Moving the HME Industry Forward


Clinical Study – Be Aware of Kickback Problems

February 13, 2017

AMARILLO, TX – It is important for DME suppliers to be aware that they live in the proverbial “glass house.” As part of this awareness, suppliers need to understand two metaphors that govern an analysis of whether an arrangement is legitimate, or if it is simply a disguised kickback: “you can put lipstick on a pig…but it is still a pig;” and “if it looks like a duck, walks like a duck, and quacks like a duck…then it is a duck.”

An arrangement that is coming under government scrutiny is the “clinical study.” Is this a legitimate arrangement designed to gather valuable data? Or is this a smoke screen designed to allow a DME supplier to pay money to a referring physician?

Description of Clinical Study
In a typical clinical study: (i) the physician will refer patients to the DME supplier for e.g., urological supplies, respiratory equipment, etc.; (ii) once a patient starts using the product, then the physician will obtain information from the patient such as “on a scale of 1 to 10, with 1 being, for example, ‘I can breathe easily’ and 10 being ‘I can hardly breathe,’ describe your ability to breathe;” (iii) the physician will forward the information to the supplier; and (iv) the supplier will pay compensation to the physician on a per patient/per month basis.

In determining whether a clinical study is a legitimate study designed to obtain valuable information about the efficacy of a product, or is a subterfuge designed for the DME supplier to pay money to a referral source, the supplier needs to examine federal and state law.

Federal Law
The Medicare anti-kickback statute (“AKS”) makes it a felony to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce or reward referrals of items or services reimbursable by a federal health care program (e.g., Medicare, Medicaid, Medicare Advantage, TRICARE).   In most clinical studies, because a DME supplier typically pays the physician on a per patient/per month basis, the government will likely conclude that the clinical study is intended to motivate physicians to generate patient referrals.

A DME supplier may take the position that it is not paying the physician for referrals – but rather – is paying the physician for legitimate services. Several courts have addressed this issue and have come up with the “one purpose” test. Under this test, if “one purpose” behind a payment is to induce referrals, then the AKS is violated notwithstanding that (i) the primary purpose of the payment is to pay for legitimate services and (ii) the payment is fair market value.

There are a number of safe harbors to the AKS. If an arrangement falls within a safe harbor then as a matter of law, the AKS is not violated. The Personal Services and Management Contracts Safe Harbor permits payments to referral sources as long as the arrangement complies with specific elements, including the following:  (1) payments must be pursuant to a written agreement, and (2) the aggregate compensation paid must be set in advance (e.g., $12,000 over the next 12 months or $1,000 per month), be consistent with fair market value, and not be determined in a manner that takes into account the volume or value of any referrals or business generated.  

Because the compensation in a typical clinical study is based on a per patient/per month basis, then the compensation is calculated in a manner that takes into account the volume of referrals from the physician to the DME supplier. As such, the typical clinical study does not meet the standards of the Personal Services and Management Contracts Safe Harbor.

A clinical study may attempt to avoid problems with the AKS by stating that “no patients (covered by a government health care program) will be included in the study and the physician will never be compensated by the supplier for any time or effort spent with any patient with such coverage.” However, the Office of Inspector General (“OIG”) has taken the position that if a party is generating both commercial and federally-funded health care program referrals to an entity, any arrangement where the entity pays that party on a per patient basis for the commercial patients and the federally-funded health care program patients are “carved out” from the payment, nevertheless violates the AKS.

The OIG’s reasoning is that compensation relating to the commercial patients also rewards the referral of patients covered by a government health care program. Therefore, a DME supplier may not circumvent the AKS by only paying compensation relating to commercial patients if the physician is also referring federally funded health care program patients to the supplier.

Because the typical clinical study incentivizes referrals, there is a risk that the physician will generate patients, covered by a government health care program, for the supplier. Although the clinical study might provide that the supplier will not compensate the physician for any time spent with patients, covered by a government health care program, the arrangement will likely violate the AKS if the physician also refers such patients to the supplier. In addition, the physician’s referral of patients, covered by a government health care program, to the supplier will likely violate the federal Stark law, which prohibits a physician from making referrals to a supplier with which the physician has a direct or indirect financial relationship.

State Law
Assume that the physician refers no patients to the DME supplier who are covered by a government health care program. In this scenario, the supplier does not have to contend with the AKS, the Stark law, and other federal anti-fraud laws. However, the supplier must review the clinical study arrangement under applicable state law.

All states have anti-fraud statutes that are similar to the federal anti-fraud statutes. Most states have anti-kickback statutes similar to the AKS. Some state anti-kickback statutes come into play only if the payer is the state Medicaid program; other state anti-kickback statutes apply even if the payer is a commercial insurer (or even if the patient pays cash). A number of states have physician self-referral statutes that are similar to the federal Stark physician self-referral statute. All states have a Medical Practice Act that applicable only to physicians.

As an example of one of many states with similar laws, New York defines professional misconduct in the practice of medicine to include “[d]irectly or indirectly offering, giving, soliciting, or receiving or agreeing to receive, any fee or other consideration to or from a third party for the referral of a patient or in connection with the performance of professional services.”  Significantly, this prohibition applies to items and services covered by any payer. As professional misconduct, the receipt of a prohibited kickback is punishable by the suspension or revocation of the physician’s license and a fine of up to $10,000 for each charge of misconduct.

Although New York’s kickback laws only apply to items or services covered by the New York Medicaid program,  New York’s physician self-referral law applies to items and services covered by any payer. Specifically, the wording of the New York physician self-referral statute prohibits a physician from referring a patient to a DME supplier if the physician or an immediate family member of the physician has a direct or indirect compensation arrangement with the supplier.  The referring physician and the supplier furnishing the services in violation of this prohibition are jointly and severally liable to the payer for any amounts billed and collected.  In addition, a violation by a health care provider may result in civil fines of up to $2,000 for each violation.

New York regulations specify certain relationships that are not considered compensation arrangements implicated by the self-referral prohibition. For example, the personal services exception provides that a personal service arrangement is not considered compensation arrangement as long as certain conditions are met, including a requirement that the compensation is set in advance, does not exceed fair market value, and is not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties.  This exception is similar to the Personal Services and Management Contracts safe harbor to the AKS.

In most clinical studies I have encountered, the DME supplier (or pharmacy) compensates the physician on a per patient/per month basis. Because the compensation is determined in a manner that takes into account the volume of referrals, the clinical studies arrangement does not fall within the Personal Services and Management Contracts safe harbor, nor within most state personal services exceptions. Consequently, there is a significant risk that a clinical study, in which compensation is on a per patient/per month basis, runs afoul of a number of state anti-fraud statutes.

Remember the metaphor discussed at the beginning of this article (“You can put lipstick on a pig …”). The bottom line is that if the physician is referring patients to the DME supplier, and if the supplier is paying compensation on a per patient basis, then: (i) if some of the patients referred are covered by a government health care program, the AKS and Stark law will likely be violated, or (ii) if the physician refers no patients to the supplier who are covered by a government health care program, then a state anti-fraud statute may nevertheless be violated.

A Whole New Medtrade
For Medtrade Spring 2017, the Education Advisory Board “blew up” the education program format and installed a radically different format. Feedback from attendees of prior Medtrades led the EAB to conclude that attendees value interactive education experiences Attendees want to interact with the instructors … and they want to interact with each other. And so with few exceptions, all of the programs will have two or more discussion facilitators (not “speakers”). The chairs will be configured in a semi-circle and the facilitators will stand in the middle of the attendees. The facilitators can use Power Points, but they are not required to do so. If the facilitators do use Power Point, it will not be the focal point of the program … rather, the focal point will be the interaction among the attendees and facilitators. In this interactive format, the facilitators will cover the assigned topic. This approach should result in an enjoyable and effective learning experience for the attendees.

Jeff Baird and Jim Greatorex will be presenting the following webinar:
Aggressively Moving Into the Retail Market While Avoiding Legal Pitfalls
Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato, P.C. & Jim Greatorex, Vice President of Accessible Home Improvement of America, a Division of VGM
Tuesday, February 14, 2017
2:30-4:00 p.m. EASTERN TIME
A DME supplier can no longer survive while being dependent on Medicare fee-for-service.  With competitive bidding, stringent documentation requirements, lower reimbursement, post-payment audits, and the fact that Medicare is tightening its purse strings, Medicare fee-for-service should only be a component of the supplier’s total income stream.  There are 78 million Baby Boomers (people born between 1946 and 1964); they are retiring at the rate of 10,000 per day.  Boomers are accustomed to paying for things out-of-pocket.  The successful DME supplier will be focused on selling upgrades, utilizing ABNs, and selling items for cash.  These retail sales may take place in a store setting, or they may take place over the internet.  Even when Medicare is not the payor, there are a number of requirements that the DME supplier must meet.  This program will discuss the federal and state requirements that the DME supplier must meet as it sells DME at retail.  These requirements include state licensure, collection and payment of sales and/or use tax, qualification as a “foreign” corporation, obtaining a physician prescription, and complying with federal and state telemarketing rules.  In addition, the program will discuss how the supplier can sell Medicare-covered items at a discount off the Medicare allowable.

Register for Aggressively Moving Into the Retail Market While Avoiding Legal Pitfalls on Tuesday, February 14, 2017, 2:30-4:00 pm ET, with Jeffrey S. Baird, Esq., of  Brown & Fortunato, PC and Jim Greatorex, of VGM.

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