Risks When Marketing

In the real world, it is common for a business, let’s say a widget maker, to outsource marketing to a marketing company. The marketing company generates business for the widget maker, the widget maker pays commissions to the marketing company, and everybody is happy.

Unfortunately, what works in the real world often does not work in the pharmacy universe. An example of this is related to marketing companies. If a marketing company generates patients for a pharmacy, when at least some of the patients are covered by a government health care program, the pharmacy cannot pay commissions to the marketing company.

The anti-kickback statute makes it a felony to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce a person (including a legal entity) to refer an individual for the furnishing or arranging for the furnishing of any Medicare-covered item or service, or to induce such person to purchase, lease, or recommend the purchase or lease of any Medicare-covered item or service. [42 U.S.C. § 1320a-7b(b)].

Many courts have adopted the “one purpose test,” which states that if one purpose of a payment is to induce referrals, the anti-kickback statute is violated, notwithstanding that the primary purpose for the payment is to compensate for legitimate, substantive services, and the compensation is fair-market value. [See United States v. Greber, 760 F.2d 68, 71-72 (3d Cir. 1985)]. Penalties for violating this statute include up to 5 years imprisonment, plus criminal fines of up to $25,000 per violation, as well as exclusion from federal health care programs and civil monetary penalties. [42 U.S.C. §§ 1320a-7b(a), 1320a-7, 1320a-7a].

The Office of Inspector General (OIG) has adopted safe harbors that provide immunity for arrangements that satisfy certain requirements. The employee safe harbor permits an employer to pay an employee in whatever manner the employer chooses in exchange for the employee assisting in the solicitation of federal health care program business, as long as there is a bona fide employer-employee relationship. [42 C.F.R. § 1001.952(i)].

The only way that an independent contractor can be paid for marketing or promoting Medicare-covered items or services is if the arrangement complies with the personal services and management contracts safe harbor. This safe harbor permits payments to referral sources if a few requirements are met. Two of the requirements are that payments must be pursuant to a written agreement with a term of at least 1 year, and the aggregate compensation paid to the independent contractor must be set in advance (eg $24,000 over the next 12 months), be consistent with fair-market value, and not be determined in a manner that considers the volume or value of any referrals or business generated between the parties. [42 C.F.R. § 1001.952(d)]. Because the aggregate compensation is not set in advance, percentage-based compensation arrangements do not qualify for protection under the personal services and management contracts safe harbor.

The OIG has repeatedly expressed concern about percentage-based compensation arrangements involving 1099 independent-contractor sales agents. In Advisory Opinion No. 06-02, the OIG stated that “[p]ercentage compensation arrangements are inherently problematic under the Anti-Kickback Statute, because they relate to the volume or value of business generated between the parties.” Moreover, in Advisory Opinion No. 99-3, the OIG stated:

“Sales agents are in the business of recommending or arranging for the purchase of the items or services they offer for sale on behalf of their principals, typically manufacturers or other sellers (collectively, sellers). Accordingly, any compensation arrangement between a seller and an independent sales agent for the purpose of selling health care items or services that are directly or indirectly reimbursable by a federal health care program potentially implicates the anti-kickback statute, irrespective of the methodology used to compensate the agent. Moreover, because such agents are independent contractors, they are less accountable to the seller than an employee. For these reasons, this office has a longstanding concern with independent sales agency arrangements.”

Further, in its response to comments submitted when the safe-harbor regulations were originally proposed, the OIG stated:

“[M]any commentators suggested that we broaden the [employee safe harbor] to apply to independent contractors paid on a commission basis. We have declined to adopt this approach because we are aware of many examples of abusive practices by sales personnel who are paid as independent contractors and who are not under appropriate supervision. 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.”

[54 Fed. Reg. 3,088, 3,093 (Jan. 23, 1989)].

Several courts have held that marketing agreements are illegal under the anti-kickback statute and are, therefore, unenforceable. [See Med. Dev. Network, Inc. v. Prof’l Respiratory Care/Home Med. Equip. Servs., Inc., 673 So. 2d 565 (Fla. Dist. Ct. App. 1996); Nursing Home Consultants, Inc. v. Quantum Health Services, Inc., 926 F. Supp. 835 (E.D. Ark. 1996), aff’d per curiam, 112 F.3d 513 (8th Cir. 1997); Zimmer, Inc. v. Nu Tech Med., Inc., 54 F. Supp. 2d 850 (N.D. Ind. 1999)]. For example, Medical Development Network involved an agreement wherein a durable medical equipment (DME) supplier agreed to pay an independent contractor marketing company (the marketer) a percentage of the DME supplier’s sales in exchange for marketing its products to physicians, nursing homes, and others. When the DME supplier breached the contract, the marketer sued, and the DME supplier defended on the grounds that the agreement was illegal under the anti-kickback statute. A Florida appeals court agreed and affirmed the trial court’s ruling, holding that the agreement was illegal and unenforceable because the marketer’s receipt of a percentage of the sales it generates for the DME supplier violated the federal anti-kickback statute.

In recent years, there have been many enforcement actions involving commission payments to independent contractors. In one example, a home health agency agreed to pay $130,000 after disclosing that it paid commissions for each patient referred to the home health agency by 1099 independent-contractor sales representatives. (See OIG, Kickback and Physician Self-Referral, oig.hhs.gov/fraud/enforcement/cmp/kickback.asp).

Additionally, the OIG has taken the position that even when an arrangement will only focus on commercial patients and “carve out” beneficiaries of federally-funded health care programs, the arrangement will still likely violate the anti-kickback statute. In Advisory Opinion No. 06-02, the OIG explained as follows:

“The ‘carve out’ of federal business is not dispositive, however, on the question of whether the proposed program potentially violates the anti-kickback statute. The OIG has a long-standing concern about arrangements pursuant to which parties ‘carve out’ referrals of federal health care beneficiaries or business generated by federal health care programs from otherwise questionable financial arrangements. Such arrangements may violate the anti-kickback statute by disguising remuneration for federal referrals through the payment of amounts purportedly related to non-federal business.”

Here are the takeaways from all this:

• It is permissible to pay commissions to bona fide W2 part-time or full-time employees who generate patients to the pharmacy in which the payer is a government health care program.

• The employment arrangement must be bona fide and not a sham. The smell test applies. Let's say that the pharmacy and the sales rep sign a written employment agreement; let's say that the pharmacy withholds taxes from the rep's paycheck; let's say that the pharmacy gives a W2 to the rep; but let's say that the pharmacy exercises no supervision and control over the rep. It is likely that the this "employment" arrangement will be considered a sham, meaning that the government will likely take the position that the rep is, in fact, a 1099 independent contractor of the pharmacy. This, in turn, would result in a violation of the anti-kickback statute.

• A sales rep who generates patients covered by a government health care program can be a 1099 independent contractor if the arrangement complies with the Personal Services and Management Contracts safe harbor. However, a fixed annual fee arrangement with no commissions with a sales rep is normally unrealistic.

• If a 1099 independent contractor sales rep generates both commercial patients and patients covered by a government health care program, the parties cannot avoid violating the anti-kickback statute by the pharmacy paying commissions only for the commercial patients and paying nothing for the patients covered by a government health care program.

• Finally, let's say that the rep is a 1099 independent contractor, is paid commissions, and only generates commercial patients for the pharmacy. In this scenario, the Medicare anti-kickback statute will not apply. However, the parties will need to review the state's anti-kickback statute. All states have anti-kickback statutes that are similar to the Medicare anti-kickback statute. Some state anti-kickback statutes only come into play when the payer is the state's Medicaid program. Other state statutes come into play, regardless of the payment source.

Jeffrey S. Baird, Esq., is Chairman of the Health Care Group at Brown & Fortunato, P.C., a law firm based in Amarillo, Texas. He represents pharmacies, home medical equipment companies, and other health care providers throughout the United States. Mr. Baird is board certified in health law by the Texas Board of Legal Specialization.