Is it a kickback when a medical center offers insurance agent services to its patients?
A Boon for Patients
Consider this scenario. Marvin’s Medical Center markets itself as giving patients “something extra:” a free consultation with a health insurance agent with whom Marvin’s has an arrangement as “independent contractor.”
Has Marvin’s run afoul of anti-kickback laws?
The arrangement began, Marvin tells us, when Marvin first learned of Insurance Agent Annie, who did a spectacular job landing insurance for Marvin’s clientele, which then further built up Marvin’s patient base (because now they came with health insurance). So eventually Marvin just started paying Annie to be a resource Marvin’s agents could call to get insurance.
Kickback Law quick overview
In general, there are four key legal sets of rules of concern:
- federal self-referral (“Stark”) rules
- federal anti-kickback rules
- state self-referral rules
- state anti-kickback and fee-splitting rules
Self-referral laws (including federal, “Stark” rules) generally apply when a healthcare provider (or an immediate family member) is referring a patient to an entity in which the provider has a financial (ownership or compensation) interest.
So, if the healthcare provider is not referring a patient to an entity in which the provider has a financial (ownership or compensation) interest, then self-referral laws do not apply. If the referral is not from a healthcare provider, then these rules do not apply.
If no Medicare-reimbursable services are being provided, the federal law does not apply.
However, even if federal law does not apply, state law might.
For example, California Business & Professions Code (“B&P”) Section 650(a) prohibits the offer, delivery, receipt, or acceptance by any physician (and certain other licensed clinicians) of “any rebate, refund, commission, preference, patronage dividend, discount, or other consideration, whether in the form of money or otherwise, as compensation or inducement for referring patients, clients, or customers to any person.” This is California’s version of a prohibition against kickbacks and fee-splitting.
Section 650(a) speaks to “referring patients, clients, or customers.” The language is broad, and the California Attorney General (“AG”) has, in past opinions, adopted a broad interpretation of the concept of “referral
While B&P 650 references licensed clinicians, there are other California statutes that express the same public policy against compensation as an inducement for referring patients, clients or customers for healthcare services. This includes California Health & Safety Code, Section (“H&S”) 445, which prohibits any person from profiting from referring patients to a physician or clinic for care; and B&P 2273(a), which prohibits “the employment of runners, cappers, steerers, or other persons to procure patients.”
As well, the Special Fraud Alert on Joint Ventures by the Office of the Inspector General (“OIG”), U.S. Department of Health and Human Services, cautions against arrangements where the joint venture is a “shell” intended to induce referrals. State regulators are often influenced by opinions and publications of the OIG, even if federal law does not apply but state law does.
In addition to flagging statutory prohibitions on kickbacks, the OIG states that “many marketing and advertising activities may involve at least technical violations of the statute.”
This statement expresses the high scrutiny OIG gives to marketing and advertising arrangements.
Anti-kickback and fee-splitting rules and complex and subject to changing interpretations of the courts, as well as enforcement priorities of regulatory authorities.
For example, in the recent decision of Joint Technology, Inc. v. Weaver, 2014 WL 2199373 (10th Cir. May 28, 2014), the U.S. Court of Appeals for the Tenth Circuit affirmed the decision of a District Court, that had invalidated a contract, based on the District Court’s finding that a percentage-based compensation arrangement between a distributor of durable medical equipment (DME) and its independent outside contractor sales agent was a violation of the federal anti-kickback statute. In this case, the distributor’s compensation was calculated as a percentage of the sales of DME he generated for the company.
State Law Safe Harbors to anti-kickback and fee-splitting rules
There is no formal safe harbor to H&S 445 or B&P 2273(a). However, B&P 650(b) provides an allowance as follows:
The payment or receipt of consideration for services other than the referral of patients which is based on a percentage of gross revenue or similar type of contractual arrangement shall not be unlawful if the consideration is commensurate with the value of the services furnished or with the fair rental value of any premises or equipment leased or provided by the recipient to the payer.
This provision allows payment to management companies, billing persons, and other personnel for “services other than the referral of patients,” provided:
- The compensation is at fair market value (“FMV”) for the services rendered; and
Even though California Business & Professions Code 650(b) allows compensation under these circumstances, based on a percentage of gross revenues, we typically recommend a flat fee for marketing services, because marketing activities tend to be heavily scrutinized by regulatory authorities for kickbacks and fee-splitting. We discourage any percentage-based or patient-based remuneration for marketing, which would take into account the volume or value of referrals.
As well, out of abundance of precaution, and because of the influence federal standards can have on enforcement of state anti-kickback issues, it is prudent to comply with the federal safe harbor for remuneration from an entity under a personal service arrangement or management contract.
This safe harbor requires all of the following:
(1) The management agreement covers all the services the manager provides for the term of the agreement and specifies those services;
(2) The agreement is intended to provide for the services of the agent on a periodic, sporadic or part-time basis, rather than on a full-time basis for the term of the agreement, the agreement specifies exactly the schedule of such intervals, their precise length, and the exact charge for such intervals;
(3) The term of the agreement is for at least one year;
(4) The aggregate compensation paid to the manager over the term of the agreement is set in advance, is consistent with fair market value in arms-length transactions and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties;
(5) The services performed under the agreement do not involve the counseling or promotion of a business arrangement or other activity that violates any state or federal law; and
(6) The aggregate services contracted for do not exceed those which are reasonably necessary to accomplish the commercially reasonable business purpose of the services.
For a part-time contractor, the second element requires that the dates and times of the proposed services be set forth in the contract, and the exact charge for services in these blocks or chunks.
Because the third element requires that the term of the agreement be for at least one year, and the fourth element requires that “aggregate compensation” be “set in advance,” we recommend that the entire, annual compensation be set forth in advance in the written contract, as opposed to an hourly payment where the annual total (aggregate) will vary up and down according to the level of services.
Again, even if the safe harbor does not apply because no Medicare/Medicaid services are being provided, compliance with the safe harbor is advisable to bolster the argument that the arrangement is defensible.
The Problem with he insurance agent freebie
In Marvin’s case,because Agent Annie is referring patient’s to Marvin’s center, and also derives compensation from the center, there is a kickback question. Annie could be seen as marketing the Center’s services to patients. So we would recommend that Annie be compensated on a flat-fee basis — i.e., one that does not vary depending on how many patients come to the Center for medical services.
In order to comply with the federal safe harbor, we recommend that the Agent-Center Agreement:
- Explicitly specify all the services the Agent is expected to provide, including the health insurance and educational services, in exchange for the Agent Fee.
Note that while some of the services Agent provides are to the Center directly (for example, educational services regarding insurance), other services appear to be provided directly to or are for the benefit of the Center Clients.
If Agent is providing services to the patient for free, then, it is possible that this could be regarded as a kickback or illegal inducement by the Center for patients to utilize the Center’s clinical services. In other words, the patients do not pay for these services, but rather are receiving a complimentary service that is paid for by the Center; this would be problematic.
On the other hand, it may be arguable that there is no “free” service being provided by the Center, to the extent that Agent receives a brokerage fee from the insurers for brokering the insurance, and that such fee could be regarded as complete remuneration at fair market value for Agent’s services to Center Clients.
The point is that, if the conclusion is that the service is a “freebie” from the Center, then we recommend that to the extent Center Clients pay the Center an overall fee for a chunk of services, this fee explicitly include a portion designated to pay for the Agent’s services to Center Clients. Further, in such case, we recommend that all advertising and marketing materials and any agreements between the Center and Center Clients, clarify the extent to which Agent’s services are included as part of the overall fee that Center Clients pay to the Center.
- To the extent the agreement is intended to provide for the services of the agent on a periodic, sporadic or part-time basis, rather than on a full-time basis for the term of the agreement, the agreement should specify the dates and times of the proposed services be set forth in the contract, and the exact charge for services in these blocks or chunks.
- The term of the agreement should be for at least one year.
If the agreement terminates for any reason terminates during the course of the year, then the Center should not enter into another agreement with Agent for the same or similar services the remainder of such year.
- The aggregate compensation (the Agent Fee) to be paid to Agent for the full term (e.g., at least a year) should be set forth in the agreement. Such compensation must be at FMV, and not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties.
Because Agent Annie is, in effect, also recruiting patients, there is some regulatory risk here—i.e., the compensation could conceivably be regarded as paying a “capper,” or as paying for marketing services.
Therefore, as noted, a flat fee is recommended (as opposed to any formula that takes into account volume or value of Center Clients referred).
Note that per the bullet above regarding payment for part-time or sporadic services, the agreement must specify the dates and times of the proposed services, and the exact charge for the same. In this way, the agreement should set forth the total annual compensation expected to be paid to Agent, even though in one sense, this is expressed as an hourly rate.
- The services performed under the agreement must not involve the counseling or promotion of a business arrangement or other activity that violates any state or federal law.
- The aggregate services contracted for must be not more than reasonably necessary to accomplish the commercially reasonable business purpose of the services.
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