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Be Mindful of Strict Referral Laws
By Matthew Diggs and Gavin Keene

In many industries, companies rely on referral arrangements and client perks to generate and retain business. For example, investment advisors court clients with expensive dinners and concert tickets, real estate agents agree to exclusive referral arrangements, and airlines and credit card companies offer volume users “miles” or “points” in exchange for faithful patronage.

But in health care, the same conduct could result in significant civil or criminal penalties—at least when the federal government is paying the bill. For reasons that vary from ensuring medical judgment is isolated from financial considerations to protecting the federal treasury, Congress has enacted a series of restrictions on referrals involving beneficiaries of federal health care programs and services paid for by those programs.

The three statutes most often invoked by federal regulators in this area are the physician self-referral law (otherwise known as the Stark law), the Antikickback Statute (AKS), and the False Claims Act (FCA).

The Stark Law
The federal physician self-referral law—often referred to as the Stark law in honor of its primary sponsor, the late Congressman Fortney “Pete” Stark—prohibits a physician from referring Medicare patients for designated health services (DHS) to entities with which the physician (or an immediate family member) has a financial relationship, unless an exception applies.

A “financial relationship” includes ownership or investment interests in the entity as well as compensation arrangements between the entity and the physician. The Stark law contains a number of exceptions, including exceptions for many types of compensation arrangements.

In addition to prohibiting the referral itself, the Stark law prohibits the entity receiving the referral from billing Medicare for DHS provided pursuant to the referral. The existence of a financial relationship that does not fit within an exception triggers a period of disallowance, during which payments received by the entity for claims resulting from prohibited referrals are considered overpayments subject to recoupment.

The Stark law is a technical, strict liability statute that does not include an intent element. If a financial relationship does not fit within an exception, the referral and billing prohibitions are triggered. It does not matter whether the parties acted in good faith or the relationship failed to fit within an exception due to a technical oversight.

Potential penalties for violating the Stark law include denial of payment, repayment of amounts received in violation of the law, exclusion from participation in federal health care programs, and civil monetary penalties. Because of its breadth and mechanical application, the amount of the repayment liability arising out of a Stark law violation often appears disproportional to the conduct that gave rise to the violation.

The AKS
The federal AKS imposes criminal liability as well as civil monetary penalties on individuals or entities who knowingly and willfully offer, pay, solicit, or receive anything of value to induce or reward referrals of patients for services covered by federal health care programs, or to induce or reward federal health care program claims.

Most courts have interpreted the AKS to cover any arrangement where “one purpose” of the remuneration is to wrongfully induce the referral of patients or the ordering of covered services. The statute does require that the violation be knowing and willful—ie, the government must prove that the party intentionally engaged in illegal or at least wrongful conduct.

In recognition of the broad range of transactions potentially implicated by the AKS, certain types of payments and transactions are excluded from consideration by the statute or by regulatory safe harbors. While meeting the requirements of an exception or safe harbor provides comfort that an arrangement does not violate the law, an arrangement that does not fit within an exception or safe harbor does not necessarily violate the AKS. Rather, all facts and circumstances must be reviewed to determine whether the parties had the requisite intent to violate the law.

Violation of the AKS constitutes a felony punishable by a maximum fine of $100,000, imprisonment for up to 10 years, or both. Conviction will also lead to automatic exclusion from federal health care programs, including Medicare and Medicaid, and may lead to the imposition of civil monetary penalties.

Comparing the Stark Law With the AKS
Despite sharing some similarities, the Stark law and the AKS have important differences.

The Stark law applies only to referrals from physicians, while the AKS applies to referrals from anyone, including nonproviders. The Stark law applies only to referrals of Medicare patients for DHS, while the AKS applies to referrals of patients for the furnishing of any items or services reimbursable by any federal health care benefit program, as well as to payments to induce or in return for ordering goods and services paid for in whole or in part by a federal health care benefit program.

The Stark law is a strict liability statute with mandatory exceptions to avoid liability, while the AKS focuses on intent and offers optional exceptions and safe harbors. Finally, the AKS carries potential criminal penalties, while the Stark law is strictly a civil statute.

The FCA
Violations of the Stark law and the AKS often serve as the basis for liability under the federal FCA. The FCA creates civil liability for any person who knowingly submits a false or fraudulent claim to a federal program including, of course, Medicare and Medicaid. Originally enacted by Congress in 1863 to address corruption and fraudulent claims submitted to the Union Army during the Civil War, the FCA is sometimes known as the Lincoln Law.

FCA claims frequently arise in the health care industry. In fact, of the more than $3 billion recovered by the Department of Justice from FCA cases in fiscal year 2019, $2.6 billion related to matters that involved the health care industry.

Federal regulators file suits of their own, but the FCA’s qui tam provision also permits a whistleblower or “relator” to file an FCA claim on behalf of the United States. In exchange for bringing an FCA suit, a qui tam relator is entitled to receive up to 30% of the recovered funds. Under the FCA, the federal government has the authority to intervene in a suit initiated by a whistleblower or permit the whistleblower to pursue the claims without the government’s assistance.

In rare instances, the government may intervene and seek to dismiss an FCA action filed by a whistleblower. Damages under the FCA can be significant. The statute provides for a current, inflation-adjusted, maximum civil penalty of $22,363 for each false claim and permits the government to recover up to treble damages under certain circumstances.

Courts have held that the FCA may be violated if an entity knowingly submits a claim for DHS provided to a Medicare patient pursuant to a referral prohibited under the Stark law. Similarly, a claim submitted to a federal health care program resulting from an AKS violation is considered a false or fraudulent claim for purposes of the FCA. In addition, once a Stark law or AKS violation is identified by an entity, the knowing retention of payments received pursuant to prohibited referrals can provide the basis for FCA liability under what is known as a reverse false claim.

In a recent example of Stark law and AKS violations resulting in FCA liability, the Department of Justice intervened in a qui tam lawsuit against Community Health Network, an integrated health care system in Indiana. The relator’s complaint alleged Community had employment relationships with a number of physicians that violated the Stark law and the AKS because the compensation paid to the physicians was well in excess of fair market value, and bonuses were conditioned on the physicians achieving a minimum target of referral revenues to Community.

The complaint alleged that, as a consequence, Community’s submissions of claims to Medicare and Medicaid pursuant to referrals from these physicians were false claims under the FCA. This litigation is currently pending in US District Court for the Southern District of Indiana.

Practical Advice
In general, even if a referral or payment arrangement makes perfect business sense, it may be illegal in the health care industry. To avoid liability under the Stark law, the AKS, and the FCA, relevant stakeholders in the health care industry should bear in mind the following guidance:

• Physicians should not refer Medicare beneficiaries for DHS to entities in which they or a family member have a financial interest unless a Stark law exception applies.

• Do not intentionally offer, pay, solicit, or receive anything of value in exchange for or to induce a referral of an individual for services/items or for services/items themselves that may be reimbursed by a federal health care program unless the arrangement clearly fits in an AKS exception or safe harbor.

• When submitting claims for reimbursement to a federal health care program, take care to ensure that the claims are accurate and not the result of referrals or other arrangements that might violate the Stark law or the AKS.

This article does not constitute legal advice. The statutes mentioned in this article are only a few of the myriad health care referral laws enacted by Congress and state legislatures. Given the complexity of the existing regulatory landscape and the significant risks involved, the best practice is to consult a health care attorney who can help you develop a compliance framework.

— Matthew Diggs (top photo) is a partner at Davis Wright Tremaine in the firm’s White Collar, Investigations & Government Controversies practice in the Seattle office. He’s a former assistant US attorney for the Western District of Washington with a particular focus on health care fraud.

— Gavin Keene (bottom photo) is an associate in the health care practice group of Davis Wright Tremaine’s Seattle office.