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In Healthcare, Paying Commissions to 1099 Sales Reps Violates the Anti-Kickback Statute – Will Labs and Pharmacies Ever Learn?

Earlier this year, I posted about a lab that agreed to pay over $11.6 million to resolve various allegations, including that it violated the AKS through its compensation of “sales organizations on a commission basis for their referrals.” That got me thinking about these types of commission arrangements, which of course are very common outside of the health care business. As it turns out, illegal commission payments by pharmacies and labs to independent sales representatives and marketers have long proven to be a fruitful source of False Claims Act qui tam cases, and labs and pharmacies still don’t seem to be getting the message.

Unlike in other industries, when health care companies pay commissions to independent sales representatives in exchange for referrals of patients covered by Medicare or other Federal health care programs, they violate the anti-kickback statute (AKS), 42 U.S.C. § 1320a-7b(b), unless an exception or safe harbor applies. The AKS has a broad exception for payments to employees, 42 U.S.C. § 1320a-7b(b)(3)(B), but not for payments to independent contractors. See also 42 C.F.R. § 1001.952(i). And the Department of Health and Human Services Office of Inspector General (HHS-OIG) has created a safe harbor for payments in exchange for “personal services,” but it doesn’t apply to remuneration, like a sales commission, which is “determined in a manner that takes into account the volume or value of any referrals.” 42 C.F.R. § 1001.952(d).

If there were any doubt about the applicability of the AKS to commissions for independent sales representatives, both HHS-OIG and the courts have been doing their best to dispel that doubt since at least as early as 1989. In that year, HHS-OIG rejected a suggestion that it expand its own employee safe harbor “to independent contractors paid on a commission basis.” 54 Fed. Reg. 3088, 3093 (Jan. 23, 1989). The agency noted it had become “aware of many examples of abusive practices by sales personnel who are paid as independent contractors and who are not under appropriate supervision.” Id. Thus, the agency advised, “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.” Id.

In 1996, a Florida appeals court cited the HHS-OIG’s statements in affirming a decision to void a durable medical equipment marketing contract that provided for payment as a percentage of sales, including sales to Medicare and Medicaid beneficiaries. See Med. Dev. Network, Inc. v. Prof’l Respiratory Care, 673 So. 2d 565 (Fla. Dist. Ct. App. 1996). Such a contract, the court found, “was illegal under the Anti-Kickback Statute.” Id. Other courts, too, have voided health care commission sales contracts because they violated the AKS. See, e.g., Joint Technology, Inc. v. Weaver, No. CV-11-846, 2013 WL 257075, at *1 (W.D. Okla. Jan. 23, 2013); Zimmer, Inc. v. NuTech Med., Inc., 54 F. Supp. 2d 850, 863 (N.D. Ind. 1999); Nursing Home Consultants, Inc. v. Quantum Health Servs., Inc., 926 F. Supp. 835, 843-44 (E.D. Ark. 1996), aff’d, 112 F.3d 513 (8th Cir.1997).

Such commission arrangements also have led to numerous enforcement actions. In United States v. Starks, 157 F.3d 833 (11th Cir. 1998), for example, the court affirmed the AKS convictions of two individuals involved in a drug treatment program’s scheme to make payments to non-employees in exchange for referrals. Similarly, in United States v. Vernon, 723 F.3d 1234 (11th Cir. 2013), the court affirmed the AKS conviction of an executive of a specialty pharmacy that shared its profits with referral sources for prescriptions covered by Medicaid. More recently, in United States v. Mallory, 988 F.3d. 730 (4th Cir. 2021), the court affirmed a False Claims Act judgment against the owner and two sales executives of a blood testing lab that paid commissions to an independent contractor that marketed and sold the lab’s tests even after attorneys from the lab and the independent contractor “warned Defendants that paying commissions to independent contractors might well violate the Anti-Kickback Statute.” Id. at 736. Then, in January of this year, the Department of Justice intervened in a wide-ranging False Claims Act action alleging, among other things, AKS violations stemming from payments by labs to third-party recruiters. See Complaint, United States ex rel. STF, LLC v. Grottenthaler, No. 4:16-CV-547 (E.D. Tex. Jan. 31, 2022).

So, notwithstanding the substantial history of guidance and enforcement actions, it sure seems like many labs and pharmacies are still making illegal payments to third party referral sources, and that these payments will continue to be fodder for promising whistleblower qui tam cases. Notably, the Elimination of Kickbacks in Recovery Act of 2018 (EKRA), which applies to labs, has no exception for payments even to employees, if the payments “vary by (A) the number of individuals referred to a particular . . . laboratory; (B) the number of tests or procedures performed; or (C) the amount billed to or received from, in part or in whole, the health care benefit program from the individuals referred to a particular . . . laboratory.” 18 U.S.C. § 220(b)(2). It remains to be seen whether violations of EKRA alone, and not the AKS, will form the basis for False Claims Act actions. For a further description of EKRA, see this post.