INTRODUCTION

This memorandum will update you on a number of recent Medicare and Medicaid fraud and abuse developments.

First, on July 17, 2000, the Office of Inspector General ("OIG") of the Department of Health and Human Services issued an informal letter regarding "up front rebates," "prebates," and "signing bonus" payments in connection with medical product purchases. The letter provides important guidance for health care providers, distributors, and manufacturers with regard to the OIG’s concerns about up-front payments made in connection with product purchasing arrangements.

Second, the U.S. District Court for the District of Massachusetts has issued a memorandum opinion providing the first judicial analysis of the statutory discount exception to the federal anti-kickback statute, including some discussion of the discount safe harbor regulation. The opinion sheds light on the types of facts that could trigger government prosecution of alleged kickback schemes.

Third, in U.S. v. McClatchey, the Tenth Circuit joined three other jurisdictions in adopting the "one purpose" test under the anti-kickback statute, which provides that the anti-kickback statute is violated where one purpose of the payment in question is to induce referrals, regardless of the existence of other legitimate purposes for the payment. The court also closely scrutinized, and rejected, defendant’s advice of counsel defense, noting that defendant did not always follow the advice received, and may have initiated legal review as a subterfuge.

Finally, the OIG’s authority to issue advisory opinions regarding the anti-kickback statute is scheduled to expire later this month. In order to ensure consideration of an advisory opinion request, interested parties are encouraged to submit any such requests by August 18, 2000.

These issues are discussed in greater detail below.

OIG GUIDANCE ON "PREBATES"

On July 17, 2000, the OIG issued an informal letter regarding "up front rebates," "prebates," and "signing bonus" payments in connection with medical product purchases. The letter may be of interest to companies that manufacturer, distribute, and purchase medical products, including pharmaceuticals. The letter is available on the OIG’s internet website at http://www.dhhs.gov/progorg/oig/ak/prebate.htm.

The OIG issued the letter in response to an inquiry regarding arrangements in which a seller enters into contracts with group purchasing organizations and end-users of medical products, and agrees to pay substantial up-front payments to the buyer, but does not require the buyer to refund amounts if it does not satisfy minimum purchase commitments. In some instances, the buyer is required to purchase the product exclusively from the seller.

The OIG asserted that the up-front payments would not qualify for safe harbor protection because they are neither price reductions at the time of sale of goods nor rebates subsequent to the sale of goods. Next, the OIG stated its view that the arrangements could pose a significant risk of fraud and abuse because (i) they may not be readily disclosable as discounts, and (ii) they may "lock in" purchasers over time, thereby increasing overutilization or interfering with the cost/quality considerations normally applicable to purchasing decisions.

Although the OIG’s concerns may be valid in the context of many potentially abusive up-front payment arrangements, the letter contains several analytical limitations. First, the letter does not directly address situations in which up-front payments are reconciled with actual purchases through an appropriate mechanism to promote proper pricing disclosure, or situations in which minimum purchase commitments are enforced. Second, the OIG’s concerns with exclusive purchasing arrangements may be somewhat overstated. Medicare principles have long required health care providers to act as prudent purchasers by seeking discounts on products, and exclusive purchasing commitments are one mechanism that is commonly used in the market to obtain price concessions. Moreover, some medical products (e.g., generic drugs, routine medical supplies, and the like) are true "commodities" for which there is little quality differentiation and for which health care providers routinely seek to standardize their inventory.

Health care providers, distributors, and manufacturers may nevertheless wish to consider reviewing their purchasing commitments in light of the OIG’s obvious and broadly stated concern with up-front payments. For additional information on this issue, please contact Joseph W. Metro at 202/414-9284.

UNITED STATES V. SHAW

• Overview
  The memorandum opinion issued in United States v. Glenn Shaw, et al, Criminal Action No. 99-10044-REK (D. Mass., June 19, 2000) is the first in-depth judicial analysis of the statutory discount exception to the federal anti-kickback statute and the discount safe harbor regulation. The opinion provides important insights into the government’s approach to criminal prosecution of alleged kickback schemes.
• Parties
  The government brought this action against Dr. Glenn Shaw, president of NMC Medical Products, Inc., a wholly owned subsidiary of National Medical Care ("NMC"), a kidney dialysis provider and manufacturer of products used in dialysis. NMC also operated another division, LifeChem, that provided clinical laboratory blood testing services to dialysis clinics. The indictment also named two senior officials of LifeChem.
• Government’s Position
  The indictment alleges that Dr. Shaw conspired to pay remuneration to dialysis clinics to induce the clinics to use LifeChem’s laboratory services for non-routine tests and medically unnecessary tests that were reimbursed by Medicare. According to the government, these payments violated the federal anti-kickback statute. The remuneration took the form of rebates and special pricing on dialysis products, grants, entertainment (yacht rentals and hunting trips), and write-offs of bad debts for lab tests of indigent and health maintenance organization patients.
• Defendant’s Position
  In his motion to dismiss for failure to state a crime, Dr. Shaw asserted that the remuneration described in the indictment was protected by the discount exception to the anti-kickback statute and thus was not illegal. Among other things, Dr. Shaw argued that the company attempted in good faith to report price reductions, that communications to buyers constituted adequate disclosure, and that the price reductions represented a "discount or other reduction in price."
• Court’s Decision And Discussion Of Discount Exception
  The Court denied Dr. Shaw’s motion to dismiss, on the relatively narrow ground that the indictment contained all the elements of the charged offense of conspiring to pay illegal kickbacks, and the government did not have to state that the conduct failed to meet the discount exception. However, the Court’s opinion contained an extensive discussion of the statutory discount exception, which made the following observations:
  • Perhaps most significantly, the Court recognized that the statutory discount exception has "independent status" from the discount safe harbor regulation. Notably, the OIG’s safe harbor regulations do not control how a court interprets and applies the statutory discount exception, even if some deference would be given to the agency’s interpretation.
  • The question of whether the conduct qualified for the discount exception was a factual issue and one that the jury would need to assess in determining whether the government has met its burden of proof beyond a reasonable doubt that the defendant acted with the requisite state of mind.
  • The Court noted that an essential component of the statutory exception was that the federal or state health programs share in and benefit from reduced costs.
  • The Court further observed that the safe harbor regulations’ definition of "discount" was not controlling for purposes of determining the application of the statutory exception. Thus, the fact that earlier versions of the safe harbors did not protect rebates to charge-based buyers did not preclude reliance on the statutory exception in the context of a rebate arrangement.

For additional information regarding U.S. v. Shaw, please contact Eugene Tillman, Gordon B. Schatz, or Joseph Metro at 202/414-9200.

UNITED STATES V. McCLATCHEY

The Tenth Circuit handed down a significant decision interpreting the anti-kickback statute in United States v. McClatchey, 2000 WL 763769 (10th Cir. June 13, 2000). Dennis McClatchey was an officer at Baptist Medical Center in Kansas City ("the Hospital"), and had been involved in several contractual arrangements with two physicians, the LaHue brothers, on behalf of the hospital beginning in 1985. The LaHues provided physician services to numerous Medicare patients in nursing facilities, and therefore controlled a large number of potential referrals for hospital services.

The Hospital paid each of the LaHues $75,000 per year for medical director and other consulting services. A Hospital employee also was assigned to serve as a liaison between the Hospital and the LaHues’ medical practice. Although the Hospital paid his salary, he effectively acted as the manager of the physicians’ practice. In the early 1990s, McClatchey was told that the LaHues had not been performing some of the services required under their contracts, and that certain Hospital staff members did not want these services to be provided by the LaHues. Nevertheless the arrangements with, and payments, to the LaHues continued through June 1994.

In 1998, the government charged the LaHues and three hospital executives with violations of the anti-kickback statute, alleging that the payments greatly exceeded the value of any services rendered by the LaHues and were intended to induce the physicians to refer patients to the Hospital. The jury convicted McClatchey and three other defendants of conspiring to violate the anti-kickback statute, but the trial court granted McClatchey’s motion for acquittal, holding that there was insufficient evidence for a reasonable jury to find McClatchey had the requisite specific intent to violate the anti-kickback statute. United States v. Anderson, 85 F. Supp.2d 1047, 1065-68 (D. Kan 1999). The Tenth Circuit reversed and reinstated the jury’s guilty verdict.

The Court of Appeals’ McClatchey opinion is particularly important because the Tenth Circuit became the fourth jurisdiction to adopt the "one purpose" test when applying the anti-kickback statute. This test was first enunciated by the Third Circuit in United States v. Greber, 760 F.2d 68 (3rd Cir.), cert. denied, 474 U.S. 988 (1985), and provides that the anti-kickback statute may be violated where one purpose of the payment in question is to induce referrals, regardless of the existence of other legitimate purposes for the payment. This test was subsequently adopted by the Ninth Circuit in United States v. Kats, 871 F.2d 105 (9 Cir. 1989) and the Fifth Circuit in United States v. Davis, 132 F. 3d 1092 (5th Cir. 1998). The McClatchey opinion implicitly rejected the "primary purpose" test advanced by the defendant but specifically stated that defendant(s) could not be convicted "merely because they hoped or expected or believed that referrals may ensue from remuneration that was designed wholly for other purposes. Likewise, mere oral encouragement to refer patients or the mere creation of an attractive place to which patients can be referred does not violate the law. There must be an offer or payment of remuneration to induce." However, as a practical matter, it is difficult to see how parties could "hope or expect" referrals would ensue or provide oral encouragement for them, and still be found not to violate the anti-kickback statute under the "one purpose" test.

The McClatchey decision held that a jury might reasonably have found that McClatchey specifically intended to violate the anti-kickback statute because he renegotiated, rather than terminated, a contract with physicians who (i) had not performed substantial services required under prior contracts, (ii) staff did not want to perform certain services at the Hospital, and (iii) made referrals that were important to the hospital’s financial health. The court found that a jury might well have determined that McClatchey’s very reason for negotiating a new contract with the LaHues was to induce continuing referrals.

The District Court had closely examined the record and found that McClatchey believed the relationship with the LaHues was legal and acted at all times to keep it so, in accordance with advice he received from the Hospital’s lawyers. Nevertheless, the Court of Appeals did not accept McClatchey’s defense that he did not have improper intent because he directed legal counsel to remedy the physicians’ prior failure to provide services. According to the appellate court, a jury might have found McClatchey’s directions to counsel were a subterfuge to ensure the contract appeared on its face to constitute a legal arrangement. The court also rejected the argument that a jury could not reasonably have inferred McClatchey acted with criminal intent since he was acting on advice of counsel. The court pointed out that McClatchey was directing counsel on certain matters, and not vice versa, and he did not always follow the advice of counsel when he received it.

The decision has already been criticized by legal commentators because of its adoption of the expansive "one purpose" test. Meanwhile, other defendants in the original case have an appeal pending which addresses some of these same issues. They have also requested that the Tenth Circuit hold a rehearing en banc of the McClatchey decision. Therefore, changes to the McClatchey opinion are possible, albeit unlikely.

For additional information on this decision, please contact Linda A. Baumann at 202/414-9488.

ADVISORY OPINION STATUTE AUTHORIZATION

The Health Insurance Portability and Accountability Act of 1996 (P.L. 104-191) ("HIPAA") authorized the OIG to issue advisory opinions to outside parties regarding the applicability of the anti-kickback statute to a particular business arrangement. To date, the OIG has issued more that forty advisory opinions under this authority.

Under HIPAA, the advisory opinion authority is scheduled to sunset four years after enactment, or August 21, 2000, unless reauthorized by Congress. Congress has recessed until September 5, 2000, so while Congress could reauthorize the advisory opinion statute in the fall, the OIG’s authority will expire on August 21, at least temporarily. Because August 20, the last day the authority is in effect, is on a Sunday, the effective deadline for submission of an advisory opinion request is August 18, 2000.

Again, it is possible that Congress will reauthorize the advisory opinion program later this fall. Nevertheless, providers or suppliers who plan to submit a request for an advisory opinion should do so by August 18, 2000, or risk having the request rejected.

The OIG has posted its advisory opinion regulations and a preliminary checklist of information requestors should furnish on its internet site, www.dhhs.gov/progorg/oig/advopn/index.htm.