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Lab Sales & Marketing Compliance: The Current State of EKRA

by Glenn S. Demby | Feb 9, 2023 | Enforcement-nir, Essential, National Lab Reporter

Sales and marketing operations liability risks and the measures labs should and shouldn’t take to manage those risks.

Business professionals shaking hands during a meeting in a modern office istock — iStock, shapecharge

Five years after its enactment, the Eliminating Kickbacks in Recovery Act of 2018 (EKRA) law remains a significant compliance concern for not only toxicology but all medical labs, including those that provide testing for COVID-19.¹ Here’s a briefing on the current state of EKRA, the liability risks, and the measures labs should and shouldn’t take to manage those risks, particularly with regard to their sales and marketing operations.

Why EKRA Is So Scary

EKRA makes it a criminal offense to offer or receive any remuneration in an exchange to “induce” a referral to a clinical laboratory, recovery home, or clinical treatment facility. The practical impact of EKRA is to cast concern on three common types of lab business arrangements:

Variable compensation packages that labs pay to sales and marketing personnel based on the value or volume of referrals they generate;

Leasing of space in the offices of referring physicians; and

Participation in Accountable Care Organizations (ACOs).

This may not seem like a big deal given that all these arrangements also raise red flags under the Anti-Kickback Statute (AKS), Stark Law, state fraud and abuse, and other laws. The problem is that most of the multiple exceptions and safe harbors under those laws that allow for legitimate arrangements don’t apply to EKRA. Result: Arrangements that labs meticulously structured to fit into AKS or Stark exceptions or safe harbors may still be illegal under EKRA, exposing the principals to risk of fines of up to $200,000 and imprisonment of up to 10 years.

EKRA Exceptions

The EKRA ban is subject to certain narrow exceptions, including for:

Certain disclosed discounts under a healthcare benefit program;

Certain payments to bona fide employees and independent contractors, although there are several provisos to this rule and it doesn’t mirror a similar exception in the AKS;

Payments for services that meet the AKS safe harbor for personal services and management contracts;

Certain coinsurance and co-payment waivers and discounts;

Certain federally qualified health center arrangements that meet the AKS exception; and

Remuneration made under certain arrangements that the U.S. Department of Health and Human Services (HHS) deems necessary.

Another thing that makes EKRA different from existing laws is that it’s an all-payor statute, meaning that it covers arrangements with not only Medicare, Medicaid, and other government healthcare programs but also private payors.

EKRA Enforcement

There’s one other aspect of EKRA that makes the law so difficult for labs to deal with: uncertainty. The law is vague and very broadly written and many felt that it was rushed into passage without full consideration of its kickback implications. Adding to the lack of clarity is that there are no implementing regulations to flesh out crucial details, such as precise definitions of the terms “laboratory” and “laboratory services” covered by the law. Although the law authorizes the U.S. Departments of Justice (DOJ) and Health and Human Services (HHS) to “promulgate regulations” to clarify parts of the statute, that has yet to happen and there’s no indication that it ever will.¹

Lessons from EKRA Enforcement

EKRA Drug Treatment Testing Enforcement Scorecard

• In September 2019, a federal grand jury indicted a former doctor for violating EKRA by paying illegal remuneration to recruit patients to the two California substance abuse treatment facilities he owned, but the case was dropped after the defendant died;³
• On January 10, 2020, the office manager of a Kentucky substance abuse treatment clinic pleaded guilty to soliciting kickbacks from a toxicology lab in exchange for urine drug test referrals in violation of EKRA and then seeking to cover up her fraud, for which she received a 10-month prison sentence and $55,000 fine;^4,5
• On September 15, 2020, two California defendants pled guilty to conspiracy to broker patients as part of a multi-state patient scheme in which one of them directed recruiters to bribe drug-addicted individuals to enroll in drug rehabilitation and the other paid referral fees from his rehabilitation center in exchange for patient referrals;⁶
• On October 6, 2021, the owner of two California addiction treatment facilities and a patient broker, who are now awaiting trial, were charged under EKRA with conspiracy to pay roughly $2.7 million in kickbacks for referrals;⁷ and
• In March 2022, a pair of brothers who operated addiction treatment facilities in South Florida were sentenced to 188 months and 97 months in prison, respectively, for their roles in a $112 million fraud scheme involving payment of kickbacks from patient recruiters to testing labs.⁸

Without regulations or official guidance, the only way for labs to understand how EKRA applies in “real-life situations” is to look to the actual enforcement actions and caselaw. The first takeaway is regarding EKRA’s scope and the labs it covers. Because it was enacted as part of a larger piece of legislation called the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act (SUPPORT Act) designed to combat the opioid crisis, it was hoped/expected that EKRA would apply only to toxicology labs and their referral arrangements with sober living homes and clinical treatment facilities.² In fact, most of the initial enforcement actions against labs involved toxicology and drug addiction testing.

However, it also became clear early on that the DOJ interpreted EKRA broadly as applying to all clinical labs. Thus, in May 2021, Malena Lepetich, the owner of Louisiana clinical lab MedLogic LLC, was indicted for her role in an alleged $15 million kickback scheme involving payments for referrals of specimens for COVID-19 and respiratory pathogen testing.⁹ It was the first enforcement action targeting a lab outside the toxicology and drug addiction testing space.

Another notable case was the prosecution of Mark Schena, former president of Arrayit Corporation, a self-described “world leader in microarray technology empowering researchers and doctors in the life sciences, wellness, and healthcare testing markets.” Among the charges against Schena was conspiracy to pay kickbacks and bribes to doctors and marketing companies for patient blood samples and orders for allergy testing in violation of EKRA.¹⁰ We’ll get back to the Schena case later.

Lessons from EKRA Caselaw

The most useful source of guidance on EKRA’s real-world meaning comes from the case law. Unfortunately, there have been only two reported cases, both of which focus on sales and marketing commission agreements, and they send contradictory messages.

The S&G Labs Case: The first court ruling interpreting EKRA was a civil rather than a criminal case that began when a lab sued a former marketing employee for soliciting employees and customers for his new employer in violation of his noncompete agreement with the original lab. The employee countered by claiming the lab reneged on its obligation to pay sales commissions based on the volume of referrals. We made that compensation agreement before EKRA, the lab responded, and had to rework it as a fixed salary agreement to ensure compliance when the law took effect.

But the Hawaii federal court disagreed. Commissions based on referrals is remuneration, the court acknowledged. However, the agreement in this case didn’t violate EKRA because the employee wasn’t referring individual patients but rather marketing to doctors. In other words, the court ruled that EKRA only bans percentage-based compensation payments to marketers based on direct patient referrals [S&G Labs Hawaii, LLC v. Graves, No. 1:19-cv-310, 2021 WL 4847430 (D. HI Oct. 18, 2021)].¹¹

The S&G Labs case raised eyebrows. Legal experts questioned the validity of the decision, contending it ignored the purpose of EKRA and failed to consider the plain meaning of “to induce,” as well as the way marketers and physicians interact in obtaining lab test orders. The case was an outlier and labs that relied on it did so at their own risk, the experts cautioned.

The Schena Case: One group that didn’t heed that message were the defense attorneys representing former Arrayit president Mark Schena in the EKRA case that we mentioned earlier. Schena’s legal team asked the court to dismiss the case, citing S&G Labs in arguing that the statute “does not prohibit payments to persons who do not themselves refer an individual to a clinical laboratory.”

But the Northern District of California federal court rejected the motion to dismiss and the S&G Labs case on which it was based. EKRA bans both direct and indirect referrals of patients to labs, the court reasoned. That includes percentage-based compensation to recruiters, both employees and independent contractors, even if those recruiters interact only with the doctors and not the actual patients [USA v. Schena, Case No. 5:20-cr-00425-EJD-1, 2022 WL 1720083 (N.D. Cal. May 28, 2022].¹²

What to Do to Manage EKRA Liability Risk

The practical takeaway from what we know about the current state of EKRA is that the statute applies to all medical labs and not just toxicology labs. We also know that, notwithstanding the S&G Labs case, paying sales commissions to lab marketers and recruiters is extremely risky, at least outside of the federal judicial district of Hawaii where the case is binding precedent. Practices to avoid include entering into compensation arrangements based on:

Numbers of individual referrals;

Numbers of tests performed; and

The amount billed or received from the referred individuals’ payor.

Of course, these arrangements were also risky before EKRA came along. However, AKS safe harbors allow for such arrangements when the sales person is an employee and not an independent contractor. But because the AKS safe harbor doesn’t apply to EKRA, such arrangements are problematic regardless of the salesperson’s status as an employee or contractor.

One potential solution is to offer sales personnel compensation incentives that are based not on referral volume or value but more neutral metrics that will incentivize effective performance, such as: