Martin Merritt, Esq.
Partner, Health Law & Healthcare Litigation, Friedman & Feiger, Dallas, Texas
Executive Director, Texas Health Lawyers Association, Dallas, Texas
Most providers are aware that paying kickbacks for referrals is a felony under the Anti-kickback Statute (AKS), 42 U.S. Code § 1320a–7b (b)(1)1. You can get in to very big financial trouble, and lose your license. Unlike Stark law, 42 U.S.C. 1395nn., which only applies to physician referrals, the AKS applies to remuneration paid to anyone for arranging in whole, or in part, the furnishing of services or items covered by a federal healthcare program. This means the AKS is broad enough to cover payments to a sales force which is paid on commission. The actual wording of the statute reads:
The AKS specifically exempts bona fide employees: [the statute does not apply to] "any amount paid by an employer to an employee (who has a bona fide employment relationship with such employer) for employment in the provision of covered items or services.
In 1989, the OIG expressly stated in the proposed rules that "We have decided to adopt the definition of employee from the Internal Revenue Service (IRA) set forth in 26 U.S.C. 3121(d)(2).2 In other words, the bona fide employee exemption only applies to bona fide W-2 employees.
The OIG continued, "We believe that if individuals and entities desire to pay a salesperson on the basis of the amount of business they generate, then to be exempt from civil or criminal prosecution, they should make these salespersons employees where they can and should exert appropriate supervision for the individual’s acts." See 54 Fed. Reg. 3088, 3093 (1989).3 Under the IRS Tax Code, a company typically is responsible for controlling the actions of its employees, but is not allowed to control the details of the work of an independent contractor.
The distinction likely also has its roots in the traditional drafting of many state anti-solicitation rules. Typically, a provider cannot pay "another person" to solicit, but a company often is allowed to solicit business for itself, depending upon the context, this is commercial free speech. This typically extends to a company’s employees.
Independent contractors paid under a 1099, are, by definition, "another person or company" and would be required under OIG rules to meet some other "safe harbor." Usually the "Personal Services" Safe Harbor is the closest fit. However, this Safe Harbor will not be met if the compensation fluctuates with the amount of business generated. Further, if the employment is less than full, time, the exact schedule must be set in advance. Thus, the 1099 sales contractor must be paid a fixed overall aggregate rate and have a fixed schedule. There are additional requirements which further make this Safe Harbor difficult to meet. State laws may also prohibit payment for solicitation of healthcare business which is even stricter than Stark law4 and the AKS.
If you are a provider considering opening or investing in a clinical, or non-clinical healthcare businesses, be mindful that the AKS is broader than Stark law. Payments to a commissioned sales force for the referral or recommendation of business, can be illegal. It is best to consult a health lawyer in your area, who can guide you through the process.
1Anti-kickback Statute (AKS), 42 U.S. Code § 1320a–7b (b)(1) https://www.law.cornell.edu/uscode/text/42/1320a-7b
226 U.S. Code § 3121 - Definitions https://www.law.cornell.edu/uscode/text/26/3121
3Office of Inspector General, U.S. Department of Health and Human Services http://oig.hhs.gov/compliance/safe-harbor-regulations/
4Stark law governs physician self-referral for Medicare and Medicaid patients http://starklaw.org/stark_law.htm