Managing Kickback Risks in Lab Sales & Marketing Arrangements

As with any other business, labs need sales and marketing expertise to survive and grow in the competitive diagnostics market. But to the extent you serve patients in Medicare, Medicaid and other government health programs, your sales and marketing arrangements can expose you to liability risks under health care fraud laws. Here’s a look at the risks and the practical measures you can take to manage them.

The Danger
Lab managers need to be sure that their sales and marketing activities, both internal and external, don’t run afoul of federal fraud laws. There are two key laws that need to be navigated:

Anti-Kickback Statute (AKS): The AKS makes it a crime to "knowingly and willfully" offer, pay, solicit or receive remuneration:

  • To induce referrals of lab and other health services reimbursed by federal health care programs; or
  • For referring, recommending or arranging the referral of patients for services reimbursed by such programs.

Note that "remuneration" need not actually be paid. Merely offering it is enough to trigger liability.

Stark Law: The federal Physician Self-Referral Law, aka Stark Law, bans:

  • Physicians from referring patients for lab and other health services payable by federal health care programs to entities with which the physician or immediate family member has a financial relationship; and
  • Labs or other entities on the receiving end of banned referrals from billing those programs for the services they provide as a result of the referral.

Sales and marketing agreements between a lab and third-party vendors raise red flags under both the AKS and Stark Law, especially when the vendor receives a commission or other payment based on the volume or value of sales generated.

The 2 Safe Harbors
The AKS and Stark Law carve out safe harbors or exceptions giving labs room to engage in otherwise problematic business arrangements involving remuneration of referral sources provided that the transaction meets specified conditions. There are two basic safe harbors in play for contracts between labs and outside sales and marketing vendors:

1. The Bona Fide Employee Safe Harbor
Arrangements between labs and individual vendors may qualify for protection under the AKS "bona fide employee" safe harbor. For the safe harbor to apply, the vendor must:

  • Be a bona fide W-2 employee, rather than an independent contractor; and
  • Receive compensation that is:
    • Reasonable;
    • Reflective of fair market value;
    • Negotiated at arm’s length; and
    • Not based on the number or value of referrals.

2. The Personal Services or Management Safe Harbor
Sales and marketing arrangements between labs and vendors who are agencies and/or individuals acting as independent contractors may be permitted under the safe harbor for personal services or management contracts. To qualify for the safe harbor, the arrangement must meet six conditions:

  • There must be a written agreement signed by both parties;
  • The agreement must specify the services to be provided by the vendor;
  • If the services are to be provided on a periodic, sporadic or part-time rather than full-time basis, the agreement must specify the precise schedule, including the exact length and charge of each interval;
  • The aggregate term of the agreement must be at least one year;
  • The aggregate compensation paid over the agreement’s term must be:
    • Set in advance;
    • Consistent with fair market value in arm’s length transactions; and
    • Not based in any way on the volume or value of referrals or business generated;
  • The services performed may not involve counseling or promotion of business arrangements or activities that violate state or federal laws.

Beware of Commissions & Percentage Sales Fees
Failing to qualify for a safe harbor doesn’t necessarily make an arrangement illegal. However, it does leave you at the mercy of OIG review. The personal services and management contracts safe harbor has proven especially dicey over the years.

While acknowledging that "many advertising and marketing activities warrant safe harbor protection," the OIG has consistently taken the position that commission-based compensation to contract sales force will not meet the personal services and management contracts safe harbor because it "is not fixed in advance and is determined in a manner that takes into account the value or volume of business generated between the parties, including federal health care program business."

The HDL Case
The Health Diagnostics Laboratory (HDL) case is a striking example of the trouble labs can get into by not heeding the OIG’s warning against percentage- based sales arrangements. The case, which began as a series of qui tam suits, accused HDL and two other labs (including Singulex, Inc.) of paying physicians sham processing fees in exchange for blood testing referrals, including medically unnecessary large multi-assay panels.

At the center of the case was the labs’ marketing arrangement with their outside sales consultant, BlueWave Consultants. The DOJ contended that the sales contract was illegal noting that in addition to a monthly consulting fee, BlueWave received a commission up to 19.8% of lab revenue. The other problematic aspect was the marketing tactic of BlueWave’s sales force, alleged to have encouraged physicians to order medically unnecessary blood testing via panels and offering doctors a fee per blood test (up to $20 from HDL and $10 from Singulex) for processing and handling samples. The result was billing of Medicare for millions of dollars in unnecessary tests.

On April 9, 2015, HDL agreed to pay $47 million to settle the FCA claims. Roughly two months later, it filed for Chapter 11 bankruptcy. Singulex shelled out $1.5 million to settle charges stemming from its role in the scheme. Both labs also entered into CIAs with the government.

Alternatives to Consider
Alternatives to percentage-based structures tied to volume or value of lab testing may include fair market value compensation that is set in advance and based upon other production-related values not determined by the volume or value of lab referrals that result from the individual or vendor’s marketing activities, such as:

  • The amount of time spent;
  • The number of attendees at marketing presentations;
  • The number of sales presentations made;
  • The overall financial performance of a region or division of the lab organization; and/or
  • Other pre-set financial performance targets not linked to specific customers or test volumes.

Any of these payment methodologies should be carefully spelled out in the sales and marketing agreement (or employment contract if the sales and marketing services are supplied by an individual employee).

Takeaway: While enlisting individuals and entities to furnish sales and marketing services for your lab may be crucial to success, you also need to be keenly aware of the AKS and Stark Law risks. The best way to manage these risks is to ensure that your arrangements satisfy a safe harbor:

  1. Structuring arrangements as bona fide employment agreements when hiring individuals; and/or
  1. Structuring arrangements as bona fide personal services and management contracts when hiring agencies or individuals acting as independent contractors; and
  1. In all cases, ensuring that compensation is reasonable, reflective of fair market value and NOT based on commissions or the value or volume of sales or business generated.

You have 2 articles left to view this month.

Your 3 Free Articles Per Month Goes Very Quickly!
Get a 3 month Premium Membership to
one of our G2 Newsletters today!

Click on one of the Newsletters below to sign up now and get unlimited access to all articles, archives, and tools for that specific newsletter!









Try Premium Membership