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Rosen & Rahl: Court permits commission payments under EKRA

When making payments to those who perform marketing and other services or refer patients, health care providers must not only be aware of the restrictions and penalties imposed under federal anti-kickback provisions (AKS) and the Stark Law, but an additional layer of concern was added in 2018 with the Eliminating Kickbacks in Recovery Act (EKRA).

EKRA was enacted as part of the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act of 2018 (SUPPORT Act). The SUPPORT Act arose from concerns that existing law was not broad enough to prevent certain abusive payment practices related to opioid addiction treatment providers.

EKRA imposes harsh criminal sanctions for soliciting, receiving, paying, or offering any remuneration, directly or indirectly, overtly or covertly, in cash or in kind for any referrals to recovery homes, clinical treatment facilities or laboratories. EKRA further criminalizes the payment or offer of remuneration to induce a referral to or in exchange for an individual using the services of specified providers.

Also, EKRA provides far fewer exceptions or safe harbors than under Stark and the AKS, and EKRA generally prohibits all payments based on the volume or value of referrals.

Further, unlike Stark and the AKS, EKRA is an all-payor statute, applying to services covered by any type of health care benefit program in or affecting interstate or foreign commerce, including commercial health insurance plans.

It applies to laboratories

EKRA is also noteworthy because it includes broad definitions covering the activities of more than just traditional opioid treatment providers (the stated target of the SUPPORT Act).  Specifically, it is widely believed that EKRA applies to all laboratory testing subject to the federal Clinical Laboratories Improvement Amendments, commonly referred to as CLIA, including waived tests performed by physician-owned labs.

As a result of the volume/value restrictions in EKRA, most diagnostic laboratories have taken the position that payments to sales representatives or employees performing sales-related activities cannot vary with the volume or value of samples received from referring health care providers.  Those labs that have not adjusted compensation practices post-EKRA, and that pay based on sample volume or value, risk serious criminal sanctions.

Important case

A recent case from the federal district court in Hawaii, S & G Labs Hawaii v. Graves, provides some interesting reasoning concerning EKRA restrictions in the context of commission-based lab employees.

The case involved a diagnostic lab that hired a client account manager. The account manager and the lab entered into an employment contract that provided he would be paid an annual base salary of $50,000 and a percentage of the monthly net profits generated by his client accounts and the client accounts handled by certain other lab employees he managed.

Eventually, the account manager sued the lab and lab owners alleging among other things, breach of the account manager’s employment contract and violations of certain Hawaii wage statutes. As part of its defense, the lab argued that EKRA prohibited the lab from making percentage of profits payments to the account manager.

After nearly two years of contentious litigation, the court surprisingly disagreed with the lab’s EKRA arguments, holding that EKRA did not prevent the specified payments. The court concluded that EKRA applies only to situations where a payment is made “to induce a referral of an individual to” a provider covered by EKRA.

In this case, the court held that the percentage of profits payments were to induce the account manager to bring more business to the lab by contacting health care practices to encourage them to send samples to the lab, not to induce the referral of any individuals to the lab. Because the account manager’s clients were health care practices and not individuals, the court concluded that the EKRA volume or value prohibitions did not apply.

Tenuous reasoning

The S & G decision’s tenuous reasoning overlooks several realities. EKRA’s clear language prohibits the knowing and willful: (1) solicitation or receipt of any remuneration in return for referring a patient “or patronage” to a lab; and (2) payment or offer of any remuneration to induce a referral of an individual or in exchange for an individual using the services of a lab.

Under the facts of this case, it is an intellectual stretch to argue that the percentage of profits payments were not in return for the referral of patients and patronage by the account manager’s health care practice clients. It is also hard to see how the court could conclude that the payment structure was not to induce the referral of individuals to use the lab for testing.

It should not have mattered that the account manager had to convince the referring health care practices to send the individual patients to the lab, as the underlying employer payments clearly were to induce those referrals.

Recommendation

While some laboratories and those receiving variable bonuses from laboratories will cite S & G with favor, the case is not binding in other jurisdictions, and it will also likely be criticized by other courts.  Accordingly, the conservative and wise approach is that laboratories should continue to avoid any compensation arrangements that vary based on volume or value of samples.

Barry F. Rosen is the chairman & CEO of the law firm of Gordon Feinblatt LLC, heads the firm’s health care practice group, and can be reached at 410-576-4224 or brosen@gfrlaw.com. Christopher R. Rahl is a member of both the health care and financial services practice groups at Gordon Feinblatt, and can be reached at 410-576-4222 or crahl@gfrlaw.com