This article describes a situation in which an ASC pays a physician such as an ophthalmologist as a supplier on a per-case or per-click basis for disposables, equipment and other items needed for surgery; the ophthalmologist then performs procedures at the ASC. This type of arrangement is fairly uncommon and, further, we believe it raises very significant legal concerns under the Stark Act and the Medicare Medicaid Anti-Kickback Fraud and Abuse Statute (the Anti-Kickback Statute).
I. Per-click arrangements
1. Stark Act commentary on per-click Arrangements. The government has articulated substantial concerns with per-click arrangements during the past 12 to 18 months in its commentary to the Stark Act. For example, it stated: “After reconsidering the issue, we are proposing that space and equipment leases may not include unit-of-service-based payments to a physician lessor for services rendered by an entity lessee to patients who are referred by a physician lessor to an entity. We believe that such arrangements are inherently susceptible to abuse because the physician lessor has an incentive to profit from referring a higher volume of patients to the lessee, and we would disallow such per-click payments, using our authority under section 1877(e)(1) of the [Social Security] Act, even if the statute does not expressly forbid per-click payments to a lessor for patient referred to the lessee.”1
2. No safe harbor for per-click arrangements. Under the Anti-Kickback Statute, there is no safe harbor that permits per-click arrangements. Further, consulting agreements must also be structured to be fixed per arrangement. The Anti-Kickback Statute safe harbor basically states that all rental charges for arrangements, aside from being reasonably necessary and consistent with fair market value, must be set in advance, the lease must be commercially reasonable and it must not be determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties. This type of arrangement would not meet these tests and thus, it would not meet a safe harbor. Moreover, it is the type of arrangement that is suspect.
In order to meet the “equipment rental” safe harbor, the arrangement must meet the following six standards:
(c) Equipment rental. As used in [the Social Security Act], “remuneration” does not include any payment made by a lessee of equipment to the lessor of the equipment for the use of the equipment, as long as all of the following six standards are met —
(1) The lease agreement is set out in writing and signed by the parties.
(2) The lease covers all of the equipment leased between the parties for the term of the lease and specifies the equipment covered by the lease.
(3) If the lease is intended to provide the lessee with use of the equipment for periodic intervals of time, rather than on a full-time basis for the term of the lease, the lease specifies exactly the schedule of such intervals, their precise length, and the exact rent for such interval.
(4) The term of the lease is for not less than one year.
(5) The aggregate rental charge is set in advance, is consistent with fair market value in arms-length transactions and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid or all other Federal health care programs.
(6) The aggregate equipment rental does not exceed that which is reasonably necessary to accomplish the commercially reasonable business purpose of the rental.
Note that for purposes of paragraph (c) of this section, the term fair market value means that the value of the equipment when obtained from a manufacturer or professional distributor, but shall not be adjusted to reflect the additional value one party (either the prospective lessee or lessor) would attribute to the equipment as a result of its proximity or convenience to sources of referrals or business otherwise generated for which payment may be made in whole or in part under Medicare, Medicaid or other Federal health care programs.2
In order to meet the “personal services and management contracts” safe harbor, the arrangement must meet the following seven standards:
(d) Personal services and management contracts. As used in [the Social Security Act], “remuneration” does not include any payment made by a principal to an agent as compensation for the services of the agent, as long as all of the following seven standards are met —
(1) The agency agreement is set out in writing and signed by the parties.
(2) The agency agreement covers all of the services the agent provides to the principal for the term of the agreement and specifies the services to be provided by the agent.
(3) If the agency agreement is intended to provide for the services of the agent on a periodic, sporadic or part-time basis, rather than on a full-time basis for the term of the agreement, the agreement specifies exactly the schedule of such intervals, their precise length, and the exact charge for such intervals.
(4) The term of the agreement is for not less than one year.
(5) The aggregate compensation paid to the agent over the term of the agreement is set in advance, is consistent with fair market value in arms-length transactions and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid or other Federal health care programs.
(6) The services performed under the agreement do not involve the counseling or promotion of a business arrangement or other activity that violates any State or Federal law.
(7) The aggregate services contracted for do not exceed those which are reasonably necessary to accomplish the commercially reasonable business purpose of the services.
For purposes of paragraph (d) of this section, an agent of a principal is any person, other than a bona fide employee of the principal, who has an agreement to perform services for, or on behalf of, the principal.3
3. Anti-kickback cases — large and small. There have been several cases over the last few years in which the government has incarcerated individuals or otherwise prosecuted them for what appeared to be relatively small amounts of money, which the government alleged such individuals fraudulently obtained. For example, in U.S. v. Goss, a lease case in Ohio, the lessor was being paid on a lease basis for services that were not really necessary in exchange for providing referrals to the lessee. Although the physician only received four hundred dollars under this lease, the physician nonetheless went to prison for a period of time.4
Additionally, in U.S. v. Kats, an owner of a medical clinic was prosecuted for accepting payments from a medical laboratory.5 Kats claimed these were payments for drawing blood and preparing the sample for shipment to the laboratory. The prosecutor alleged that this payment was also an inducement to use the laboratory, and, therefore, it was an illegal arrangement. The court rejected Kats’ argument, stating that a “‘kickback’ also includes a payment for granting assistance to one in a position to control a source of income, unless such payment is wholly and not incidentally attributable to the delivery of goods or services.” This ruling made it clear that the prohibited conduct was any payment that encouraged a referral, irrespective of whether the physician receiving the payment provided goods or services in return.6
The case law has always held that if any one purpose of a payment is to induce referrals then such a payment is considered illegal under the Anti-Kickback Statute.
There have also been several other recent Federal cases and investigations relating to the payment of money in exchange for referrals. The Federal government has repeatedly indicated that these types of per-click arrangements are susceptible to abuse and are therefore problematic, highly suspect arrangements.
II. Physician/vendor kickback arrangements
This article also discusses a situation in which a physician performing procedures as an ASC enters into an agreement with a third-party provider of cataract outsourcing services (“Vendor”). Per the agreement, the physician receives a fee from the vendor for each case performed in which the vendor’s disposables, equipment or other services are used by the ASC. There are situations in which a physician performing procedures at the ASC has an ownership interest in a vendor. These types of arrangements are also uncommon, and create significant legal risk under the Anti-Kickback Statute.As described above, arrangements in which a physician receives remuneration based upon the volume of referrals in return for purchasing items or services directly, or influencing the purchasing decisions of an organization, for items or services reimbursable by a federal healthcare program are inherently susceptible to abuse. A physician who receives a per-procedure fee from a vendor providing items or services reimbursable by Medicare or Medicaid has a financial incentive to use products or services of such vendor even if they do not represent the most cost-effective option. A physician who has an equity interest in a vendor often has an identical financial incentive. These types of relationships between vendors and physicians are at the core of an existing and lengthy investigation of relationships (and settlements) between orthopedic device companies with orthopedic surgeons.
Furthermore, such referrals do not qualify for protection under the Anti-Kickback Statute safe harbor, and the OIG’s guidance suggests that vendors should consider the following factors indicative of a federal Anti-Kickback Statute violation when determining whether to enter into a transaction with physicians: (i) might an incentive to a physician interfere with his or her
clinical decision-making; (ii) is there a potential for increased cost to Federal healthcare programs or beneficiaries; (iii) does the arrangement pose a risk of overutilization or inappropriate utilization; and (iv) does the arrangement raise patient safety or quality concerns?7 The relationships described above raise all four concerns.
It would be unwise for an ASC or its administrator to disregard the potential fraud and abuse risks associated with the above described problematic relationships. To minimize liability to the ASC and its physicians, the ASC should implement a conflict of interest policy in which physicians and other key employees with purchasing and decision-making authority are required to disclose any financial interest or compensation arrangement they have with vendors and other parties doing business with the ASC.
1 72 Fed. Reg. 38,183 (July 12, 2007).
2 42 C.F.R. § 1001.952(c).
3 42 C.F.R. § 1001.952(d).
4 96 Fed. Appx. 365, 2004 WL 953926.
5 U.S. v. Kats, 871 F.2d 105 (9th Cir. 1989).
6 871 F.2d 105 (9th Cir. 1989).
7 Compliance Program Guidance for the Durable Medical Equipment, Prosthetics, Orthotics and Supply Industry, 64 Fed. Reg. 36368 (Jul. 6, 1999).
