MEDICARE AND MEDICAID FRAUD AND ABUSE:
THE ANTI-KICKBACK STATUTE
William M. Copeland, MS, JD, PhD, FACHE
The most familiar Medicare/Medicaid fraud and abuse statute (and the one most
relevant to this analysis) is Section 1128B(b) of the Social Security Act (42 U.S.C. r1320a-
7b(b)), often referred to as the quot;Anti-Kickback Statute.quot; The statute prohibits the offer or
payment, as well as the solicitation or receipt, of quot;any remuneration (including any
kickbacks, bribe, or rebate)quot; in exchange for referrals. The prohibited activity is a two
way street, with both the payer and the receiver equally culpable.
What constitutes quot;any remuneration,quot; however, is a gray area. While the statute
provides that remuneration includes quot;any kickback, bribe or rebate,quot; it does not define
these terms. Further, there is a prohibition against remuneration quot;directly or indirectly,
overtly or covertly, in cash or in kind.quot; Clearly, direct cash payments in exchange for
referrals violate the statute. What is less clear, however, is what constitutes quot;indirect
The intent of the anti-kickback law is to eliminate payment for referrals of
Medicare/Medicaid patients or business that is paid for by those programs. Any
payment, including profit distributions, made to a physician or other healthcare
provider by an activity to which he, she or it makes referrals of patients or goods or
services is suspect. While the statute is primarily aimed at prohibiting payment to
physicians for referrals, it is not limited as such and care facilities and their suppliers
are not exempt.
There are four specific exceptions to the broad sweep of the general prohibition against
remuneration: (1) a discount or price reduction to the provider that is properly disclosed
and appropriately reflected in costs claimed or changes made by the provider; (2)
payments by an employer to a bona fide employee for employment in the provision of
covered items or services; (3) group purchase arrangements established by written
contract with full disclosure; and (4) specified limited payment practices, the so-called
quot;safe harbors,quot; under the regulations required by the Medicare and Medicaid Patient and
Program Protection Act of 1987 ('the 1987 Actquot;).
Because the anti-kickback statute is extremely broad in its language, its scope is
established by judicial interpretation. 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.
The leading case applying the anti-kickback statute is United States v. Greber, dealing
with payments between a medical diagnostic company that provided holter monitor
services and physicians. The company billed Medicare for the monitoring services it
performed and forwarded 40 percent of those payments (up to $65 per patient) to the
referring physician. The defendant, Dr. Greber, asserted that these payments to referring
physicians were quot;interpretation feesquot; paid for the initial consultation and for explaining
the test results to the patients. He argued that compensation for services actually
performed did not violate the anti-kickback statute absent a showing that the only
purpose of the fee was improperly to induce future services. The court found that the
statute prohibited any financial incentives to physicians that might induce unneeded
services: quot;If one purpose of the payment is to induce future referrals, the Medicare statute
has been violated.quot;
Under this broad reading of the statute, any payments from a provider to a referral
source could violate federal law even if the payments were primarily intended to
compensate the referral source for goods and services actually provided.
In 1989, this broad interpretation was adopted in the Kats and Bay State cases. Kats
involved an agreement between a community medical clinic and a diagnostic
laboratory to share Medicare payments received for laboratory services provided to
patients referred by the clinic to the laboratory. Citing Greber, the federal appeals court
held that the anti-kickback statute was violated if one of the purposes of the payment
was to induce future referrals, even for professional services. Conviction is proper
unless the payments involved were quot;wholly and not incidentally attributable to the
delivery of goods and services.quot;
In Bay State, an executive of a city-owned hospital was charged with receiving illegal
remuneration in the form of two automobiles and cash he was paid for services rendered
as a consultant to an ambulance company. The government contended he received the
cars and money to influence the hospital to award a contract to the ambulance company.
Defendants contended that quot;the government had to show the payments ... were not as
compensation for services performed ... or were of substantially more value than the
services performed or to be performed ... quot; The court found the defendants guilty, stating:
The gravamen of Medicare Fraud is inducement. Giving a person an
opportunity to earn money may well be an inducement to that person to
channel potential Medicare payments toward a particular recipient.
... The statute is aimed at the inducement factor.
The text refers to quot;any remuneration.quot; That includes not only sums for
which no actual service was performed but also those amounts for
which some professional time was expended .... That a particular
payment was a remuneration (which implies that a service was
rendered) rather than a kickback, does not foreclose the possibility that
a violation nevertheless could exist.
The First Circuit Court adopted the more expansive reading of the statute in Greber,
quot;stating that the issue of the sole versus primary reason for payments is irrelevant since
any amount of inducement is illegal.quot;
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 (quot;HHSquot;) and its review by the
Administrative Appeals Board (the quot;Appeals Boardquot;) within HHS now provides the
guidance that has been lacking.
Hanlester Network is the first case in which any tribunal has defined the
circumstances under which physician ownership in health care providers is prohibited
by the anti-kickback statue. It is also the first time the HHS Office of the Inspector
General (quot;OIGquot;) has used its exclusion authority rather than proceeding with a criminal
prosecution. Therefore, it provides substantial guidance for interpreting the anti-
The 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
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 Appeals Board and remanded.
On remand, Judge Kessel found, using the criteria provided by the appeals panel, that
the defendants had violated the statute. The criteria used by Judge Kessel is very
important and very broad.
He 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
pays remuneration with an intent to influence the person to make referrals, the anti-
kickback statute is violated. Because the limited partner physicians were actively
encouraged to refer to the partnership labs, the arrangement violated the law.
Physicians were told that their failure to refer would be a quot;blueprintquot; 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.
Hanlester sets forth, for the first time, a definition of remuneration. The
Appeals Board 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
Issues of over-utilization, excessive testing, or inappropriate judgments as the result
of the physician's involvement in the partnership are moot. Judge Kessel states: quot;The
issue is whether Respondents violated the law by inducing physicians to refer tests, not
whether Respondents violated the law by inducing physicians to refer unnecessary or
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 statement of the DIG on the
decision: quot;[A]s a result of this case no provider will be able to make that claim of
ignorance in the future.quot;
Judge Kessel only excluded the clinical labs, not the individual physicians and
other investors. Exclusion, in his view, is justified only when conduct shows a
quot;propensityquot; to engage in unlawful or harmful acts.
The Administrative Appeals Board has reversed that decision in part and imposed
exclusions the individuals as well as the entities. While agreeing in principle with
Judge Kessel's conclusion, the Appeals Board did not agree that the individuals
should not be excluded for the program. It found that the individuals' violation of the
anti-kickback law, a criminal statute, creates a strong inference of their
untrustworthiness and supports their exclusion.
The Medicare and Medicaid Patient and Program Protection Act of 1987
Given the direction of judicial interpretation, the Medicare and Medicaid Patient and
Program Protection Act of 1987 (quot;the Actquot;) may be viewed as an effort to respond to the
concerns of health care providers that many relatively innocuous, or even beneficial,
commercial arrangements are technically within the scope of the statute and hence
maybe subject to criminal prosecution. The Act modifies criminal provisions by
requiring the promulgation of regulations specifying those payment practices that will
not be subject to criminal prosecution and that will not provide a basis for exclusion
from the Medicare or state health care programs. The Secretary of HHS, in consultation
with the Attorney General, is authorized to develop these regulations. Because the
definitions of fraud and abuse in the Medicare/Medicaid statute have changed over
time, the Act and its regulations attempt to clarify those practices exempt from
consideration as fraud and abuse, that is, safe harbors.
Safe Harbor Regulations
On July 29, 1991, HHS issued the first final safe harbor regulations. On November
5, 1992, two additional safe harbors were published that will protect some managed
care plans. In addition, seven new safe harbors have been published for public
comment in a Notice of Proposed Rulemaking. The purpose of these safe harbors is to
define payment practices that will not be subject to criminal prosecution, exclusion, or
civil monetary penalties. However, strict compliance with the criteria for each safe
harbor is necessary to obtain immunity under these rules and the practices that are
protected are very narrow. Therefore, careful reading and assessment is necessary. A
reading of these regulations in their entirety shows that certain recurring themes
permeate them. First, remuneration or economic benefit given to a referring physician
may not be proportionate to or contingent upon the making of a referral or the
ordering of a good or service. Second, that remuneration may not exceed the fair
market value of the service, property or investment for which the remuneration is
given. Third, wherever possible, the parties should sign a written agreement
specifying the manner and extent to which the service, property or investment of the
referring physician is to be compensated. Finally, that agreement should be for a term
of no less than one year. The concept behind these requirements is to avoid a quid pro
As noted above, to comply with a safe harbor and escape enforcement, all criteria for
the particular safe harbor must be met. However, it is important to note that failure to
comply fully with a safe harbor's criteria does not necessarily mean that a particular
practice or arrangement violates the anti-kickback statute. In effect, the practical
consequence of not meeting the requirements for a safe harbor is to leave the party in
much the same position as it was prior to the rules, with one notable difference. Because
prosecution requires the specific intent to solicit or receive illegal remuneration, the
existence of the rules makes it more difficult to assert a defense of lack of intent. This is
one of the key lessons of Hanlester.
Finally, it should be noted that the final rules rely heavily on Bay State for
guidance, particularly that quot;the gravamen of Medicare Fraud is inducementquot; and that
quot;[T]he statute is aimed at the inducement factor.quot; In other words, relying on Bay State,
the DIG takes the position that the payment is not the important element. What is
important is an intent to induce.
In the following section, each of the safe harbors is named and those that
are pertinent to care facilities are discussed briefly.
There are two components to the investment interest safe harbor, one for large
publicly traded entities and another for certain small entities. There are certain general
issues that apply to both.
quot;Investorquot; means individuals or entities who or which hold an investment interest,
directly or indirectly, in the entity. quot;Investment Interestquot; means any type of equity or
debt held in the entity, including stock, partnership units, bonds, debentures, notes, or
other debt instruments. quot;Referring Providersquot; includes any person or entity who refers
patients or business or does business with the entity.
The safe harbor distinguishes between quot;interested investorsquot; and other investors.
The latter only seeks return on investment. Doing business with the entity means quot;an
investor who is in a position to make or influence referrals to, furnish items or services
to, or otherwise generate business for the entity.quot; Joint ventures between suppliers
and nursing homes is an example of an investor who does business with the entity.
Physicians are not the only ones who can make or influence referrals. The preamble
makes it clear that hospitals and other providers can do so. Investors who enter into
written stipulations that they will not refer to or otherwise do business with an entity
for the life of the venture will have the status of non-interested investors.
Specifically, the safe harbor states that remuneration does not include any payment
that is a return on an investment interest, such as a dividend or interest income, made to
an invertor as long as all of the applicable standards are met in one of the following two
categories of entities:
(1) Investments in entities that are publicly traded with undepreciated
net tangible assets in excess of $50 million.
To obtain safe harbor protection under this category of investment, five standards
must be met: (i) equity securities must be registered with the SEC; (ii) they must be
available to the general public on the same terms; (iii) passive investors cannot be
favored over non-investors in the marketing and furnishing of services; (iv) the
investment interest cannot be loaned or guaranteed by the entity; and (v) return on
investment must be proportional to capital invested.
The first two of these standards speak for themselves. They mandate registered
securities available to the general public. The third standard is applicable only to
passive investors; therefore, preferential marketing can be provided to active
investors. quot;Active Investorquot; means an investor who is responsible for the day-to-day
management of the entity and is a bona fide general partner or who agrees in writing
to undertake liability for the actions of the entity's agents acting with the scope of their
agency. quot;Passive Investorquot; is one who is a limited partner in a partnership, a
shareholder in a corporation, or holder of a debt security.
Where investors are loaned money from the entity they are adding no real capital to
it. The thrust of the forth standard is to assure that investors provide new needed
capital and that the entity is not a sham to pay for referrals.
Finally, if dividend payments are to receive protection, they can only be tied to the
number of shares owned by the investor and not to his or her referrals. However,
those investors who serve as officers and directors may be compensated at fair market
value so long as they are active investors. By definition, active investors must be
involved in the day-to-day operations of the company. The standard recognizes that
they are not expected to serve without remuneration.
(2) Investments in entities having either active or passive investors.
To obtain safe harbor protection under this category of investment, eight standards
must be met: (i) no more than 40 percent of each class of investment may be held by
interested investors; (ii) the terms offered to passive investors must be the same as
those offered to interested investors (different terms can be offered to active
investors); (iii) the terms offered to interested investors must not be related to the
previous or expected volume of referrals; (iv) there is no require that a passive
investor make referrals or generate business (active investors can be required to refer);
(v) passive investors cannot be favored over non-investors in the marketing and
furnishing of services (active investors can be favored); (vi) no more than 40 percent of
the gross revenue (not just Medicare revenue) of the entity can come from interested
investors; (vii) the investment interest cannot be loaned or guaranteed by the entity;
and (viii) return on investment must be proportional to capital invested.
As indicated above, some of these standards do not apply to active investors.
This is because active investors assume the business risks and therefore are held to
a lower standard than passive investors.
The thrust of the standard requiring no more than 40 percent investment by
interested investors is to ensure that investors who make referrals, or who are in a
position to make referrals, or others who do business with the entity or are in a
position to generate business for the entity own significantly less than a majority
interest in the entity. Conversely, the standard requires that individuals who are not
in a position to make referrals have a legitimate opportunity to invest and that they
have an interest of at least 60 percent of all equity or debt investments.
This DIG seeks to curb marketing strategies that discriminate against the passive
investor who is not in a position to make referrals and which offer better deals to those
who are in a position to make referrals or generate business. The marketing standard
focuses on the status of the investor and safe harbor protection where the terms of the
investment opportunities depend on the ability of the passive investor to make
This standard does not apply to active investors because general partners and
corporate officers are chosen as a result of their familiarity with the health care field
and their presumed ability to make referrals and, on this basis, they are offered
different terms than the passive investor.
To be in total compliance with this standard, shares should be offered to non-
interested investor on the same terms as the offering to interested investors. In other
words, the offering should be made to individuals or entities who are not in a position to
make or influence referrals or otherwise generate business on the same terms as to those
who are in a position to influence referrals or business.
This standard concerning linking shares to expected referrals also addresses marketing
strategies that are discriminatory. Here, however, it is assumed that an investment
interest is being offered to an individual or entity who may influence referrals and denies
safe harbor protection if the interest is offered on favorable terms based upon the
investor's past or expected referrals or on the amount of business that maybe otherwise
generated for the entity. This standard applies to both passive and active investors.
The entity is barred from requiring an individual to make referrals as a condition
for remaining an investor. While encouragement to make referrals may appear
innocuous in nature, investors may feel pressured to make referrals or generate
This standard concerning preferential marketing is applicable only to
passive investors, therefore, preferential marketing can be provided to
The standard concerning gross revenue establishes a bright-line rule that return on
investment from these entities is protected only so long as no more than 40 percent of
the entity's revenue comes from interested investors. This standard, as well as the first
standard discussed above, establishes a clear rule that leaves no question where
The thrust of the standard is to ensure that revenue in protected ventures comes
from a wider population than from investors' referrals. When coupled with the first
standard, it will help assure that profits are distributed to a larger population than
simply to referring investors.
As with the first investment interest safe harbor, loans to the investor by the entity add
no real capital to it. The thrust of this standard is to assure that investors provide new
needed capital and that the entity is not a sham to pay for referrals.
If dividend payments are to receive protection, they can only be tied to the number of
shares owned by the investor and not to his or her referrals. Therefore, return on
investment must relate to the capital investment of the investor. However, those
investors who serve as officers and directors may be compensated at fair market value
so long as they are active investors. By definition, active investors must be involved in
the day-to-day operations of the company. As indicated above, the OIG recognizes that
they are not expected to serve without remuneration.
Space and Equipment Rental
These arrangements are quot;exemptquot; provided there is an executed, written
agreement that specifies the premises covered by the lease. Access to the space or
equipment must be for the total lease period or if it is for periodic intervals, these
intervals must be set in advance and be specific as to their schedule, precise length,
and exact rent. The lease must be for at least a period of one year and not subject to
readjustment on the basis of the number of referrals. Charges must reflect fair market
value, be set in advance, and must be determined in a manner that does not take into
account the volume or value of referrals and does not reflect the value of being close
to the source of referrals.
Personal Services/Management Contracts
These arrangements require an executed agreement specifying the services
provided, their schedule and the exact charges. As with space and equipment rentals, the
term of the agreement must be at least one year, with compensation set in advance and
based on fair market value, not the volume or value of referrals. The services performed
must not include counselling or promotion of activities that violate the Act. An agent is
defined as anyone, other than a bona fide employee, who has an agreement to perform
services for, or on behalf of, a principal.
These three safe harbors, space rental, equipment rental and personal services and
management contracts, are very similar, with four of the standards of each almost
identical. The requirement that the agreement be in writing is to ensure that the terms
are specific and not subject to fluctuation. As for the requirement that the premises,
equipment or services be specified in the agreement, the intent is to provide specificity
to the agreement.
The OIG objects to percentage or per use agreements between providers in a position
to refer because the payments in these arrangements are directly tied to the volume of
business or amount of revenue generated, thus providing an improper incentive to
refer. However, it is the nature of the relationship between overall volume of use and
referrals, that triggers the statute. If the lessor or agent were not in a position to make
referrals to the lessee or principal, the statute would not be violated.
This does not mean that percentage and per use leases that are based on overall
volume, versus volume of referrals, are per se violations of the statute. There are
legitimate considerations, such as depreciation of equipment, that can motivate these
arrangements without them being influenced by referrals.
The OIG is also concerned with abuse resulting from periodic renegotiation of
ostensibly short term agreements, in response to changes in referral patterns. Therefore,
these agreements must be for a term of at least one year. This requirement restricts the
period within which contract terms may not be changed, and not the time within which
services under a contract may be performed. So long as the terms of the agreement are
not changed during the one year period, the time of performance is not pertinent.
Part-time contractual arrangements and periodic access leases between health care
providers are especially vulnerable to abuse because they re subject to modification
based on changing referral patterns between the parties. Recognizing that it is not
always possible to specify the timing and duration of business arrangements, or the
precise compensation involved, the OIG indicates that where the arrangement does not
meet the safe harbor, they will be analyzed on a case-by-case basis.
There is no single figure for fair market value. Rather, it contemplates a rental fee
falling within a commercial range that is reasonable, without taking into account
proximity or convenience to referral sources. Rental charges that take location into
account may impermissibly generate referrals or other business.
Counselling or promotion of a business arrangement or other activity that violates
the anti-kickback statute is also forbidden. This requirement is aimed at the promoter or
consultant that becomes involved in activities that encourage providers and others to
violate the statute. An example is the development of an impermissible joint venture
An employer may pay an employee to solicit business. This quot;safe
harborquot; applies only to bona fide employer-employee relationships.
Other Safe Harbors
In addition to the safe harbors discussed above there are safe harbors for: (1)
group purchasing organizations (2) purchase of a physician's practice, (3) referral
services, and (4) discounts and warranties. In my opinion, these safe harbors have little
impact on care facilities and will not be discussed in any depth here. In addition, the
OIG has published two safe harbors, effective November 5, 1992, dealing with managed
care entities. Again, in my opinion, these have little impact on care facilities and will not
be discussed here.
Additional Safe Harbors
As indicated above, the Secretary of HHS has published seven additional
safe harbors for public comment. These proposed safe harbors are:
investment interests in rural areas;
investment interests in ambulatory surgical centers;
investment interests in group practices composed exclusively of
obstetrician malpractice insurance subsidies;
referral agreements for specialty services;
cooperative hospitals service organizations;
These proposed safe harbors are open for comment until November 22,
There are many actions that can be taken to mitigate the prospect of a violation of
the kickback statute. I recommend that counsel advise care and supplier clients to
avoid activities such as:
Marketing investments in entities to organizations or entities in a position to
make substantial referrals.
Making it easy for persons or entities in a position to refer to invest by
keeping the minimum investment low.
Relating profit distributions to volume of referrals. (However, in Hanlester,
one of the findings that sustained the guilty verdict was that profit
distributions were indirectly related to the volume of referrals made by
partners because profits would increase with increased referrals. Even
though payments to physicians were not large, they were sufficient to
induce them to refer.)
Telling potential investors that they can expect a high rate of return on their
investment. (In Hanlester, physicians were told that they could expect to earn
in excess of 50 percent on their investment.)
Telling investors that failure to refer will result in failure of the entity.
Structuring the organization to allow investors to profit from referrals in
areas where they cannot bill directly. (In Hanlester, the investments
permitted physicians to profit from their Medicare referrals when
reimbursement restrictions prohibited them from directly billing for
quot;Pharmacy/broom closetquot; leases. These occur where a supplier or lab rents
space from a nursing home that is suitable for little else than a broom closet.
Obviously, the space is never used for its contracted purpose.
Ventures where a party to the venture is already engaged in the line of
business that is to be engaged in by the venture. (The question is why that
party needs to create a venture to continue its business.)
Percentage or per use rentals and leases if at all possible. While these are not
per se illegal, quot;they are rife with abuse.quot;
Sometimes a venture can be restructured to bring it closer in line with the safe harbor
requirements. Such restructuring might include:
Admission of third party investors (should be at least 60 percent) who make
the same investment and receive the same return as the other venturers even
though they will make no referrals to the venture.
Providing goods and service of the venture to customers other than the
partners (should be at least 60 percent of revenue).
Engaging in a business undertaking that is significantly different than that of
All of the above.
Before engaging in a venture or conduct that is questionable, the care provider or
supplier should get an unqualified opinion (as opposed to an advisory letter) from a
legal consultant who has a significant practice in this area. The opinion should specify
that the venture or conduct meets the requirements of the statute, or if it does not,
specifies where it does not and defines the risk of undertaking the project without that
Providers and suppliers should also make sure that:
any contracts for services or supplies are set out in writing and signed by
the contract specifies the services, supplies, space or equipment covered; P1
the contract is for not less than one year;
if the contract is for periodic intervals, it includes as much specificity
as possible; and
the contract is for fair market value.
To say that application of the Medicare and Medicaid Anti-Kickback Statute is less
than clear would be a gross understatement. Nevertheless, structuring ventures and
conducting business so that one is as close as possible to the safe harbors will mitigate
the risk of an enforcement action by the DIG or other law enforcement agencies.
One should get good advice for someone who practices in this area and understands
its idiosyncracies. It is almost impossible to completely eliminate risk in this area,
however, if those risks can be quantified and the activity is conducted in good faith on
the advice of counsel, the risks can be mitigated.
1 e 3 [ y 1 ~ :7G1 t 1 ~ I ? IG1 e 1 C~]~l ~ : ~~/ I ~ ~ t ~ A ~ ? IG1