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Identifying Fraud and Abuse Concerns in eHealth Commerce
By Diane M. L. Lee
[July 2000]

As the pace of commerce and communications over the Internet grows, buyers and sellers, as well as the intermediary organizations that facilitate transactions between buyers and sellers, must be careful not to engage in transactions that violate fraud and abuse laws. By "fraud and abuse" we refer generically to a number of federal and state laws, including the following¹:

• Anti-kickback laws (see "Summary of Law" below) prohibit the payment, receipt, offer or solicitation of remuneration in exchange for the referral, recommendation or generation of health care goods and services. Generally, remuneration is defined broadly to include any direct or indirect economic benefit, including kickbacks, discounts, rebates, relief from financial obligations (such as interest-free loans), gifts and gratuities. Commonly accepted business practices such as preferential pricing on bundled goods and services, providing rebates based on volume, below cost pricing, free goods and services, and compensation based on percentage of revenue may violate anti-kickback laws if not structured properly.

• Fee-splitting laws prohibit a licensed professional from splitting his or her professional fees with an unlicensed person or entity. Sometimes the prohibition is related to an impermissible intent, for example, the inducement of referral. In other cases, the fee-splitting prohibition is related to a ban on the corporate practice of medicine. (Put simply, the states that prohibit corporate practice restrict the provision of medical services to only natural persons, and any offer or provision of such services by a corporate entity [including an Internet company] constitutes the unlicensed practice of medicine. Corporate practice, licensing and professional liability issues will be discussed in a future advisory.)

• It is unlawful to provide any remuneration to a Medicare, Medicaid or other federal health program beneficiary to induce him or her to order an item or service paid for by such programs from a particular provider or practitioner (see "Summary of Law" below). Remuneration includes the waiver of copayments and deductibles (except under specific conditions) and the provision of goods and services free or at below market value. Items of nominal value (such as literature and refreshments) and those that promote preventive care may be given, but cash, vitamins, beauty aids and nutritional supplements are not considered "preventive care."

• Self-referral laws (see "Summary of Law" below) prohibit health care providers (typically physicians) from referring their patients for certain health services to entities with which they have financial relationships, either ownership interests or compensation arrangements, or both, unless the referral or the financial relationship falls within a stated exception. They are based on the premise that such financial relationships may create incentives for the physician to refer to the entity for reasons other than the best interests of the patient.

These laws were written to apply to traditional providers of health care-i.e., licensed health professionals and facilities, such as physicians, pharmacies and hospitals. However, fraud and abuse laws also have the potential to affect eHealth entities in both business-to-business (B2B) and business-to-consumer (B2C) transactions, if the transactions involve licensed health professionals and facilities as consumers or business partners, or involve the advertising, promotion and purchase of goods and services that are provided by licensed health professionals or facilities, or that are required to be provided only pursuant to a physician's order, such as prescription drugs.

A more detailed summary of these laws can be found at the end of this Advisory Bulletin.

Applying Fraud and Abuse to Internet Transactions

Two general statements may be made about the application of fraud and abuse laws to Internet transactions:

1. Federal laws apply only when goods or services are reimbursed directly or indirectly by federal health care programs, such as Medicare and Medicaid. Because of the severity of sanctions for federal law violations (including, program exclusion or debarment, recoupment of reimbursement, civil and criminal fines and imprisonment), as a jurisdictional matter, one needs to determine if:
   • any party to the transaction (the Internet company, the consumer, or the business affiliate or partner) is a licensed provider that participates in such federal programs; or

   • whether any goods or services provided by and through the site are reimbursed in whole or in part by such federal programs. Outpatient prescription drugs are covered by the Medicaid program and, with more limitations, by the Medicare program. Laboratory tests and x-rays are covered by both. However, professional medical services and hospital services delivered through an electronic medium currently have only limited coverage under "telemedicine" provisions.

   If any one of the foregoing conditions is true, then because most federal fraud and abuse laws affect both direct and indirect actions, the entire chain of financial interactions must be reviewed for compliance.

2. An activity may be lawful in one state and unlawful in another. Laws vary significantly from state to state on both the scope of activities covered by fraud and abuse laws and the persons subject to jurisdiction. For example, some state anti-kickback laws apply only to Medicaid services; others, to all payors. Some state self-referral laws apply only to equity interests; others apply to any financial relationship between a health care provider and a third party. Some self-referral laws apply only to physicians; others apply to all facilities and professionals. Designing or modifying an Internet product to comply with all state fraud and abuse laws may present administrative and operational challenges for an Internet company and its business clients and consumers.

Example A: Offering Free Equipment and Software to Physicians

An Internet start-up ("the Company") offers to provide hardware (desktop or hand held computers, printers, and modems), software and supplies to physicians free of charge if they agree to enter into licensing agreements with the Company. The equipment and software allow the physician to order prescription drugs online from the Company's participating pharmacies and to view instantaneously information on side effects, indications and contraindications, coverage by the patient's insurance and formulary information. Physicians may terminate the licensing agreement at any time and keep the equipment. There are no subscription fees for the first three years of the license agreement. Although the licensing agreement calls for the use of the computers only in connection with the Company's services, there is no real way for the Company to monitor the use of the equipment for other purposes. There is no requirement that physicians actually order any drugs. The Company is paid by participating pharmacies and pharmacy benefit management companies (PBMs) based upon drugs ordered through its site.

Analysis.  It is relatively transparent that the provision of free goods and services by the Company to physicians is being funded, in whole or in part, by the Company's participating pharmacies, and that the participating pharmacies anticipate sufficient volume of orders to justify this subsidy. Although there is no requirement that the physicians order any drugs, the business would not make economic sense for the Company to undertake unless physicians do indeed order prescriptions. Under these circumstances, it would be difficult for the Company and the pharmacies to demonstrate that one purpose of offering the free goods and services is not to induce pharmacy purchases. Under federal anti-kickback case law, one purpose may be sufficient to constitute a violation.

In addition, pharmacies are prohibited by anti-kickback laws from offering or paying remuneration to physicians as an inducement for placing orders with them, and physicians are prohibited from soliciting or receiving such remuneration. Remuneration under such laws generally includes all forms of economic benefit, including the relief from payment of expenses the recipient would otherwise have to pay. The pharmacies cannot do indirectly through the Company what they are prohibited by law from doing directly.

The provision of free goods and services to physicians indirectly by pharmacies or directly by the Company may also create a financial relationship between each physician and each pharmacy that would prohibit such a physician from referring patients to that pharmacy, and prohibit the pharmacy from submitting a claim to the Medicare or Medicaid program, under the federal physician self-referral prohibition. However, since under this law a financial relationship has to exist between a specific pharmacy receiving the referral and a specific physician writing the order, an argument can be made that the financial relationship here is too indirect to constitute a violation.

Example B: Payments Based Upon the Purchase by Consumers of Health Care Goods and Services

The Company receives payment from participating pharmacies and pharmacy benefit management companies (PBMs) in a variety of ways: through a flat fee, on a per order basis, or as a commission on sales.

Analysis.  The Company may be in violation of anti-kickback laws, even though Company is not itself a provider of health services. To the extent participating pharmacies and PBMs pay the Company on a per order, per prescription or percentage of sales basis, such payments could be violations under the language of some state anti-kickback laws as payment by a pharmacy to a third party for the referral of patients, clients or customers. A flat fee that is fair market value for connectivity and advertising is a conservative, safer route.

Example C: Payment by Health Care Providers of Physician Subscription Fees

The Company plans to add clinical laboratory connectivity to its menu of services. Physicians will be able to order laboratory tests for their patients and receive test results online. The Company has been approached by a national laboratory company ("the Laboratory"). The Laboratory has offered to "sponsor" physician use of the Company's service, by paying Company for the equipment, software, supplies and the subscription fees on a per physician basis. The Company will advertise the Laboratory's sponsorship and deliver its products to physicians "courtesy" of the Laboratory.

Analysis.  If the Laboratory underwrites the costs of equipment, software, supplies and monthly subscriptions in a manner that directly ties it to the physician, the Laboratory arguably has provided a financial benefit to the physician for the purpose of inducing the physician to make referrals to the Laboratory, in violation of federal and state anti-kickback laws. Where the Laboratory can and does identify, formally or informally, which physicians would be eligible for its sponsorship and such sponsorship is made known to the physician, then it would be difficult to argue that the intent of the sponsorship is not to induce referrals. In addition, clinical laboratory services are subject to federal and some state self-referral laws. The sponsorship by the Laboratory may create a financial relationship with the physician which would prohibit the physician from referring to the Laboratory. In general, there are no exceptions under self-referral laws where goods and services are provided to physicians without fair market value compensation.

Example D: Offering Free Goods and Services to Consumers Directly or Through Physicians

In order to promote use by physicians, one of the participating pharmacies has asked the Company to create an application which will allow the pharmacy to cause discount coupons to be printed in the physician's office for delivery to the patient each time the physician orders a drug. One coupon will be for the waiver of the patient's applicable copayment at presentation at the pharmacy. Other coupons may be for items being promoted by the pharmacy at the time of the order, such as for beauty products or over-the-counter drugs.

Analysis.  The coupons issued by a pharmacy waiving a patient's copay each time a drug is ordered electronically from that pharmacy by a physician violate the anti-kickback law prohibiting inducements to beneficiaries. Although the physician receives no benefit from the waiver except the patient's goodwill, and assuming the physician gives the patient proper disclosures as to his or her freedom of choice of pharmacy, the waiver is intended to induce the patient to use that particular pharmacy to fill the prescription. It should be noted, however, that a recent OIG Advisory Opinion suggests that it would not violate anti-kickback laws if a pharmacy gives a physician discount coupons for distribution to his or her patients for goods or services, so long as the coupons are not for goods and services for which payment is made by a federal health program and so long as the coupons are distributed to all patients, regardless of whether they might need goods or services payable under a federal health program.

Diane M. L. Lee is a partner in DWT's San Francisco office, focusing on the regulatory aspects of health care transactions and operations, including billing, reimbursement, anti-kickback, self-referral, licensing, certification, and corporate compliance, for hospitals, physicians, ancillary providers, telemedicine and internet companies. Diane can be reached at (415) 276-6508 or dianelee@dwt.com.

SUMMARY OF LAWS

ANTI-KICKBACK LAWS

Federal Anti-Kickback Statute
The Medicare/Medicaid Anti-Kickback Statute² makes it a felony for any person or entity to knowingly and willfully solicit, receive, offer or pay any remuneration in exchange for referring, furnishing, purchasing, leasing or ordering (or recommending the furnishing, purchasing, leasing, or ordering of) any good, facility, service or item that is paid in whole or in part by the Medicare or Medicaid (Medi-Cal in California) programs, or other federal health care programs. Both the recipient and the offeror of the remuneration are subject to the Anti-Kickback Statute. Violators are subject to fines up to $25,000 per violation, up to 5 years in prison, as well as administrative penalties, including exclusion from participation in the Medicare and/or Medicaid programs.

Remuneration.  The term "remuneration" is broadly defined and includes any kickback, bribe, discount, rebate, in cash or in kind, whether paid directly or indirectly. The government has taken the position that conferring of any benefit by one party on another constitutes "remuneration" for the purpose of the Anti-Kickback Statute. Because the prohibition applies to direct as well as indirect remuneration, the entire chain of financial transactions must be analyzed under this law where at least one of the parties receives reimbursement from federal health programs and at least one other party is in a position to make referrals, order goods or services or generate businesses for the first. Such common business practices as the provision of discounts for volume, or the offer of preferential pricing on prepackaged or bundled goods and services, are subject to scrutiny as unlawful remuneration.

One Purpose Rule.  The Anti-Kickback Statute has been construed by court decision to prohibit any otherwise legitimate remuneration for goods or services rendered if "one purpose" of the payment is to an induce the referral, furnishing, leasing, etc., of goods or services paid by the Medicare or Medicaid programs.³

Fair Market Value
When the remuneration between the parties is not fair market value, the government suspects that one purpose of the reimbursement is to compensate referrals between the parties.

Fair market value under the Anti-Kickback Statute is generally defined as that remuneration in an arms' length transaction that is not determined in a manner that takes into account the volume or value of Medicare or Medicaid services generated between the parties. Although no compensation methodology is per se prohibited, the government in various public statements has indicated that it views per procedure, per order, per purchase and percentage of revenue compensation methodologies as susceptible to abuse under the Anti-Kickback Statute because they inherently vary with volume or value.

Safe Harbors.
The government has promulgated by regulation certain "safe harbors," which are payment practices that are excluded from the definition of "remuneration."⁵ However, the failure of an activity to comply with a safe harbor does not mean it violates the law, only that it is subject to case by case scrutiny under the Anti-Kickback Statute. The safe harbors cover a limited number of payment practices and are narrowly drawn. In all cases the safe harbors require arrangements to be in writing and remuneration to be fair market value. In addition, the safe harbors generally require that the entire transaction be "commercially reasonable" and have a reasonable commercial purpose other than the exchange of referrals. The risk of an enforcement action is mitigated the closer a transaction comes to meeting the various standards of a safe harbor.

Fraud Alerts
The Office of Inspector General (OIG) of the Department of Health and Human Services in fraud alerts, Advisory Opinions and other public statements has identified practices and arrangements that it considers potentially violative of the Anti-Kickback Statute. These fraud alerts should be regarded as the government's enforcement position with respect to a particular subject matter. The fraud alerts are examples and the naming of specific types of providers in a fraud alert does not limit the application of its meaning.

The OIG considers improper under the Anti-Kickback Statute any payment, prize, reward, including any gift, or any offer of free goods or services if it is:

• made to a person in a position to generate business for the paying party related to the volume of business generated for the paying party;

• is more than nominal in value and/or exceeds fair market value of any legitimate service rendered to the paying party, or is unrelated to any service at all other than generation of business for the paying party.⁶

Because of the central role of physicians under Medicare reimbursement rules, the OIG has also issued fraud alerts on the paying of incentives to physicians, and has identified several arrangements it considers potentially improper, such as providing physicians with:

• free or significantly discounted office space, equipment or staff;

• free training for physician's office staff;

• discounted loans or loan forgiveness tied to patient referrals;

• conference and/or continuing education expense reimbursement;

• insurance coverage at a below-standard cost;

• payment for services requiring few actual duties;

• a discounted price or a gift, coupon, bonus or cash payment to physicians in exchange for or based on prescribing or ordering specific products;⁷

• cash or other benefits in exchange for performing sales-oriented, educational or patient outreach marketing; and in-office technicians, computers and/or fax machines at no charge, unless it can be shown that the staff or equipment is integral to the service being provided by the supplier, and limits are placed and monitored to assure staff and equipment are used by physicians only for the purposes of using or ordering the supplier's product.⁷

State Anti-Kickback Laws

States have a variety of anti-kickbacklaws. Sometimes they are in the individual professional practice acts, other times they apply across all healing arts professions, still other times they apply only to health care services paid for under Medicaid programs. In California, the prohibition on payments for inducement for referral is found at California Business & Professions Code Section 650 and applies to all healing arts professionals (including pharmacists, pharmacies and physicians), and all payors.⁸ The analysis for Business & Professions Code Section 650 compliance generally parallels the federal Anti-Kickback Statute, but this may not be true in other states, and state-by-state analysis is required.

B. Inducements to Beneficiaries.
Under the Health Insurance Portability and Accountability Act (HIPAA) of 1996, a person is prohibited from the offering of any remuneration to a Medicare or Medicaid beneficiary if the offeror knows or should know that it may influence the beneficiary to order or receive an item or service payable by a federal health program from a particular provider or supplier.⁹ A waiver of patient co-payments is prohibited under this law. The only exceptions to the HIPAA prohibition are for certain types of preventive care services.

C. Physician Self-Referral Laws.
"Physician self-referral laws" refer to laws that prohibit physicians from referring to entities with which they have financial relationships. Physician self-referral laws are generally discussed in tandem with federal and state anti-kickback laws, but they are often structured quite differently.

FEDERAL STARK LAW.

Under the federal physician self-referral prohibition (known as the Stark Law),¹⁰ a physician is prohibited from referring to an entity for certain "designated health services" if he or she has an ownership interest or a compensation arrangement with the entity. In addition, the referral recipient is prohibited from submitting a claim or receiving payment for services provided pursuant to a prohibited referral. Because a "compensation arrangement" is defined as one which involves any form of remuneration, direct and indirect, the Stark Law will apply to every financial relationship between an entity and a physician, and likely such intermediaries and Internet based service providers who facilitate transactions between the physician and the provider of designated health services. "Designated health services" include outpatient prescriptions and radiology services.¹¹

The Stark Law differs from the federal Anti-Kickback Statute in that where the Anti-Kickback Statute is intent-based (i.e., it requires knowing and willful behavior), the Stark Law creates an absolute prohibition on referral regardless of intent unless the financial relationship or the referral falls within a stated exception.¹² Hence, failure to find an exception to the Stark Law is generally fatal to a transaction.¹³ One of the exceptions provided under Stark is for the purchase of services (other than designated health services) by a physician at fair market value. This exception would apply to the financial relationship between an Internet based services provider and a physician.¹⁴

STATE SELF-REFERRAL LAWS.

The Stark Law applies to federal health programs only. Not all states have self-referral laws, but the ones that do vary in scope. Some, like California and New York laws, are structured similarly to Stark. Others prohibit referrals only for equity interests; still others do not prohibit referrals but require disclosures. State by state analysis is required. California's self-referral law (known as the "Speier Law") applies to all payors and has a similar structure to the Stark Law.¹⁵ However, designated services under the Speier Law as well as its statutory exceptions vary from Stark. For example, referrals for outpatient drugs are not designated health services under the Speier Law. Another variation from the federal law is that there is no exception for "fair market value" purchases of services (other than designated health services) by physicians in California.

FOOTNOTES:

1  Other fraud and abuse laws include the criminal False Claims Act, the Civil Money Penalties Law, RICO, mail fraud, wire fraud, program exclusion and payment suspension authorities.

2  42 U.S.C. § 1320a-7b(b).

3  U.S. v. Greber, 760 F.2d 68 (3d Cir.), cert. denied 474 U.S. 988 (1985).

4  42 C.F.R § 1001.952.

5  42 C.F.R. § 1001.952 et seq. Safe harbors exist for: publicly traded investments, small investments, space rental, equipment rental, personal and management services, sales of physician practices, referral services, warranties, discounts, employment, group purchasing organizations, waivers of hospital coinsurance, increased coverage, reduced costs sharing or reduced premiums offered by health plans, price reductions offered by providers to health plans, practitioner recruitment, OB malpractice insurance subsidies, group practice investments, ASC investments, referral agreements for specialty services, price reductions offered to managed care organizations, price reductions offered by contractors with substantial risk to managed care organizations, interests.

6  Special Fraud Alert: Prescription Drug Marketing Schemes (August 1994) republished in 59 Fed. Reg. 65372, 65376 (December 19, 1994).

7  Special Fraud Alert: Hospital Incentives to Physicians (May 1992), republished in 59 Fed. Reg. 65372, and Special Fraud Alert:Arrangements for the Provision of Clinical Lab Services (October 1994), id. at 65377.

8  California Business & Professions Code §650 provides in pertinent part: [T]he offer, delivery, receipt or acceptance by any person licensed under this division 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, irrespective of any membership, proprietary interest or coownership in or with any person to whom these patients, clients or customers are referred is unlawful.

9  42 U.S.C. § 1320a-7a.

10  42 U.S.C. § 1395nn.

11  Id. Under the Stark Law the following are "designated health services": clinical laboratory, physical therapy, occupational therapy, radiology (including MRI, CT, ultrasound, and mammography), durable medical equipment, parenteral and enteral nutrients, equipment and supplies, prosthetics and orthotics, home health services, outpatient prescription drugs, inpatient and outpatient hospital services, and radiation therapy services and supplies.

12  Id.

13  Penalties for violating the Stark Law are severe, including per claim penalties, refund of overpayments, civil penalties and exclusion. Because there is a prohibition on presenting claims made pursuant to a prohibited referral, a Stark violation may also implicate the federal False Claims Act.

14  42 U.S.C. § 1395nn (e)(8).

15  Cal. Bus. & Prof. Code § 650.01 et seq.

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