In 2018, Congress enacted the Eliminating Kickbacks in Recovery Act (“EKRA”), codified at 18 U.S.C. § 220 (as part of the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act or “SUPPORT Act”). The law targeted kickback arrangements, bribes and patient brokering within the recovery homes, clinical treatment facilities, or laboratories industries. EKRA is a criminal statute, and violations may result in up to 10 years of imprisonment and fines up to $200,000 per occurrence. Historically, concerns related to EKRA include harsh penalties for violating EKRA, exceptions that are not entirely synchronous with the Anti-Kickback Statute (“AKS”) and lack of guidance by the federal government and legal authorities.
That has somewhat changed because as of last month, in United States v. Schena, the U.S. Court of Appeals for the Ninth Circuit issued the first appellate decision interpreting EKRA. This decision is the first time a federal appeals court has addressed EKRA’s reach while providing clarity in its application to marketing arrangements within the healthcare, particularly involving laboratories.
Facts and Background:
Mark Schena (“Schena”) operated Arrayit, a medical lab in California with family members, friends and his wife. The lab performed clinical diagnostics, particularly blood tests for allergies. Schena marketed the blood tests as superior, in part because insurance providers paid up to $10,000 for each full suite of tests. The tests only cost Arrayit a small fraction of the amount billed. Arrayit conducted tests for 120 allergens. Evidence at trial indicated that for most patients testing for the full 120 allergens was not warranted, so medical necessity was in question.
In an effort to become more profitable, Schena paid marketing intermediaries a percentage of the revenue they collected. The evidence at trial showed that the marketers misrepresented Arrayit’s services to referring professionals, especially those unfamiliar with allergy testing, claiming that Arrayit’s blood testing was “highly accurate” and “far superior” to skin tests, even though skin testing was more common in the industry and Arrayit’s blood tests could not assess whether the patient had an allergy. Evidence also showed that marketers controlled which lab received the blood samples, and another marketer confirmed that Arrayit’s financial incentives led them to encourage blood tests and never mentioning skin tests as an option.
Arrayit billed insurers over $77 million between 2018 through 2020. The government charged Schena with healthcare fraud, securities fraud, and violations of EKRA, including two substantive EKRA counts based on payments made to a top marketer. The jury convicted Schena on all counts, and the district court sentenced him to 96 months in prison and ordered him to pay over $24 million in restitution.
Court’s Ruling:
In affirming the conviction of Schena, the court held that EKRA applies not only to direct payments made to referring physicians, but also to payments made to marketing intermediaries. Interestingly, the Ninth Circuit noted that a percentage-based marketing arrangement, without more, would not constitute a violation of EKRA. Such contractual arrangements become unlawful under EKRA when operated through false, fraudulent and deceptive practices that improperly affect referral decisions. The court found that, by directing marketers to mislead and deceive physicians about Arrayit’s blood testing services, particularly those physicians less knowledgeable about allergies, Schena engaged in deceitful conduct that gave marketers undue influence over referrals. Accordingly, the Ninth Circuit found Schena paid marketers to induce referrals to his lab in violation of EKRA.
Takeaways:
Due to the lack of guidance from the federal government, this decision defining the scope of EKRA is helpful with identifying the relevant prohibitions. This decision clarifies that EKRA does cover payments to marketers designed to induce referrals, and is not limited to payments made to medical professionals who are referring the patients.
The decision tells us while percentage-based or commission-based payments made to marketers are not violative of EKRA, when those marketers are requested and led to mispresent to medical professionals making the patient referrals about the medical services at issue, those payments would violate EKRA.
The court emphasized the need to be aware and cautious when structuring compensation arrangements and should consider the safe harbors in 18 U.S.C. Section 220(b)(2), which permits payments made to employees or independent contractors, if payments are not determined by:
- the amount of referrals to a particular recovery home, clinical treatment facility, or laboratory;
- the amount of tests or procedures performed; or
- the amount billed to or received from an insurer.
Recovery homes, clinical treatment facilities laboratories should develop strategies and internal processes to review compensation structures, marketing practices and marketing agreements to minimize the appearance of undue influence, and ensure their conduct does not violate EKRA.
Ritter Spencer Cheng, PLLC (“RCS”) regularly advises clients on healthcare regulatory and corporate transaction matters in Texas and throughout the country. He is certified in healthcare compliance (CHC) through the Compliance Certification Board (CCB). The RSC healthcare team will continue to monitor any changes related to EKRA. Our clients benefit from informed strategic advice, while being counseled on the regulatory burdens associated with healthcare transactions. For questions, reach out to Richard Y. Cheng, Esq., CHC at rcheng@ritterspencercheng.com.
