Compliance Perspectives: Anatomy of a Physician Referral Relationship: Dissecting the Risk Areas and Ensuring Compliance

Relationships between health care providers and their physician referral sources are facing an unprecedented level of government scrutiny for potential fraud and abuse in these relationships. With a renewed focus on target areas of enforcement such as quality-of-care issues and mandates for increased levels of accountability from the governance and leadership of health care organizations, the federal government will continue its relentless pursuit to eradicate fraud, waste, and abuse. The recent arrests on federal charges of a physician and executives of New Jersey-based Biodiagnostic Laboratory Services LLC for an alleged scheme to bribe physicians for patient referrals demonstrate that laboratories are not immune from this scrutiny. Seemingly innocent business arrangements between laboratories and potential referral sources, such as employment agreements, medical directorships, and space or equipment leases, may provide an easy enforcement target if not structured appropriately. Additionally, in today’s challenging global economy, business opportunities and regulatory risks are constantly changing. Therefore, it is imperative that laboratories understand the legal framework and remain vigilant in navigating this dynamic, yet unstable, regulatory landscape they confront each day. Legal Framework Laboratories considering a potential arrangement with referral sources should familiarize themselves with the potential regulatory requirements in structuring these arrangements in a compliant manner. Two key laws that should be considered are the physician self-referral law, also known as the Stark law, and the anti-kickback statute. Physician Self-Referral Law. The physician self-referral law generally prohibits physicians and immediate family members with a direct or indirect financial interest in an entity, such as a laboratory, from referring Medicare patients to that entity for “designated health services,” which include clinical laboratory, radiology, and other imaging services, unless one of the many exceptions applies.¹ These exceptions include equipment and space leases, employment, and personal services. Each exception has specific requirements that must be met. For example, if a laboratory wishes to engage a medical director, the laboratory may look to structure the arrangement to comply with the personal services exception. This exception requires, among other things, a written agreement with a term of at least one year that is signed by the parties and specifies the services covered by the arrangement, which do not exceed those that are reasonable and necessary for the legitimate business purposes of the arrangement. The arrangement also cannot involve the counseling or promotion of a business arrangement or other activity that violates any law. Additionally, the personal services exception requires that the compensation paid under a medical director agreement must be set in advance, not exceed fair market value, and not be determined in a manner that takes into account the volume or value of any referrals or other business generated between the physician and the laboratory. The Stark law’s purpose is to prevent a potential conflict of interest that may arise for a physician who can benefit financially from making referrals that may not be medically necessary or appropriate. Importantly, the Stark law is a strict liability statute, which means that proof of intent to violate the law is not required—physicians may be liable even if the violation was “technical” and not intentional. Penalties for this strict liability law include denial of payment, refunds of billed amounts, and civil monetary penalties of up to $15,000 per prohibited referral. Anti-Kickback Statute. The anti-kickback statute (AKS) is a criminal law that prohibits the knowing and willful payment of “remuneration” to induce or reward patient referrals or the generation of business involving any item or service payable by federal health care programs.² Remuneration can involve anything of value, including cash, free rent, hotel stays and meals, excessive compensation, or other “perks” related to referrals. The AKS is intent-based, which means that a violation cannot occur unless the parties possess the requisite level of intent. The Office of Inspector General (OIG) has taken an expansive view of what constitutes the requisite intent, and the AKS’s intent standard has been interpreted to have been met if any one purpose is to induce referral or generation of federal health care program business.³ Moreover, the 2010 Patient Protection and Affordable Care Act revised the intent requirement such that actual knowledge of or specific intent to violate the AKS is not required. Merely the intent to induce the referral or purchase of items or services for which payment may be made, in whole or in part, by a federal or state health care program is sufficient. The OIG has established certain “safe harbors” that protect remuneration that could otherwise be considered suspect under the AKS. While compliance with a safe harbor is not mandatory, such compliance creates a presumption that the parties are meeting the statutory requirements of the AKS. These safe harbors include space rentals, equipment rentals, and personal services and management contracts. Using the medical director example described above, the personal services and management contracts safe harbor has similar requirements as the Stark personal services exception. These requirements include a written agreement with a term of at least one year that is signed by the parties and covers all of the arrangement’s services. The arrangement also cannot involve the counseling or promotion of a business arrangement or other activity that violates any law. The aggregate compensation must also be set in advance, consistent with fair market value in an arm’s-length transaction, and not determined in a manner that takes into account the volume or value of any referrals or business generated between the parties for which payment may be made by federal health care programs. Failure to comply with a safe harbor does not mean that an arrangement is per se illegal, and such arrangements must be analyzed on a case-by-case basis to determine risk under the AKS. Conversely, even if an arrangement complies with all of the applicable safe harbor requirements, the OIG maintains that a safe harbor still may not protect the arrangement if the intent or purpose of the arrangement is to provide a referral source with the opportunity to generate or retain a profit from the referral source’s referrals. The AKS covers both the payers and recipients of kickbacks with penalties including fines of up to $50,000 per kickback plus three times the amount of the remuneration and imprisonment up to five years.⁴ Conviction may also lead to exclusion from participation in federal health care programs. False Claims Act. Where the government has found violations of the AKS or the Stark law, the False Claims Act (FCA) may create additional civil and criminal liability for laboratories.⁵ Where a claim to Medicare or Medicaid has resulted from a kickback or is made in violation of the Stark law, it may be rendered “false or fraudulent,” creating liability for up to three times the program’s loss plus $11,000 per claim filed. The FCA also can subject a laboratory to criminal liability. Questions to Ask in Structuring Arrangements With Referral Sources When applying the regulatory framework to their operations, laboratories should apply several basic principles in evaluating whether to enter into a particular business arrangement or opportunity. Laboratories should consider the following questions prior to entering into relationships with potential referral sources to ensure that the relationship is appropriate:

1. Does the arrangement or practice have a potential to interfere with, or skew, clinical decisionmaking?
2. Does the arrangement or practice have a potential to increase costs to federal health care programs?
3. Does the arrangement or practice have a potential to increase the risk of overutilization or inappropriate utilization of laboratory services?
4. Does the arrangement or practice raise patient safety or quality of care concerns?

In addition to these questions, laboratories should consider the following to assist with monitoring and maintaining compliance: Remember the Stark law’s basic purposes. Federal regulators believe that the successful and efficient delivery of quality health care is driven by sound clinical judgment that is free from potential conflicts of interest. Therefore, laboratories should examine potential arrangements with referral sources and avoid potentially conflicted medical decisionmaking, which can ultimately result in overutilization, increased program costs, and unfair competition. Meet a Stark exception and hug a safe harbor or advisory opinion as closely as possible. Remember, the Stark law is a strict liability statute so intent is not required, and an exception must be met if the Stark law applies. On the contrary, not falling directly within a safe harbor under the AKS does not mean you are in violation of the law. However, it does mean that there may be a significant component of risk present. It is optimal to meet a safe harbor or structure the arrangements to come as close to compliance with the safe harbor as possible. Always review and evaluate OIG guidance and advisory opinions. More importantly, document reasons why full compliance with an applicable safe harbor may not be possible. “Everyone is doing it” is not an absolute defense. A laboratory’s compliance obligations will never be viewed by regulators in the context of “what everyone else is doing.” It really shouldn’t and doesn’t matter. Laboratories should avoid becoming the next “national project” and be particularly sensitive to areas of heightened scrutiny. Laboratories should stay up to date on government enforcement trends by reviewing the Health and Human Services OIG work plan, recent government settlements, and any other guidance that may be applicable to their operations. Greed is not good. Optimization of revenue and achieving compliance is possible, but laboratories should remain vigilant to ensure that the two are not mutually exclusive. Laboratories should look for potential red flags to investigators, such as excessive return on investments and excessive compensation. A laboratory’s return on investment, compensation structure, and operational expenditures should be demonstrative of its commitment to compliance. Fair market value is your best friend. Facilitating business arrangements in today’s complex regulatory landscape is sufficiently challenging without having to worry about implicating Stark and AKS. Minimize some of the frustration by relying on outside valuators and respected independent industry resources to justify potential services and investments. A key question to ask is if a reasonable commercial entity would undertake the arrangement absent a potential for referrals. Anytime a health care business offers something to a referral source for free or at below fair market value, the question should be “Why?” To further ensure that an arrangement falls within fair market value, a laboratory can consider obtaining an outside valuation of the compensation from an independent third party. Document! Document! Document! A regulator may take the position that if something is not documented, then it does not exist. In certain instances, a lack of documentation may equal a regulatory violation. Laboratories must document all legitimate business purposes for its arrangements with referral services, fair market value assessments, and all services to be provided and the time spent providing them. But documentation is discoverable, so accuracy is of the upmost importance. Review compliance on an ongoing basis. Compliance programs are more than a “trophy document” or annual training. Laboratories should continually reassess to be certain that deals are properly implemented, parties are fulfilling substantive responsibilities, and ongoing documentation is properly maintained. Be sure to integrate best practices into your organization’s culture and reflect these best practices in all business practices. Look for the big picture. When evaluating an issue or potential violation, gain a full understanding of every angle of the layered, interconnected network of facts and the risk impact to your organization’s business. Do not review issues as isolated incidents, especially when the stakes are high. Managing your compliance programs using an enterprise risk management approach can never hurt, since it compels everyone to be proactively engaged in the process. The Takeaway: Business arrangements between laboratories and potential referral sources can be risky if not structured properly. In setting up agreements, labs must review key laws and ask key questions regarding the intent and appearance of the arrangements. Anna Grizzle can be reached at agrizzle@bassberry.com. LeToia Crozier can be reached at crozier.letoia@cogenthealth care.com. 1. 42 U.S.C. § 1395nn(a). 2. 42 U.S.C. § 1320a-7b(b). 3. See United Sates v. LaHue, 261 F. 3d 993 (10th Cir. 2001); United States v. Kats, 871 F.2d 105 (9th Cir. 1989); United States v. Greber, 760 F.2d 68 (3d Cir.), cert. denied, 474 U.S. 988 (1985). But see United States v. McClatchey, 217 F.3d 823, 834 (10th Cir. 2000), in which the 10th Circuit Court of Appeals stated that the mere hope for or expectation of referrals collateral to a legitimate motive for the financial arrangement does not rise to the level of an improper purpose. 4. Id. 5. 31 U.S.C. §§ 3729-3733.

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