the speakers “who were prescribing large amounts of Subsys and to incentivize those [physicians] to continue to prescribe Subsys in the future.” According to the indictment, one “speaker” was paid approximately $83,500 in order to induce more prescriptions of Subsys over similar (competing) products.

In addition, other former Insys Therapeuutics, Inc. executives and managers were indicted. A Massachusetts federal judge last Tuesday set an October 15, 2018, trial date for six former Insys Therapeutics, Inc., executives and managers accused of bribing physicians to prescribe Subsys, often to patients without cancer. At a Boston status conference, U.S. District Judge Allison D. Burroughs set the date for an estimated 10-week trial for Michael L. Babich, Alec Burlakoff, Michael J. Gurry, Richard M. Simon, Sunrise Lee, and Joseph A. Rowan.

Prosecutors have accused the company officials of steering kickbacks to physicians who prescribed Subsys. Starting in the summer of 2012, Insys managers allegedly paid physicians to speak at sham events where their primary goal was to prescribe Subsys.  If the physician did not write enough prescriptions, Insys would reduce their number of paid speaking events. “Speaker Program events were often just social gatherings at high-priced restaurants that involved no education and no presentation,” the indictment said.

Insurers were hesitant to approve payment for the treatment for patients without cancer, so Babich and Gurry allegedly devised a scheme to defraud the insurers. The co-conspirators allegedly hid their employer’s identity and lied about the patients’ diagnoses, pain, and other treatments in order to defraud insurers into approving payment for Subsys, the indictment said.  Through this alleged scheme, the executives generated “substantial profits” for themselves and the company.

Second Case
A Texas federal appeals court will not overturn the conviction and 80-month sentence of a woman found to have co-run a $3 million Medicare fraud, it said Wednesday, because her leadership style was “the paradigmatic case” for the use of a contested rare jury instruction.

Tracy Richardson Brown, the former co-owner of Psalms 23 DME LLC was convicted last year of nine counts of health care fraud, seven counts of paying illegal kickbacks, and one count each of conspiracy to commit health care fraud and conspiracy to pay illegal kickbacks after a trial before U.S. District Judge Stanwood Duval, Jr.  The jury found Brown caused the company to inappropriately bill Medicare via her New Orleans-area medical-supply company and orchestrated a $3 million fraud and kickback scheme involving payments for medical equipment.

Brown was sentenced to 80 months on fraud counts and 60 months on kickback counts.  A jury returned the conviction in May 2016. Her former co-owner was also convicted and sentenced.

A rare instruction under which the jury was told it could “consider evidence of the defendant’s charade of ignorance as circumstantial proof of guilty knowledge,’ in the Fifth Circuit’s words, was wholly appropriate in Brown’s case, the Fifth Circuit said. This is known as a deliberate-ignorance instruction.

“We have repeatedly cautioned that the instruction ‘should rarely be given,’ but this is the paradigmatic case. The thrust, if not the entirety of Brown’s defense, was that … she was not aware of her underlings’ crime. But ample evidence showed that as an owner and involved operator of the company, Brown was subjectively aware of a high probability of fraudulent billing,” the panel said.

A particularly strong example came in the form of Brown’s 2007 meeting with a consultant, who “pointed out” that Psalms “repeatedly waived copays; billed the same pieces of equipment for many of its patients; billed multiple pieces of equipment to a single patient that could not use all the equipment,” and other serious problems.  The instruction is “intended for this situation in which Brown knew it was highly likely that something illegal was afoot, but tried looking the other way.”

Largely because of the same instruction, Brown also could not challenge the sufficiency of the evidence given against her at trial, the panel said.  The jury was within its rights to find merely that Brown “was deliberately ignorant of the ongoing fraud.”  The jury’s finding “does not come close to being a miscarriage of justice.”

Of the $3.2 million Brown billed—much of it fraudulent—the government paid about $1.9 million, the U.S. Department of Justice said. Brown paid “patient recruiters” for names and Medicare ID numbers of Medicare recipients in and around New Orleans, then used those numbers to bill the federal program, claiming that Psalms 23 had provided them with power wheelchairs, accessories, and orthotics, the government said. Trial evidence showed that a vast majority of those patients did not need the equipment and many did not even get it, prosecutors said. Brown also engaged in upcoding—billing Medicare as if her company had provided patients with high-cost versions of back and knee braces after providing cheap versions, the DOJ said.

Brown was indicted in November 2013 along with Sandra Parkman Thompson. Thompson, who at the time of the indictment was incarcerated in Texas, was one of the “marketers” Brown paid to find physicians willing to prescribe equipment to patients who did not want or need it. Marketers received about $500 for each wheelchair referral and up to $250 for a referral for an “arthritis kit,” with various braces and orthotics, the DOJ said.

Lessons to be Learned
Here are the “takeaways” from these two cases for the DME supplier:

• Before the supplier provides “anything of value” to a physician, the supplier needs to consult with a health care attorney to ensure that the arrangement does not violate the AKS or Stark. If an arrangement with a physician violates the AKS, then it likely also violates Stark…..and vice versa.

• “Anything of value” can be a payment of money, it can be a trip, it can be a set of golf clubs, and it can be front row seats to a Springsteen concert. “Anything of value” can include the supplier performing services for the physician that the physician would normally have to perform himself/herself. By performing these types of services for the physician, then the supplier is saving the physician money; such savings constitutes “value” to the physician.

• It is permissible for a DME supplier to enter into a Medical Director Agreement (“MDA”) with a physician who also refers Medicare patients to the supplier. The MDA needs to comply with the PSMC safe harbor and with the Stark Personal Services exception. Among other requirements, (i) the MDA must be in writing and have a term of at least one year, (ii) the physician must render valuable (not “made up”) services to the supplier, (iii) the compensation paid by the supplier to the physician must be fixed one year in advance, and (iv) the compensation must be the FMV equivalent of the physician’s services. If the MDA does not meet these requirements, then the DME supplier and physician will likely be in violation of the AKS and Stark.

• If a supplier is going to pay a physician to put on an education program, then it must pass the “smell test.” Specifically, the physician must be qualified to make the presentation, the physician must actually make the presentation, the presentation topic must be substantive and timely, the audience must be in the position of benefitting from the presentation, and the compensation to the physician must be FMV.

• If a DME supplier uses a marketing rep, and the marketing rep generates government program patients for the supplier, and the supplier pays commissions to the rep, then the rep must be a bona fide W2 full-time or part-time employee of the supplier.

• If a DME supplier uses a marketing rep, and the marketing rep generates government program patients for the supplier, and if the rep is a 1099 independent contractor of the supplier, then the relationship needs to comply with (or substantially comply with) the PSMC safe harbor.

• The DME supplier needs to stay away from “patient recruiters.”

• If a DME supplier submits a claim to Medicare that arises out of an improper arrangement with a physician and/or a marketing rep (i.e., the arrangement violates Stark and/or the AKS), then the claim is “tainted” and becomes a false claim. Penalties under the FCA can be massive.

• If a DME supplier is doing something it should not be doing, then somebody knows about it, and the supplier will likely eventually get caught.

Attribution:  The information regarding the Jeffrey Pearlman indictment is taken from a Law360 article (dated February 10, 2017), written by Stewart Bishop, entitled “Ex-Insys Sales Boss Indicted in Fentanyl Kickback Scheme.” The information regarding the indictments of the other Insys executives and managers is taken from a Law360 article (dated September 12, 2017), written by Rachel Graf, entitled “Indicted Insys Execs Face October 2018 Trial.” The information regarding the sentencing of Tracy Richardson Brown is taken from a Law360 article (dated September 14, 2017), written by Cara Salvatore, entitled “5th Circ. Affirms 80-Month Sentence for $3M Medicare Fraud.”

Jeff Baird and Bradley Smith will be presenting the following webinar:
Buying and Selling a DME Supplier
Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato, P.C. & Bradley M. Smith, ATP, CMAA, Vertess
Tuesday, September 26, 2017
2:30-4:00 p.m. EASTERN TIME
When a person intends to buy … or sell … a DME supplier, there are a number of documentation and regulatory issues that must be addressed.  First, 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” sale or a “stock” sale.  The parties will need to engage in the normal 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 supplier.

Register for Buying and Selling a DME Supplier on Tuesday, September 26, 2017, 2:30-4:00 pm ET, with Jeffrey S. Baird, Esq., Brown & Fortunato, P.C., and Bradley M. Smith, ATP, CMAA, Vertess.

Please contact Ika Sukh at if you experience any difficulties registering.

Member: $99.00
Non-Member: $129.00

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato, PC, a law firm based in Amarillo, Tex. He represents pharmacies, infusion companies, HME companies, 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