Moving the HME Industry Forward


Recognizing and Avoiding Fraud Landmines – Part Five

Jeffrey S. Baird, JD • June 8, 2018

AMARILLO, TX – DME suppliers operate in a highly regulated environment. They must comply with (i) federal anti-fraud laws, (ii) state anti-fraud laws, (iii) supplier standards, (iv) accreditation requirements, and (v) guidance from Medicare, Medicaid and commercial insurers. If a DME supplier is doing something it should not be doing, then “someone knows about it.” That “someone” can be an employee, a competitor, a referral source, or a government agency/contractor.

If a DME supplier violates one or more of the federal anti-fraud laws, then it can (i) have potential criminal liability, (ii) potential civil liability, and (iii) be subject to payment supervision and PTAN revocation. The risks are too high for the supplier to be cavalier regarding compliance with anti-fraud laws. It is important that on a day-to-day basis, the supplier (i) be aware of the applicable federal and state anti-fraud laws and (ii) be aware of whether it is in compliance with the laws.

Part I summarized federal and state anti-fraud laws. Parts II – V discuss specific fraud landmines to avoid.

Hiring Sales Rep Whose Spouse is a Physician

Assume that a supplier is contemplating employing the spouse of a physician as a sales representative. As a physician, the spouse of the sales representative will be in a position to, and likely will, refer patients to the supplier. Assume that the supplier intends to pay the sales representative on a salaried basis with the potential for productivity bonuses or commissions based on the amount of business generated by the sales representative. Is this type of arrangement permitted by law?

Federal Anti-Kickback Statute

The AKS prohibits knowingly and willfully offering, paying, soliciting, or receiving any remuneration to induce or reward referrals of items or services reimbursable by a federal health care program. The AKS excepts from its reach “any amount paid by an employer to an employee (who has a bona fide employment relationship with such employer) for employment in the provision of covered items or services.” The OIG safe harbor uses substantially the same language; however, under the employment safe harbor, the term “employee” has the same meaning as it does for purposes of 26 U.S.C. § 3121(d)(2), which adopts the “usual common law rules.”

Federal Stark Law

The federal Stark law prohibits a physician (or an immediate family member of such physician) who has a “financial relationship” with an entity from referring patients to the entity for “designated health services” covered by Medicare, Medicare Advantage, or Medicaid unless an exception is available. Although the Stark law does not define the term “immediate family member,” regulations implementing the law define this term to include, among other things, a husband or wife. Similar to the employment safe harbor, the Stark law contains an exception for amounts paid by an employer to a “physician (or immediate family member),” if the physician or family member has a bona fide employment relationship and certain conditions are met. It is important to note that although the payment made to an employee cannot be based on the volume or value of referrals made by the physician, the exceptions do not prohibit payments in the form of productivity bonuses based on services performed personally by the employee. The productivity bonus of the employee cannot be based on or include, in any way, any of the referrals made by the physician family member.

State Law

It is important to also analyze the arrangement under applicable state anti-kickback and physician self-referral laws.

Application of Law

In the above example, the compensation paid by the supplier to the sales representative constitutes remuneration under the federal AKS. However, the supplier may avoid liability under the AKS if it structures the relationship to meet the OIG employment safe harbor, which requires the employment relationship to meet the common law rules. In other words, the supplier must have the ability to exercise control and direct the sales representative, not only as to the result to be accomplished, but also as to the details and means by which the result is accomplished. The substance, not the form, of the relationship will determine whether the sales representative meets these requirements. The Stark law will be implicated because a referring physician’s immediate family member will have a financial relationship with an entity with which the physician is making referrals for designated health services that are payable by Medicare, Medicare Advantage or Medicaid. However, the supplier may avoid liability under the Stark law if the relationship is structured to meet the employment exception to the Stark law. To meet this exception, the supplier must structure the employment relationship in such a manner that the remuneration paid is for identifiable services, is consistent with fair market value, is commercially reasonable even if no referrals are made by the spouse, and does not take into consideration, in any way, the volume or value of any referrals made by the spouse. A productivity bonus or commission that does not take into consideration the volume or value of referrals of the spouse, but is based on services performed personally by the sales representative, is permissible.

Working With Physicians in Rural Areas

Stark Rural Provider Exception

In entering into an arrangement with a physician in a rural area, the supplier needs to focus on the rural provider exception. The rural provider exception states that an ownership interest by a physician in a rural provider is not considered a “financial relationship” under Stark. Rural providers are defined as those that furnish at least 75% of the designated health services (“DHS”) they provide to residents of a “rural area.” Thus, whether this exception applies depends on whether at least 75% of the patients that the supplier services are located within a “rural area.” “Rural area” is defined as “an area that is not an urban areas as defined in 42 CFR 412.62(f)(1)(ii) which states that “the term urban area means a Metropolitan Statistical Area (MSA) or New England County Metropolitan Area (NECMA), as defined by the Executive Office of Management and Budget …” Therefore, any area that is not an MSA or a NECMA is considered to be a “rural area.” So long as no less than 75% of the products that the supplier furnishes is to patients in a rural area, the rural provider exception applies to the supplier, regardless of where the supplier is located. The current list of MSAs can be found on the U.S. Census Bureau website. A town might fall within a Micropolitan Statistical Area, which is defined as an urban cluster of at least 10,000 but less than 50,000 people. In regards to whether a Micropolitan Statistical Area could be considered a “rural area” under the definition of Stark, the Stark II, Phase III implementation final rule states: “Micropolitan Statistical Areas are not within MSAs; thus, for purposes of the physician self-referral rules, Micropolitan Statistical Areas are not considered urban and are, therefore, rural areas. So long as the supplier satisfies the Stark “rural provider” exception, then a physician can have an ownership in the supplier and can refer Medicare, Medicare Advantage and Medicaid patients to the supplier.

Paying Physicians: Guidance From a Criminal Case

Criminal 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 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.” Here are the “takeaways” from this criminal case:

  • 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.
  • “Anything of value” can be a payment of money, it can be a trip, it can be a set of golf clubs, it can be tickets to a Springsteen concert, and it can be services that the physician would normally have to perform himself.
  • It is permissible for a 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 Personal Services and Management Contracts 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 fair market value (“FMV”) equivalent of the physician’s services.
  • If a supplier is going to pay a physician to put on an education program, then it must pass the “smell test.” 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 supplier submits a claim to a government program that arises out of an improper arrangement with a physician, then the claim is “tainted” and becomes a false claim. Penalties under the FCA can be massive.

Government Scrutiny and Qui Tams

Increased Scrutiny By Government Agencies

The U.S. Department of Justice (“DOJ”) and the Office of Inspector General (“OIG”) are aggressive in bringing civil and criminal investigations against DME suppliers and their owners.

Proliferation of Qui Tam Lawsuits

Many investigations are a result of qui tam (whistleblower) lawsuits. This is when a disgruntled ex-employee, disgruntled current employee, or any other person with “original facts,” files a federal lawsuit against the supplier and its owners. The lawsuit will be in the name of the current/ex employee (“relator”) and in the name of the U.S.

Qui Tam Lawsuits

False Claims Act – Civil FCA contains a whistleblower provision that allows a private individual to file a lawsuit on behalf of the United States – also known as a qui tam.

Whistleblowers – Entitled to a percentage of any recoveries – Could be current or ex-employees, current or ex-business partners, patients, competitors, or any other person with “original facts”

The qui tam lawsuit will be based on the federal False Claims Act. It is the position of the DOJ that if the supplier commits an act that violates any law (civil or criminal), and if the supplier eventually submits a claim to a government health care program (in which the claim directly or indirectly is related to the acts), then the claim is a “false claim.” Under the FCA the supplier (and its individual owner) can be liable for actual damages, treble damages, and between $10,781 to $21,563 per claim. When the qui tam lawsuit is initially filed, it will go “under seal,” meaning that nobody (except for the DOJ) will know about it. An Assistant U.S. Attorney (in the jurisdiction in which the qui tam is filed), who specializes in civil health care fraud cases, will review the lawsuit and will ask investigative agents (FBI, OIG) to investigate the allegations set out in the qui tam suit. The agents may talk to current employees and/or ex-employees. The agents may talk to patients, marketers, and referring physicians. The agents may talk to others who may have information regarding the allegations set out in the qui tam. The investigation may take six months, or it may take several years. If the civil AUSA believes that the supplier’s actions are particularly serious, then he/she may ask a criminal AUSA to launch a criminal investigation. In fact, most criminal health care fraud investigations arise out of qui tam lawsuits. Often, a supplier will have to resolve two cases brought by the DOJ: a civil case … and a criminal case. Once the investigation is completed, then the DOJ will “unseal” the lawsuit, meaning that the defendant provider will find out about it. If the civil AUSA believes that the qui tam has merit, then the DOJ will take the lawsuit over and the relator’s attorney will “sit on the sidelines.” If the DOJ does not “intervene” (i.e., take the lawsuit over), then the relator’s attorney can proceed without the DOJ’s assistance. Because of the potential massive liability under the FCA, most qui tam lawsuits are settled (i.e., the provider pays a lot of money). In addition to paying money to the DOJ (of which 15% to 20% will go to the relator), the supplier will usually be required to enter into a Corporate Integrity Agreement (“CIA”) with the OIG. A CIA normally has a 5 year term. Under the CIA, the supplier must fulfill a number of obligations to the OIG.

Regulators Sift Through Data To Find Cases

Sifting Through Data

  • Law enforcement estimates that fraud accounts for 10% of Medicare’s annual spending
  • This is almost $58 billion in bogus payments
  • And DME suppliers are a big target.

In addition to receiving information from relators, the DOJ/OIG uncover fraudulent activity through “data mining.” Example: Agents look to the volume of products/sales compared to other suppliers and to previous years.

Government Interviews Witnesses

The government interviews patients to determine whether they received the products or services and if so, the products or services they actually received. Said another way, did the supplier properly bill for what was provided? The government interviews physicians to determine the nature of the prescriber-patient relationship. The government interviews company marketers to determine if free products or services were offered – these individuals can be cooperating witnesses for the government.

Jeff Baird and Allison Shelton will present the following the webinar:


What Constitutes a HIPAA Breach and How to Respond to the Breach

Presented by:

Jeffrey S. Baird, Esq., Brown & Fortunato, P.C. & Allison D. Shelton, Esq., Brown & Fortunato, P.C.

Tuesday, June 12, 2018

2:30-3:30 p.m. EASTERN TIME

HIPAA has been with us for enough years that health care providers, including DME suppliers, know that they need to follow HIPAA guidelines…and avoid HIPAA breaches. A HIPAA breach can be small and relatively uneventful. On the other hand, a larger breach can cause all kinds of trouble for the supplier. HIPAA enforcement is handled by the Office for Civil Rights (“OCR”). And during recent years, the OCR has been flexing its muscles in bringing enforcement actions against health care providers that experience HIPAA breaches. This webinar will discuss (i) what exactly a HIPAA “breach” is; (ii) the types of breaches that are relatively minor and those that are more serious; (iii) the types of liability that the supplier can face in the event of a HIPAA breach; and (iv) how the supplier should respond to a HIPAA breach. Equally as important, this webinar will discuss (i) the importance of a HIPAA compliance program; (ii) the roles that HIPAA compliance officers should take; (iii) the provisions that must be contained in a HIPAA compliance program; and (iv) the type of HIPAA training that the supplier should provide to its employees.

Register for What Constitutes a HIPAA Breach and How to Respond to the Breach on Tuesday, June 12, 2018, 2:30-3:30 pm ET, with Jeffrey S. Baird, Esq. and Allison D. Shelton, Esq., of Brown & Fortunato, PC.


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. Mr. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization, and can be reached at (806) 345-6320 or