March 11, 2022 - David M. Eskew
The following article was originally published on March 10, 2022 in the Expert Analysis section of Law360 and was authored by AEL partner Scott R. Landau.
It has long been the conventional wisdom that the safe harbors to the Anti-Kickback Statute (AKS) protect certain payment practices from liability, regardless of the intent of the parties. A February order issued by the U.S. District Court for the Central District of California in U.S. v. Medtronic PLC, a False Claims Act (FCA) qui tam case predicated on alleged AKS violations, however, casts doubt on this view, and could trigger the erosion of the very protections the safe harbors are meant to provide.
The AKS and the Safe Harbors
The AKS is a federal 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. 42 U.S.C. § 1320a-7b. AKS violations are subject to criminal penalties and administrative sanctions including fines, imprisonment and exclusion from participation in federal healthcare programs. See 42 U.S.C. § 1320a-7b(b); 42 U.S.C. § 1320a-7. Claims for payment from federal health care programs that are tainted by AKS violations are also actionable civilly under the FCA. See 42 U.S.C. § 1320a-7b(g).
Because of the broad reach of the AKS, following its implementation concerns were raised that certain commercial arrangements that should be outside its purview “were technically covered by the statute and therefore were subject to criminal prosecution.” See Medicare and State Health Care Programs: Fraud and Abuse; Clarification of the Initial OIG Safe Harbor Provisions and Establishment of Additional Safe Harbor Provisions Under the Anti-Kickback Statute, 64 FR 63518-01 (Nov. 19, 1999). As a result, in 1987 Congress enacted the Medicare and Medicaid Patient and Program Protection Act. See Public Law 100-93 (section 1128B(b)(3)(E)); 42 U.S.C. 1320a-7b(B)(3)(E)). The act tasked the U.S. Department of Health and Human Services to develop safe harbor provisions to “specify various payment and business practices that would not be subject to sanctions under the anti-kickback statute, even though they may potentially be capable of inducing referrals of business under the Federal health care programs.” Medicare and State Health Care Programs: Fraud and Abuse; Electronic Health Records Safe Harbor Under the Anti-Kickback Statute, 78 FR 79202-01 (Dec. 27, 2013).
Based on that mandate, HHS promulgated regulations establishing a number of safe harbors for certain arrangements that remove them from the scope of the AKS. United States ex rel. Baklid v. Halifax Hospital Medical Ctr. , No. 6:09-cv-1002-Orl, 2013 WL 6196562, *6 (M.D. Fla. Nov. 26, 2013). The regulations, codified at Title 42 of the Code of Federal Regulations, Section 1001.952, identify certain so-called payment practices that “shall not be treated as a criminal offense under … the Act and shall not serve as the basis for an exclusion” so long as the criteria enumerated therein are met. Id.
Importantly, in establishing the regulations, HHS “sought to specify particular safe harbors, that, despite the potentially unlawful intent, would protect non-abusive relationships.” Medicare and State Health Care Programs: Fraud and Abuse; Issuance of Advisory Opinions by the OIG, 62 FR 7350-01 (Feb. 19, 1997). According to HHS, the final safe harbors “describe practices that are sheltered from liability, even though unlawful intent may be present” and where the “actual intent of the parties is entirely irrelevant.” Id.; see also Medicare and State Health Care Programs: Fraud and Abuse; Clarification of the OIG Safe Harbor Anti-Kickback Provisions, 59 FR 37202-01 (July 21, 1994) (noting that the regulations “describe payments that would be prohibited, where the unlawful intent exists, but for the safe harbor protection that has been granted”).
The safe harbors were thus meant to provide parties with assurance that certain types of business practices would not be subject to enforcement actions under the AKS, regardless of intent. Medicare and State Health Care Programs: Fraud and Abuse; OIG Anti-Kickback Provisions, 56 FR 35952-01, 35983 (July 29, 1991).
In Medtronic, an action brought pursuant to the qui tam provisions of the FCA, see 31 U.S.C. § 3730(b) (permitting whistleblowers known as “relators” to sue persons or entities on behalf of the U.S. for defrauding the government), the relator, Dr. Kuo Chao, alleged that Medtronic, a medical device manufacturer, caused false claims to be filed for services payable by government health care programs by paying kickbacks to physicians to induce and/or reward them for using certain Medtronic devices, in violation of the AKS. See Docket in Civil Action No. 2:17-cv-01903-ODW-SS (hereinafter “Docket”), Entry No. 102.
After the government declined to intervene, and following motion practice regarding the complaint and first amended complaint, the relator filed a third amended complaint that Medtronic moved to dismiss. Id. In its motion, Medtronic argued, inter alia, that the relator’s claims should be dismissed for failure to plead that the subject payments fell outside the AKS’ safe harbors — specifically, the personal services safe harbor, which shelters certain service and management arrangements from liability so long as they meet the requirements set forth in the regulations. See Docket, Entry No. 106, at pp. 16-18. At the time of the alleged violations (prior to the January 2021 amendments to the AKS personal services safe harbor), the requirements of the personal services safe harbor were as follows: (1) the agreement is set out in writing and signed by the parties; (2) the agreement covered all the services the agent provides to the principal and specifies the services to be provided; (3) the agreement specifies exactly the schedule of intervals for services to be provided on a periodic or sporadic basis; (4) the term was not for less than one (1) year; (5) the aggregate compensation was set in advance, consistent with FMV, and was 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 under any federal health care program; (6) the services did not involve the counseling or promotion of any arrangement or activity that violated any law; and (7) the services did not exceed those which were reasonably necessary to accomplish the commercially reasonable business purpose of the services. See 42 C.F.R. § 1001.952(d) (effective prior to Jan. 19, 2021).
Though the U.S. had declined to intervene — leaving the relator to litigate on his own pursuant to Title 31 of the U.S. Code, Section 3730(c)(3) — it did submit a statement of interest in response to Medtronic’s motion. See Docket, Entry No. 108. In the statement, the government argued that the motion should be denied because lack of fair market value is not an element of the AKS, and because “FMV, standing alone, is not a defense to the AKS.” Id. at p. 6-8. In urging the court to deny the motion, the government also quoted what it described as the HHS Office of Inspector General’s long-standing warning that under the AKS, “neither a legitimate business purpose for the arrangement, nor a fair market value payment, will legitimize a payment if there is also an illegal purpose.” Id. at p. 7 (citing OIG Supplement Compliance Program Guidelines for Hospitals, 70 Fed. Reg. 4848, 4864 (Jan. 31, 2005)).
The Order Denying Medtronic’s Motion to Dismiss
In an order dated Feb. 24, the court denied Medtronic’s motion to dismiss, agreeing that the relator was not required to set forth the negation of one or more of the elements of the personal services safe harbor with particularity at the pleadings stage, and held that it was plausible that the safe harbor does not apply. See Docket, Entry No. 119, at 10-13.
In so holding, the court embraced many of the government’s assertions from its statement of interest, including that:
As the United States points out, even some fair market value payments will qualify as illegal kickbacks, such as when the payor has considered the volume of reimbursable business between the parties in providing compensation and otherwise intends for the compensation to function as an inducement for more business.Id. at 12.
The court also stated that the relator’s allegations regarding Metronic’s intent — to reward doctors for using Medtronic devices — if true, would take the payments out of the AKS safe harbor. Id. In reaching its conclusions, the court expressly referenced the long-standing warning cited by the government in the statement of interest. Id.
The notion that fair market value on its own is not enough to insulate an arrangement from AKS liability is not controversial — as fair market value is but one of seven requirements that must be met for the personal services safe harbor to apply. The court’s conclusion that improper intent can take the payments out of the safe harbor, however, is notable.
For starters, the personal services safe harbor does not contain an intent element; parties can thus achieve compliance without consideration of subjective intent so long as they meet all the other requirements of this safe harbor. The court’s conclusion here is also contrary to the purpose of the safe harbors — to “describe practices that are sheltered from liability, even though unlawful intent may be present” and where “[t]he actual intent of the parties is entirely irrelevant.” Medicare and State Health Care Programs: Fraud and Abuse; Issuance of Advisory Opinions by the OIG, 62 FR 7350-01, 7351 (Feb. 19, 1997). The order thus challenges the very premise of the safe harbors — the sheltering of certain arrangements from enforcement, regardless of intent.
The Medtronic court’s conclusion regarding the impact of intent on safe harbor protection is based, at least in part, on certain propositions set forth in the government’s statement of interest. In particular, the court appears to have been moved by what the government called “the HHS-OIG’s longstanding warning” that neither legitimate business purposes nor fair market value payment matter if there is also an illegal purpose. See Docket, Entry No. 119, at. 12; see also Docket, Entry No. 108, at 7, citing OIG Supplement Compliance Program Guidelines for Hospitals, 70 Fed. Reg. 4848, 4864 (Jan. 31, 2005). Interestingly, that statement originated from a 2005 document issued by HHS titled “OIG Supplemental Compliance Program Guidance for Hospitals,” in which HHS suggested so-called useful inquiries for hospitals in analyzing arrangements or practices for AKS compliance before taking steps to reduce or eliminate risk — such as ensuring safe-harbor compliance. Id. at 4864. The statement was thus taken out of context and is in fact inapposite, as it relates only to the analysis of arrangements prior to considering the application of potential safe harbors.
While the government did not expressly cite it to support the proposition that improper intent can vitiate safe harbor protection, its reliance thereupon — and its statement of interest generally — certainly implies a more expansive view than HHS’ longer-standing one — that “[t]he actual intent of the parties is entirely irrelevant” to safe harbor analysis.” Id. Regardless, in concluding that improper intent can take a payment out of the safe harbor, the Medtronic court embraced the more expansive view, effectively interpreting the safe harbors as rebuttable presumptions — that can be overcome upon a showing of improper intent — rather than safe harbors that provide assurances against enforcement when met.
Although the order was issued on a motion to dismiss and pertained only to the sufficiency of the pleadings, and though this conclusion itself is arguably dicta, it will no doubt be cited by parties in future cases as standing for the broad proposition that intent can eliminate safe harbor protection. If that happens, this — incorrect — view will thereafter creep into the AKS safe harbor jurisprudence, and in time, could lead to their erosion. The AKS safe harbors were so named intentionally — to provide safety from AKS enforcement for certain otherwise non-abusive arrangements even though unlawful intent may be present.
If courts embrace the view that intent can vitiate safe harbor protection even when the requirements of a safe harbor have been met, the safe harbors will no longer provide meaningful assurances that the business practices they cover are safe from enforcement. Their protections will be upended and ultimately rendered unsafe, despite their name to the contrary.