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General Healthcare

Fixed Annual Fee Service Agreement With a Referral Source – What the Law Requires

January 27, 2014

AMARILLO, TX – The federal anti-kickback statute makes it a felony to offer or pay, solicit or receive, any remuneration in exchange for referrals for items or services that may be paid, in whole or in part, by Medicare, Medicaid, or another federal health care program.

Courts in a number of jurisdictions have adopted what has become known as the “one purpose test,” which asserts that if even one purpose of a payment is intended to reward or induce referrals, the anti-kickback may be violated, notwithstanding that there may be a primary legitimate purpose.

Any person, or any legal entity, may be a referral source for a DME supplier. Referral sources may include physicians, pharmacists, other DME suppliers, hospitals, sleep labs, and wound care centers. A DME supplier may legitimately need services from a referral source.

For example, there may be a legitimate need for the DME supplier to contract with a referring physician for the physician to serve as the supplier’s medical director. Likewise, a DME supplier may store CPAPs and CPAP supplies at a sleep lab; the sleep lab may perform education and set-up services for obstructive sleep apnea patients who elect to obtain their CPAPs from the DME supplier. And yet, if the DME supplier pays compensation to the physician….or to the sleep lab…..for services, then the supplier runs the risk of violating the one purpose test.

Because the anti-kickback statute is drafted broadly, the OIG has issued safe harbor regulations to provide “bright line” tests defining arrangements that do not violate the anti-kickback statute. If a business arrangement clearly falls within a safe harbor, then it is not violative of the anti-kickback statute.

If the arrangement does not clearly fall within a safe harbor, then it must be examined on a case-by-case basis in light of the anti-kickback statute and related court decisions to determine if the arrangement violates the statute. The safe harbor applicable to a service arrangement between a DME supplier and a referral source (e.g., physician, sleep lab, hospital) is the Personal Services and Management Contracts safe harbor.

This safe harbor provides that illegal remuneration (as defined in the anti-kickback statute) does not include payments made to an independent contractor as long as a number of criteria are met, including the following: (i) the agreement is set out in writing and signed by the parties; (ii) the agreement specifies the services to be provided; (iii) if the arrangement provides for services on a sporadic or part-time basis, then it must specify exactly the scheduled intervals, their precise length, and the exact charge for each interval; (iv) the term of the agreement must be for at least one year; and (v) the aggregate compensation must be set in advance, be consistent with fair market value, and must take into account any business generated between the parties.

From a practical standpoint, it can be difficult to fully comply with all of the requirements of the safe harbor. For example, because services are normally sporadic, it may be difficult to specify the exact scheduled intervals and charges. Additionally, it is difficult to calculate the fixed annual compensation without taking into account the business generated between the parties.

Nevertheless, failure to meet all of the criteria of the safe harbor does not necessarily mean that the arrangement violates the anti-kickback statute. A review of the court decisions, and my personal experience in defending investigations brought by the government, indicate that the most important requirements of the safe harbor are for the compensation to be fixed one year in advance and for the compensation to be consistent with fair market value for the services provided.

Separate and apart from the federal anti-kickback statute, many states have adopted anti-kickback laws similar to the federal statute. Some of the state anti-kickback statutes apply only if the payor is the state Medicaid program. Other state anti-kickback statutes apply even if the payor is a commercial insurer or an individual paying cash. An example of the latter is the Pennsylvania anti-kickback statute that provides, in part: “With respect to an insurance benefit or claim covered by this section, a health care provider may not compensate or give anything of value to a person to recommend or secure the provider’s service to or employment by a patient or as a reward for having made a recommendation resulting in the provider’s service to or employment by a patient……” 18 Pa. Const. Stat. 4117(b)(2). Some states adopt the federal safe harbors by reference; others do not. Even if a state does not adopt the federal safe harbors by reference, if an arrangement falls within a federal safe harbor, then the risk of a state enforcement action may be low. The DME supplier will need to consult with a health care attorney regarding the risk.

Baird will be presenting at Medtrade Spring 2014 in Las Vegas, where he will share his expertise, advice, and ideas. CLICK HERE to register for Medtrade Spring, held from March 10-12, 2014, at the Mandalay Bay Convention Center.

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