Know the Risks of the Personal Services & Management Contracts Safe Harbor

The federal anti-kickback statute (AKS) prohibits a durable medical equipment (DME) supplier from paying (or offering to pay) or receiving (or asking to receive) anything of value in exchange for:

• the referral of a patient covered by a federal health care program (FHCP)
• arranging for the referral of an FHCP patient, or
• recommending the purchase of a product or service covered by an FHCP.

A number of federal circuits have adopted the “one purpose” test. This states that if one purpose behind paying a party is to reward the party for referrals, the AKS is violated—even if the principal purpose behind the payments is to pay for legitimate services.

Because of the breadth of the AKS, the Office of Inspector General (OIG) has published a number of safe harbors. If an arrangement falls into a safe harbor, the compensation paid under the arrangement does not constitute illegal remuneration in violation of the AKS. If an arrangement does not fall into a safe harbor, it does not mean that the arrangement violates the AKS. Rather, it means the arrangement needs to be carefully examined in light of the language of the statute, court decisions and other published guidance.

A Safe Harbor
The Personal Services and Management Contracts and Outcomes-Based Payment Arrangements (PSMC) safe harbor allows a DME supplier to pay a referral source for legitimate services on the condition that all of the elements of the safe harbor are met. Before January 1, 2021, it was difficult for a supplier to fully comply with the PSMC safe harbor. In particular, there were two elements of the safe harbor that were challenging. One was the requirement that the compensation be fixed one year in advance. The second was the requirement that if the payee renders services on a sporadic or part-time basis, the schedule of such services must be spelled out in the agreement.

However, the PSMC safe harbor was modified January 1, 2021, to give providers or suppliers more flexibility in furnishing products and services to FHCP patients. The sporadic or part-time requirement was removed. More importantly, instead of requiring the parties to the arrangement to fix the compensation a full year in advance, the modified version requires the parties to set the methodology for calculating the compensation one year in advance.

This opens up the possibility of the compensation being on an hourly basis or, perhaps, based on a unit of service.

The shift to “methodology of calculation” might cause a supplier to develop a false sense of security. A supplier might take the position that the compensation to a referral source for services can, without question, be on a per patient or per encounter basis. However, this is a slippery slope. There is a risk that compensation to a referral source on a “per” basis is tied to referrals from the referral source.

For example, in United States of America, et al., ex rel. Dr. Kuo Chao v. Medtronic PLC, et al., as part of a procedural ruling, the court stated that even some fair market value (FMV) payments will qualify as illegal kickbacks, such as when the payer 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. The court stated that under the AKS, “neither a legitimate business purpose for the arrangement, nor an FMV payment, will legitimize a payment if there is also an illegal purpose (i.e., inducing federal health care program business).”

A Proposed Arrangement
Recently, the OIG issued Advisory Opinion No. 22-09, which states that a “per service” compensation would likely violate the AKS.

The party requesting the opinion (“requestor”) operates a network of clinical laboratories. Under the proposed arrangement, the requestor would enter into contracts with hospitals (the “contract hospitals”), pursuant to which the requestor would pay the contract hospitals on a per-patient encounter basis to collect, process and handle specimens (“services”) that are then sent to the requestor’s laboratories for testing. The requestor would bill FHCPs for the testing.

The requestor certified that:

the proposed arrangement would be set out in a writing signed by the parties, cover all of the services to be provided, and be for a term of at least one year;

the services would not exceed those that are reasonably necessary to accomplish the commercially reasonable business purpose of the aroposed arrangement;

the per-patient encounter compensation rate would be FMV;

contract hospitals would not separately bill payers or patients for the services; and

none of the contract hospital’s employed physicians, contracted physicians or affiliated practices would be required or directed to refer to the requestor nor receive any remuneration from the contract hospital for referrals to the requestor.

The OIG’s Opinion
The OIG determined that the proposed arrangement would implicate the AKS because it would involve remuneration from a laboratory to a party that is in a position to make referrals to the laboratory paid for, in whole or in part, by an FHCP. Where an individual presents to a contract hospital without a laboratory specified on the order, the contract hospital could refer specimens from that individual to the requestor for reimbursable testing.

Because of the per-patient encounter fees paid by the requestor for the services, contract hospitals have a financial incentive to direct specimens to the requestor. The proposed arrangement would not be protected by the PSMC safe harbor because the per-patient encounter compensation methodology would take into account the volume or value of referrals or other business generated for which payment may be made in whole or in part under an FHCP.

The proposed arrangement warrants careful scrutiny because lab services may be particularly susceptible to the risk of steering and because it would involve a “per-click” fee structure that generally reflects the volume or value of referrals or business otherwise generated between the parties. Here, the per-patient encounter fee could induce the hospitals to refer specimens to the requestor for testing. While the requestor certified that the compensation it would pay the hospitals would be consistent with FMV and that the hospitals would be prohibited from separately billing payers or patients for their services, these safeguards do not overcome the risk of inappropriate steering to the requestor given the financial incentive inherent in a per-patient encounter compensation methodology.

While the requestor certified that the contract hospitals would be required to represent that none of their employed physicians, contracted physicians or affiliated practices would be required to or asked to refer to them, this safeguard also does not sufficiently mitigate the risk of inappropriate steering. The hospitals have an incentive to encourage their doctors and affiliated practices to order lab services from the specific requestor.

Applicability to Suppliers
The Medtronic PLC ruling and the OIG advisory opinion provide guidance to DME suppliers. Assume that a referring physician serves as a medical director for a supplier. While a credible argument can be made that fixed annual compensation (for example, $6,000 over the next 12 months) or hourly compensation (such as $300 per hour) is appropriate under the PSMC safe harbor, assuming it is fair market value, there is a risk that such an argument cannot be made for compensation that is a fixed dollar amount per patient chart review.

The January 1, 2021 modification to the PSMC safe harbor is helpful. But it does not allow parties to enter into an arrangement that common sense dictates is a kickback.