1) The Hanlester Network case established that any remuneration provided with the intent to influence referrals violates anti-kickback laws, even without an explicit agreement on referrals. 2) The case involved a laboratory partnership where physician investors were encouraged to refer tests to earn higher returns, violating anti-kickback statutes. 3) While the physicians were not excluded from Medicare themselves due to previous uncertainty around such arrangements, the ruling warned those in healthcare joint ventures that they can no longer claim ignorance of anti-kickback laws.

1. HANLESTER: IMPACT ON JOINT VENTURES
by
William Mack Copeland, Esquire
The Medicare Fraud and Abuse Anti-Kickback Law (42 U.S.C.
§1320a-7b(b)) prohibits the offer or payment, as well as the
solicitation or receipt, of "any remuneration" in exchange for
referrals. The prohibited activity is a two way street, with both
the payer and the receiver equally culpable.
What constitutes "any remuneration," however, is a gray area.
While the statute provides that remuneration includes "any kickback,
bribe or rebate," it does not define these terms.
Further, there is a prohibition against remuneration "directly
or indirectly, overtly or covertly, in cash or in kind." Clearly,
direct cash payments in exchange for referrals
violate the statute. What is less clear, however, is what
constitutes "indirect payments."
To date, the courts have interpreted the statute in an
expansive manner. If remuneration flows from one party to
another and if referrals (or the opportunity to provide goods
and services) flow back, the potential for criminal prosecution
exists, regardless of the presence of good business reasons for
the venture. Thus, even in the case of what those unfamiliar
with the statute might consider normal business arrangements,
the shadow of criminal sanction remains.
Until recently, there had been no decision dealing with the
return on investment in an entity to which the investor makes
referrals. The decision of an administrative law judge at the
Department of Health and Human Services now provides the guidance
that has been lacking.
In the original Hanlester Network case, Administrative Law Judge
Steven Kessel found that the defendants had not violated the
anti-kickback statute because there was no agreement to refer. That
decision was reversed by the Administrative Appeals Board within
the Department of Health and Human Services and remanded. On remand,
Judge Kessel found that the defendants had violated the statute.
Hanlester Network was the general partner in three clinical
laboratory limited partnerships. A management contract with
SmithKline Beecham Clinical Laboratories allowed SmithKline to
manage the facilities and to refer 90 percent of the tests to its
own laboratories. Hanlester then billed for the tests, paid
SmithKline a monthly management fee and distributed the profits to
the investors, including the physician limited partners.
In his remand opinion, Judge Kessel concluded that a violation
does not require that an offer or payment be conditioned on a referral
agreement. Rather, when a party knowingly or willfully offers or

2. pays remuneration with an intent to influence the person to make
referrals, the anti-kickback statute is violated. Because Hanlester
had a management agreement with SmithKline from which the labs
obtained benefits and because Hanlester referred tests to
SmithKline's central lab, the arrangement violated the law.
The arrangement also was deemed illegal as to the limited partner
physicians because they were actively encouraged to refer to the
partnership labs. Physicians were told that their failure to refer
would be a "blueprint" for failure of the labs. The greater number
of tests referred, the greater income earned by the physicians.
Thus, there was at least an indirect relationship between income
and the volume of referrals.
Despite these findings, Judge Kessel did not exclude the
individual physicians from the Medicare program. Judge Kessel
emphasized the remedial purpose of the law. Exclusion, in his view,
is justified only when conduct shows a "propensity" to engage in
unlawful or harmful acts. Here, the physicians, like many other
similarly situated entrepreneurs, engaged in conduct which had not
been established at the time of its commission to be illegal or
harmful. Until now, no judicial authority had ever concluded that
such conduct was unlawful. Thus, while Hanlester was permanently
excluded as a provider, the individual physicians were not.
Judge Kessel warned physicians that such conduct had now been
deemed illegal--and that they could no longer assert a lack of
knowledge as to its legality.
New regulations published by the Secretary of Health and Human
Services on January 29, 1992 moot the issue: an Administrative Law
Judge no longer has discretion to review exclusion determinations
made by the Office of the Inspector General. Under the new
regulations, the Inspector General has nonreviewable authority to
impose exclusions for an indefinite period until the Inspector
General decides to reinstate the physician. The consequence is
that the Inspector General may exclude any party whom he has authority
to exclude free from any administrative review of either his decision
to exclude or his decision of whether or when to reinstate.
Hanlester sets forth, for the first time, a definition of
remuneration. The Appeals Panel defines remuneration to encompass
even a minimal payment that is intended to influence the reason or
judgment of the payee as to referrals. Such a minimal payment violates
the statute, even without an agreement to make referrals.
Issues of overutilization, excessive testing, or inappropriate
judgments as the result of the physician's involvement in the
partnership are moot. Judge Kessel states: "The issue is whether
Respondents violated the law by inducing physicians to refer tests,
2

3. not whether Respondents violated the law by inducing physicians to
refer unnecessary or excessive tests."
Judge Kessel concludes on a rather ominous note:
Any provider who invests in enterprises to which he refers
business should beware the possibility that he is acting
in violation of the law. So should the entrepreneur who
organizes such enterprises. Parties who act in disregard
of possible violations in the future cannot contend
credibly, as have these respondents, that they acted in
an atmosphere of uncertainty.
Judge Kessel's conclusion was underscored by the Inspector General's
statement on the decision: "[A]s a result of this case no provider
will be able to make that claim of ignorance in the future."
This decision has far reaching implications for all healthcare
joint ventures and for any other business transactions between
healthcare providers.
NKYHLTLW.ART
3