Liability Traps to Avoid:
Commission-Based Lab Marketing Arrangements

Contracts between labs and sales and marketing firms raise red flags under both the Anti-Kickback Statute (AKS) and Stark Law, especially when payment is by commission or based on the volume or value of sales generated. While acknowledging that "many advertising and marketing activities warrant safe harbor protection," the OIG has consistently taken the position that commission-based compensation to contract sales force will not meet the personal services and management contracts safe harbor because it "is not fixed in advance and is determined in a manner that takes into account the value or volume of business generated between the parties, including federal health care program business." Labs that fail to heed that warning do so at their own peril.

The HDL Case
If you don't believe it, just ask Health Diagnostics Laboratory (HDL). In a case which began as a series of qui tam suits, the US Justice Department accused HDL and two other labs (including Singulex, Inc.) of paying physicians sham processing fees in exchange for blood testing referrals, including medically unnecessary large multi-assay panels.

The charge focused on the labs' marketing arrangement with their outside sales consultant, BlueWave Consultants. The DOJ contended that the sales contract was illegal noting that in addition to a monthly consulting fee, BlueWave received a commission of 19.8% of lab revenue. The other problematic aspect was the marketing tactic of BlueWave's sales force, alleged to have encouraged physicians to order medically unnecessary blood testing via panels and offering doctors a fee per blood test (up to $20 from HDL and $10 from Singulex) for processing and handling samples. The result was billing of Medicare for millions in unnecessary tests.

On April 9, 2015, HDL agreed to pay $47 million to settle the FCA claims. Roughly two months later, it filed for Chapter 11 bankruptcy. Singulex shelled out $1.5 million to settle charges stemming from its role in the scheme. Both labs also entered into CIAs with the government.

Takeaway: While enlisting individuals and entities to furnish sales and marketing services for your lab may be crucial to success, you also need to be keenly aware of the AKS and Stark Law risks. The best way to manage these risks is to ensure that your arrangements satisfy a safe harbor:

1. Structuring arrangements as bona fide employment agreements when hiring individuals; and/or

2. Structuring arrangements as bona fide personal services and management contracts when hiring agencies or individuals acting as independent contractors; and

3. In all cases, ensuring that compensation is reasonable, reflective of fair market value and NOT based on commissions or the value or volume of sales or business generated.