Healthcare and Life Sciences Compliance Reminders for "Commercial Only" Arrangements

Two recent developments serve as reminders that healthcare and life sciences companies should take care in structuring so-called “commercial only” arrangements that seek to reduce U.S. Anti-Kickback Statute (AKS) risk by excluding federal healthcare program (FHCP) patients from the arrangement. Commercial-only arrangements refer to those programs and activities in which only commercially insured patients are eligible and for which Medicare, Medicaid, and other FHCP patients are excluded by design and implementation. Healthcare and life sciences companies commonly look to these arrangements as an attractive compliance option for certain activities such as co-pay assistance and certain free goods programs. Easy to design and, with appropriate safeguards, fairly straightforward to implement, commercial-only arrangements can be an elegant way for healthcare and life sciences companies to de-risk certain patient programs as well as commercial and marketing activities.

This Sidley Update provides an update on a recent U.S. Court of Appeals for the Fifth Circuit case and advisory opinion from the U.S. Department of Health and Human Services Office of Inspector General (HHS-OIG) addressing commercial-only arrangements. We also provide examples of the types of safeguards healthcare and life sciences companies might consider when designing and implementing commercial-only arrangements to reduce potential AKS risks. In summarizing these developments, we are not endorsing the positions or interpretations the Fifth Circuit, the Department of Justice, or the Department of Health and Human Services have taken.

Fifth Circuit Case

In United States v. Shah, No. 21-10292 (5th Cir. Oct. 2, 2023), Chief Judge Priscilla Richman for the court found that there was a conspiracy to violate the AKS despite the defendants’ alleged efforts to implement a commercial-only surgery-referral scheme that largely excluded FHCP patients. More specifically, the court ruled that the AKS requires that a defendant merely ought to know that a FHCP could pay for a service in a kickback scheme even if merely one patient in the scheme was insured by a FHCP as a secondary payor. The Shah case is flawed in its analysis but does serve as a reminder to implement compliance safeguards to identify and exclude FHCP patients from commercial-only arrangements.

The case arose out of an alleged pay-for-surgery scheme. The court’s opinion stated that Forest Park Medical Center was out of network for all insurers in an alleged attempt to take advantage of higher reimbursement rates for out-of-network care. Pursuant to the alleged scheme, the medical center waived any out-of-network fee to patients to keep costs equivalent to in-network as well as paid surgeons for referrals. These payments were allegedly disguised as consultancy or marketing fees to a pass-through entity. According to the opinion, most of the alleged patients at issue had private insurance, but at least some had some FHCP program coverage on a secondary insurance basis.

Several surgeons and other defendants were convicted of conspiracy to violate the AKS. One of the three convictions addressed the court’s interpretation of the AKS prong that requires payment by a FHCP. This defendant challenged the conspiracy to violate the AKS conviction by arguing that the government had to prove that he knowingly and willfully referred FHCP patients into the scheme.

In sidestepping the question of scienter, the court found that the AKS requires only that a payment “may” be made by a FHCP and that the government only “had to show that [the physician defendant] knowingly agreed to accept renumeration for referring patients that could be federally insured” (emphasis in original). The court then clarified that because the defendants argued that they were intentionally avoiding federally insured patients, they were providing services that could be paid by a FHCP, even if ultimately they were not paid by FHCP. Further, the court explained that the government had to prove “at least some patients” were federally insured or that payment could have been made by such a program to establish jurisdiction.

On that point, the government pointed to evidence that the physician defendant referred a patient for whom Tricare was a secondary insurer. The physician defendant argued that Tricare did not actually reimburse for the surgery, which was reimbursed by the patient’s primary commercial insurance. The government also pointed to tracking sheets showing that the physician defendant received credit for referring Medicare patients, even if the overall scheme sought to exclude such patients. The court concluded that even if Tricare as the secondary payor did not reimburse for the single patient’s surgery, the Medicare tracking sheets reflected evidence that at least some Medicare patients were referred to Forest Park Medical Center.

Advisory Opinion No. 23-06

Advisory Opinion 23-06 follows a line of HHS-OIG advisory opinions in which HHS-OIG warns against potential risks arising from commercial-only arrangements (which HHS-OIG refers to as “carve out arrangements”). In Advisory Opinion 23-06 (published in September 2023), HHS-OIG issued an unfavorable opinion regarding a proposed commercial-only arrangement. The proposed arrangement involved the sale of the technical component of anatomic pathology services for commercially insured patients to the Requestor, which operates anatomic pathology laboratories across the country. Under the proposal, the Requestor would purchase the technical component from referring laboratories — some of which were physician-owned or affiliated, some of which were out of network for commercial insurers — and pay the referring laboratory a fair-market-value, per-specimen fee. The Requestor then would bill commercial insurers in network for both the technical and professional components of the anatomic pathology services.

In issuing an unfavorable opinion, OIG stated that commercial-only arrangements are not “dispositive” as to the potential AKS risk of an arrangement. OIG went on to state that “[s]uch arrangements implicate, and may violate, the Federal antikickback statute by disguising remuneration for Federal health care program business through the payment of amounts purportedly related to non-Federal health care program business.” In particular with respect to the proposed arrangement, OIG expressed concern that the proposed arrangement “could give rise to a significant incentive for the Physician Laboratories and Non-Physician Laboratories to refer patients, including Federal health care program beneficiaries, to Requestor.” Put another way, OIG expressed concern that that the carveout arrangement would have a “pull-through” effect of increasing referrals of all business to Requestor from referring laboratories and referring physicians, including FHCP business.

Finally, the Requestor was unable to certify that the aggregate services contracted for would not exceed those reasonably necessary to accomplish the commercially reasonable business purpose, thus making the commercial-only arrangement vulnerable under a facts-and-circumstances for the following reasons, among others:

• The Requestor could perform the technical component of the arrangement itself, raising the question of why Requestor would have a reason to outsource that service.
• HHS-OIG stated the view that it is more efficient and cost-effective to perform both components of the anatomic pathology services in one lab, rather than outsourcing a component of the arrangement to another lab.
• The Requestor would be more likely to receive orders directly from physicians because it is an in-network provider, leaving OIG to conclude that the purpose of the arrangement was likely to induce the referral of patients, including FHCP patients.
• The arrangement could result in unfair competition by favoring laboratories that are willing to pay referring laboratories technical component fees.

Examples of prior HHS-OIG advisory opinions addressing commercial-only arrangements can be found here, here, and here.

Potential Safeguards

Healthcare and life sciences companies should take heed of the developments above in designing and implementing commercial-only arrangements given the broad potential reach of the AKS and the concerns expressed in advisory opinions and now the Shah case. Examples of specific controls companies might consider for commercial-only arrangements include these:

• Controls to Identify Secondary FHCP Insurance. The Fifth Circuit decision suggests that courts might consider the presence of secondary FHCP insurance coverage as sufficient to implicate the AKS. To decrease the potential AKS risk that may arise from carveout arrangements, stakeholders should take into account whether patients with secondary FHCP insurance can be excluded from participation in the arrangement.
• Controls Against FHCP Leakage. The Fifth Circuit decision also honed in on government evidence that at least some Medicare patients were referred through the alleged surgery scheme, despite the scheme’s overall focus on patients with private insurance. To reduce potential AKS risk, stakeholders who implement carveout arrangements should put reasonable safeguards into place designed to reduce or eliminate so-called leakage, that is, circumstances where patients with primary or secondary FHCP insurance participate in the arrangement.
• Controls Against Pull-Through Effect. OIG expressed several concerns about the carveout arrangement in Advisory Opinion 23-06, but the most fundamental concern seemed to be about the potential pull-through effect. The Requestor failed to address that in its request and may have lacked controls to reduce the potential for pull-through. To decrease the potential risk of pull-through effect, stakeholders should consider controls such as affirmatively rejecting FHCP referrals if they are the direct or indirect result of a carveout arrangement.

The landscape of AKS compliance remains complex, particularly for arrangements that fall outside of a statutory exception or regulatory safe harbor. Healthcare and life sciences companies should remain attentive to the evolving AKS landscape and consider controls to help mitigate risk.