AMARILLO, TX – Assume that a DME 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 DME 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 federal Anti-Kickback Statute (“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.1 The statute has been interpreted to cover any arrangement where one purpose of the remuneration is to induce or reward referrals.2 Congress provided exceptions in the statute, and the OIG has subsequently added various safe harbor provisions to avoid liability under the AKS.
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.”3 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.” Therefore, under the safe harbor, a common law employment relationship exists when:
The person for whom services are performed has the right to control and direct the individual who performs the services, not only as the result to be accomplished by the work, but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done.4
Courts have determined that the substance, rather than the form, of the relationship will control.
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 the Medicare program, unless an exception is available. In the event a proscribed referral is made (and no exception is available), the entity performing the services is prohibited from submitting a claim for the services to the Medicare program.
The term “financial relationship” is defined in the Stark law to include both compensation arrangements and investment and ownership interests. The term “designated health services” includes, among other things, DME.5 The regulations define “financial relationship” to include “any arrangement involving any remuneration, direct or indirect, between a physician … and an entity.”6 The term “remuneration” includes “any payment or other benefit made directly or indirectly, overtly or covertly, in cash or in kind” with certain exceptions.7 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.8
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.9 Specifically, the exception requires:
1) The employment is for identifiable services.
2) The amount of the remuneration under the employment is—
i) Consistent with the fair market value of the services; and
ii) Except as provided in paragraph (c)(4) of this section, is not determined in a manner that takes into account (directly or indirectly) the volume of value of any referrals by the referring physician.
1) The remuneration is provided under an agreement that would be commercially reasonable even if no referrals were made to the employer.
2) Paragraph (c)(2)(ii) of this section does not prohibit payment of remuneration in the form of a productivity bonus based on services performed personally by the physician (or immediate family member of the physician).10
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.
Even though it is not the subject of this article, it is important to also analyze the arrangement under applicable state anti-kickback and physician self-referral laws. For example, the Florida Patient Brokering Act prohibits any person, “including any health care provider or health care facility” from offering, paying, soliciting, or receiving “any commission, bonus, rebate, kickback, or bribe, directly or indirectly, in cash or in kind” as payment in return for referrals.11
Like the federal AKS, Florida has adopted safe harbors to its Patient Brokering Act. Specifically, Florida has adopted “any discount, payment, waiver of payment, or payment practice not prohibited by 42 U.S.C. § 1320a-7b(b) or regulations promulgated thereunder.”12 This provision covers the safe harbor regulations, including the employment safe harbor as described above.
Another example is the Florida Anti-Kickback Statute which makes it “unlawful for any health care provider or any provider of health care services to offer, pay, solicit, or receive a kickback, directly or indirectly, overtly or covertly, in cash or in kind, for referring or soliciting patients.”13 The statute defines the term “kickback” to mean “a remuneration or payment, by or on behalf of a provider of health care services or items, to any person as an incentive or inducement to refer patients for past or future services or items, when the payment is not tax deductible as an ordinary and necessary expense.”14
Although the statute does not define what is considered to be “tax deductible as an ordinary and necessary expense,” the Internal Revenue Service (“IRS”) states:
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.15
In the same publication, the IRS states that one can “generally deduct the amount you pay your employees for the services they perform” and that the payment may be in “cash, property, or services” and may include “wages, salaries, bonuses, commissions, or other non-cash compensation such as vacation allowances and fringe benefits.”16 In addition to being ordinary and necessary, the pay must also be “reasonably” and “for services performed.”17
In the above example, the compensation paid by the DME supplier to the sales representative constitutes remuneration under the federal AKS. However, the supplier may avoid liability under the federal 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 and Medicaid. However, the DME 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.
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 email@example.com.
Footnote references available on request (firstname.lastname@example.org).