How substance abuse treatment centers navigate anti-kickback rules



Substance abuse treatment centers must steer carefully when sending patients for labs.  Self-referral, anti-kickback, and fee-splitting rules can create legal enforcement issues and must be considered in any healthcare referral arrangement.


Can a substance abuse center owner refer patients to the lab he or she owns, without running afoul of self-referral, anti-kickback, and fee-splitting rules?


Many healthcare ventures come to us with different business arrangements, when they’re stopped at the gate with a question of self-referral, anti-kickback, and fee-splitting rules.

In this case, Joe is a serial healthcare entrepreneur.  He is not a medical doctor, chiropractor, naturopathic physician, or any kind of healthcare licensee.

Joe owns 100% of the Joe Substance Abuse Treatment Center, as well as 50% of the Joe Medical Management Services Organization (his wife, a pianist, owns the other 50%).

Jane Brown, MD is s physician who maintains a medical practice for patients at the substance abuse treatment center.  She has no ownership stake in either the treatment center or the medical services organization (MSO).

Joe and Dr. Brown have a great professional relationship.  In fact, Joe appreciates Dr. Brown’s functional medicine approach and the various lab tests that Dr. Brown routinely orders for her patients.

Joe has found a clinical lab that provides the kind of lab test that Dr. Brown regularly orders.  Dr. Brown says she’ll send all her patients there.  Joe decides to buy the lab.  Can he do so?

Corporate Practice of Medicine—MD’s Role in Substance Abuse Facility

Assume for the moment that Joe, as a non-healthcare licensee, can own the lab.

In states with a strong “corporate practice of medicine” doctrine, the substance abuse center might be prohibited from employing the medical doctor.  In states with a weak corporate practice of medicine rule, the substance abuse center potentially could employ or contract with the medical doctor, so long as the substance abuse center does not interfere with the physician’s clinical decision-making.

There is an exception in California for substance abuse facilities.

In California, Health & Safety Code Section 11834.026 provides that a physician can provide “incidental medical services” to “address medical issues associated with either detoxification from alcohol or drugs or the provision of alcoholism or drug abuse recovery or treatment services.”

“Incidental medical services” means “services that are in compliance with the community standard of practice and are not required to be performed in a licensed clinic or licensed health facility” (as defined by Health & Safety Code, Section 1200 or 1250).

These services include:

  • Obtaining medical histories
  • Monitoring health status
  • Testing association with detoxification from alcohol or drugs
  • Providing alcoholism or drug abuse recovery or treatment services
  • Overseeing patient self-administered medications
  • Treating substance abuse disorders, including detoxification
  • And other categories of services to be defined by regulation.

Incidental medical services do not include “general primary medical care.”

Further, under this California statute, a licensed alcoholism or drug abuse recovery or treatment facility may permit incidental medical services to be provided to a resident at the facility premises by, or under the supervision of, a licensed physician who is knowledgeable in addiction medical, or other healthcare practitioners acting within their scope of practice and under the physician’s license (e.g., nurse, physician assistant) who are also knowledgeable about addiction medicine, if a number of specified conditions are met.  These include an acknowledgment of the limitation that the physician cannot provide general primary medical care.

Per Section 11834.02(a), “alcoholism or drug abuse recovery or treatment facility or facility” means a facility that provides 24-hour residential nonmedical services to adults who are recovering from problems related to alcohol, drug, or alcohol and drug misuse or abuse, and who need alcohol, drug, or alcohol and drug recovery treatment or detoxification services.”

Some Assumptions

Let’s assume that, in addition to the fact that Healthcare Joe is not a healthcare licensee, the lab tests are medically indicated; and, there is no Medicare or Medicaid reimbursement for any of the lab tests or other services provided to Joe’s substance abuse and addiction treatment center patients by the Lab.

Hooray, No Medicare

If Medicare/Medicaid were involved, then we would have to go through a Stark (self-referral) and anti-kickback analysis under federal law.

Where no federal monies are involved, we look solely to state law.

Every state has different self-referral, anti-kickback, fee-splitting, and sometimes patient brokering laws that can stop a potential business arrangement in its tracks.  State laws are sometimes nuanced, but the gist is the same.  And often state regulators follow the federal OIG opinions or other federal enforcement authority or at least consider these influential.

Hooray, Not a Healthcare Licensee

If Healthcare Joe was not a healthcare licensee, then we would have to look carefully at the provisions of state law that apply to healthcare licensees who make referrals.  For example, in California, this would be Business & Professions Code 650.01 (the mini-Stark or self-referral law, also known in California as PORA), and 650 (the California anti-kickback statute).

Legal Risks

Enforcement often depends on priorities—such as, for example, whether there is an active agenda toward fraud and abuse with respect to nursing homes, medical spas, addiction centers, or whatever is the enforcement target bubbling up among the authorities.

And, the statutes were created with one purpose in mind: to root out fraud and abuse stemming from conflict of interest.

While there is no crystal ball into the minds of legislators, these rules were devised before the spread of the Internet; and with an eye toward averting certain “evils.”  One can only speculate whether anyone balanced the pros and cons to business or took a look at the many different kinds of business models that would challenge these concepts and the language of these statutes.

As often happens in healthcare law, we’re trying to stuff a disruptive innovation kind of business into an archaic statute.  The intent of the statute is not the issue – it’s just that we can only stretch language so far to fit business models that continue evolving.

These are general thoughts simply to say that it’s rare to find a binary choice; there are usually shades of gray.

So, a caveat would apply: even if there is no technical violation, nonetheless, given the strong public policy against kickbacks and fee-splitting, enforcement authorities could still find that the “spirit” of the law is violated, and take enforcement action appropriately.

Alternatively, enforcement authorities could find an illegal “joint venture” between Healthcare Joe, the referring person, the physician, and the lab receiving the referrals, which has as one purpose to induce referrals based on promise of remuneration for the referral.

Safe Harbor for Return Proportionate to Equity Ownership

Here, there is a safe harbor for healthcare licensees, that might work for Joe, at least in principle.  The safe harbor is that it is usually not kickback, if one makes an investment to an entity to which one refers patients, so long as the return on investment is proportionate to his equity ownership and not based on number or value of patients referred.  As well, there must be a valid medical need for each referral.

This test can be very fact-specific.  Here, we would have to assume that referrals to the lab are made by the physician, without any undue influence by Healthcare Joe.

If Healthcare Joe were to be seen to steer all these referrals to the Lab, this could potentially violate the prohibition against unlicensed and corporate practice of medicine.  And in addition, such conduct could potentially run afoul of the prohibitions against referring patients to medical services for profit (in California, Health & Safety Code Section 445) and against steering patients (California Business & Professions Code Section 2273(a)).

Consulting with a healthcare lawyer experienced in self-referral and anti-kickback issues is recommended to vet problem areas.

Some Recommendations for Healthcare Joe

Although the arrangement contemplated by Healthcare Joe is not without risk, we could make some recommendations to reduce risk.  These include specific disclosures and disclaimers to the patient we would design to clarify that referrals are not based on monies going back and forth, and to widen the patient’s choice of service providers.

In addition, the facts should be checked to ensure that the medical doctor does indeed make all recommendations for lab services based on medical necessity; and that such clinical judgments are be influenced by any non-physician or non-medical entity.

Some Background Law

For those who’d like a refresher on the world of self-referral and kickbacks, here are some basic rules.

Essentially there are two types of prohibitions: (1) self-referral, which involves referring to an entity for “designated health services” (DHS) in which the referring party (or an immediate family member) has a financial interest (for example, ownership), and (2) kickbacks and fee-splitting, which essentially involve giving or receiving anything of value in exchange for a referral.

If no Medicare/Medicaid is involved, then we look solely state law.  In California, this is within the Business & Professions Code (B&P).

Under California law, laboratory services are DHS. Not only is self-referral prohibited, but also claims for payment based on a prohibited referral.

However, the main prohibition, B&P 650.01, applies to certain health care licensees.

As well, there are various exceptions, including referrals for services performed within, or goods supplied by, a licensee’s office or the office of a “group practice” as well as “in-office goods or services.” For permitted referrals under the statute, there is a requirement that the referring person disclose in writing to the patient the financial interest, and advise that the patient may choose any organization to obtain the services ordered or requested by the licensee.

The prohibition against kickbacks and fee-splitting is quite broad, in B&P 650(a).

However, this also applies to healthcare licensees.

In addition, 650(d) provides that, with specified exceptions:

It shall not be unlawful for any person licensed under this division to refer a person to any laboratory, pharmacy, clinic … or health care facility solely because the licensee has a proprietary interest or coownership in the laboratory, pharmacy, clinic, or health care facility, provided, however, that the licensee’s return on investment for that proprietary interest or coownership shall be based upon the amount of the capital investment or proportional ownership of the licensee which ownership interest is not based on the number or value of any patients referred. Any referral excepted under this section shall be unlawful if the prosecutor proves that there was no valid medical need for the referral.

In other words, the referring person’s return on investment must be proportionate to their equity ownership and not based on number or value of patients referred; and there must be a valid medical need for the referral.

There is also the carve-out in 650(b) for arrangements at fair market value:

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.

(emphasis added)

Section 654.1 provides that licensees may not refer patients, clients, or customers to a licensed clinical laboratory in which the licensee has an equity interest, unless the licensee at the time of making the referral discloses the financial interest, in writing, to the patient, client, or customer, and indicates in the disclosure that the patient may choose any clinical laboratory to have any lab work performed.

There are some additional California statutes that prohibit kickbacks and fee-splitting.  For example:

  • California Health & Safety (“H&S”) Code, Section 445 prohibits any person from profiting from referring patients to a physician or clinic for care.
  • California B&P Code, Section 2273(a) prohibits “the employment of runners, cappers, steerers, or other persons to procure patients.”
  • California Labor Code, Section 139.3, which is within the Chapter entitled, “Division of Workers’ Compensation,” has anti-kickback provisions, as does California Labor Code, Section 3215, which is within Division 4 (Workers’ Compensation and Insurance).

An additional rule to note is the position taken by federal enforcement authorities that “joint ventures” can be suspect between healthcare entities on one hand, and on the other, management companies or other entities that are not delivering professional healthcare services.  Office of the Inspector General (OIG), Special Fraud Alert on Joint Ventures and OIG, Special Advisory Bulletin on Contractual Joint Ventures.

As mentioned, although the joint venture, enforcement hot buttons derive from federal law, they can be persuasive to state authorities interpreting state anti-kickback and fee-splitting prohibitions.

Some key concerns triggering a finding of an illegal “joint venture” are:

  • The parties share significantly in the economic benefit of the proposed arrangement, but the MD risks very little.
  • Aggregate payments to the management entity vary with the value or volume of physician business.
  • The MD is unlawfully incentivized to write more scripts than medically necessary

While these factors are influential, there is always some risk, no matter how carefully the arrangement is crafted, that enforcement authorities will find an illegal joint venture, if they find aspects of the arrangement suspect.

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