A Primer on Anti-Kickback, Fraud and Abuse Legislation


Since the inception of the Medicaid and Medicare programs almost 40 years ago, fraud and abuse have grown to represent a significant financial burden for both federal programs. Although the exact amount of money lost each year to fraud and abuse is uncertain, the U.S. General Accounting Office in 1999 estimated that $1 out of every $7 spent on Medicare was lost to fraud and abuse, representing a total loss of approximately $13.5 billion for the year.

To combat and control health care fraud and abuse, the federal government has enacted several key pieces of legislation over the years. Some of these federal statutes overlap, and penalties can be imposed under more than one statute for violations. In addition, most states also have state laws regarding anti-kickbacks and self-referrals. While the inclusion of state laws regarding anti-kickbacks and fraud and abuse is beyond the scope of this article, the key federal statutes covering these topics are summarized below. In today’s health care environment, awareness and a working knowledge of these statutes can be crucial.

Anti-Kickback Statute

Both Medicaid and Medicare were created in 1965 under the Social Security Act — Medicaid was established to provide federal financing for health care for individuals in need, while Medicare was established to ensure health care for the elderly who could not afford health insurance. The cost of both programs in 1965 was approximately $1 billion each. When the Social Security Act was enacted, no provisions relating to fraud and abuse were included except for general prohibitions against making false statements in applying for benefits.

In 1972, the issue of fraud and abuse was addressed through the enactment of the Medicare/Medicaid Anti-Kickback Statute (42 U.S.C. 1320a-7b(b)). A broad criminal statute, the anti-kickback statute prohibits individuals or entities from knowingly and willfully paying, soliciting or receiving any remuneration to induce business reimbursed under a federal or state health care program. The statute specifically lists remuneration to include kickbacks, bribes and rebates made “directly or indirectly, overtly or covertly, or in cash or in kind.” Prohibited conduct includes remuneration not only for inducing patient referrals but also for purchasing, leasing, ordering or arranging for any good, facility, service or item paid for in part or in whole by a federal or state health care program.

Violation of the anti-kickback statute constitutes a felony, and both parties in violation of the statute are liable. The penalties include imprisonment for up to five years and fines of up to $25,000. In addition, criminal conviction results in mandatory exclusion from federal health care programs.

Top 20 Monetary Recoveries Obtained Under the False Claims Act
Rank Company Amount of Recovery
1* HCA $731.4 million
2* HCA $631 million
3* TAP (Taketa-Abbott Pharmaceutical)
Pharmaceutical Products Inc.
$559.5 million
4* Abbott Labs $400 million
5* Fresenius Medical Care of North America $385 million
6* SmithKline Beecham Clinical Laboratories Inc.
(doing business as GlaxoSmith Kline)
$325 million
7* National Medical Enterprises $324.2 million
8* AstraZeneca Pharmaceuticals $266.1 million
9* Bayer Corporation $257.2 million
10* First American Health Care of Georgia $225 million
11* Laboratory Corporation of America $182 million
12* Beverly Enterprises Inc. $170 million
13 United Technologies $150 million
14* Blue Cross Blue Shield Illinois $140 million
15 Northrop Grumman $111.2 million
16 Shell Oil Company $110 million
17* Vencor Inc./Ventas Inc. $104.5 million
18* National Health Labs $100 million
19* Quorum Health Group Inc. $95.5 million
20 Chevron $95 million
*Denotes a health care-related case
Source: http://www.taf.org/top20.htm

Anti-Kickback Safe Harbor Exemptions

Because provisions of the anti-kickback statute are so broad, health care providers expressed concern that “relatively innocuous, or even beneficial, commercial arrangements” were technically covered by the statute and are therefore subject to prosecution. In response to these concerns, the Medicare and Medicaid Patient and Program Protection Act (MMPPPA; Public Law [P.L.] 100-93) of 1987 required the promulgation of regulatory exemptions, known as “safe harbors,” that would be sheltered from liability under the anti-kickback statute.

The original safe harbors, which were developed by the Office of the Inspector General (OIG) and codified in 1991, include:

In addition to monetary penalties, offenders can be excluded from the Medicare and Medicaid programs and also may be required to enter into a corporate integrity agreement with the OIG.
  • Investment interests
  • Space rental
  • Equipment rental
  • Personal services and management contracts
  • Sale of practice
  • Referral services
  • Warranties
  • Discounts
  • Employees
  • Group purchasing organizations

Since first being developed and codified, these original safe harbors have been revised, clarified and expanded by the OIG. Moreover, additional safe harbors that have been codified include:

  • Waivers of Medicare Part A inpatients’ cost-sharing amounts
  • Increased coverage, reduced cost-sharing amounts or reduced premium amounts in managed care settings
  • Price reductions offered to health plans by providers in managed care settings
  • Investments in ambulatory surgical centers
  • Joint ventures in underserved areas
  • Practitioner recruitment in underserved areas
  • Sales of physician practices to hospitals in underserved areas
  • Subsidies for obstetrical malpractice insurance in underserved areas
  • Investments in group practices
  • Specialty referral arrangements between providers
  • Cooperative hospital services organizations
  • Ambulance replenishing

Although the OIG has noted that “failure to comply with a safe harbor provision does not mean that an arrangement is per se illegal,” an arrangement must fit “squarely” in the safe harbor to be protected. Compliance with the safe harbor provisions is voluntary, and arrangements that do not comply with a safe harbor are analyzed on a case-by-case basis for compliance with the anti-kickback statute. Upon written request, the OIG will offer an advisory opinion on whether specific arrangements meet safe harbor provisions. Instructions on how to request an advisory opinion can be accessed on the OIG Web site.

The OIG also provides guidance on practices it regards as unlawful or as “particularly vulnerable to abuse” by periodically issuing Special Fraud Alerts and Special Advisory Bulletins. The most recent Fraud Alert, “Telemarketing by Durable Medical Equipment Suppliers,” was released in March 2003 and outlines the three specific situations in which unsolicited telephone calls to Medicare beneficiaries are permitted. The most recent Special Advisory Bulletin, “Contractual Joint Ventures,” was released in April 2003 and focuses on questionable contractual arrangements between health care providers in related lines of business.

Stark II, Phase II Regulations Issued – What Does It Mean To You?
By Marla P. Spindel, Esq.

The Stark I Law was enacted in 1989, and applied only to physician referrals for laboratory services. In 1995, the Stark II Law became effective, which prohibits physicians from referring a patient for a broad range of services known as “designated health services” to an entity with which the physician has a financial relationship, unless an exception to the Law is met. A designated health service includes, among other things, O&P items.

Thus, if a physician makes a prohibited referral to you for O&P, you may not bill the Medicare or Medicaid programs for the item or service provided to the patient pursuant to such referral, unless you meet an exception. In addition, there are civil money penalties and exclusions from the Medicare and Medicaid programs if you violate the Law.

Financial Relationships

Accordingly, if you have a financial relationship with a physician that refers business to you, you must ensure that the arrangement meets an exception to the Stark Law or neither you nor the physician may bill for the item or service furnished. In the O&P field, these relationships typically take the form of you renting space in a physician’s office to store orthotic soft goods, commonly referred to as “consignment closet” arrangements.

Also, you may lease an employee to a physician to assist in fitting patients with O&P items. Any of these types of relationships, where money is being exchanged between you and the physician, will implicate the Stark Law and an exception must be met in order for you or the physician to bill for the item or service.

In 2001, the Centers for Medicare and Medicaid Services (CMS) issued regulations implementing certain aspects of the Stark II Law. This was known as phase I of the regulations. Those regulations clarified that O&P is defined as anything designated as O&P in the DMEPOS fee schedule. It also exempted “personally performed services,” even if they are designated health services, from the definition of a “referral” under the Stark Law. Accordingly, if a physician orders O&P for a patient and personally furnishes the O&P to the patient, that arrangement would not be subject to the Stark Law’s prohibitions and the physician would be able to bill for the O&P.

Consignment Closets

In March 2004, CMS issued phase II of the Stark II regulations, which will go into effect on July 26. A few of the provisions in the phase II regulations may be applicable to your practice. First, the regulations provide some clarification of the space lease exception to the Stark Law, which you will need to meet if you rent space from a physician or physician group to store your O&P (i.e., you have a “consignment closet” arrangement).

The space lease exception, as set forth in the Stark Law, requires that:

  • The lease is in writing, signed by the parties and specifies the premises covered
  • The space leased does not exceed what is necessary for the business purposes of the lease
  • The lease provides for a term of at least 1 year
  • The rental charges over the term of the lease are set in advance, consistent with fair market value, and are not determined in a manner that takes into account the volume or value of referrals
  • The lease is commercially reasonable

The phase II regulations provide that the rental charges may be set in advance even if they are based on a percentage arrangement, so long as the percentage is determined in advance. Also, the lease may permit the lessee to holdover the lease after the initial term on a month-to-month basis that does not exceed 6 months. Further, the one-year term requirement does not prevent termination before 1 year, provided the parties do not enter into a new lease during the first year of the original term.

Professional Courtesy

The phase II regulations also create a new exception for “professional courtesy,” defined as free or discounted health care items or services provided by an entity to a physician, his or her immediate family, or office staff. The following conditions must be met for you to meet this exception:

  • The professional courtesy must be offered to all physicians in your community service area without regard to referrals from those physicians
  • The items or services must be routinely provided by you
  • You must have a written and approved professional courtesy policy
  • The professional courtesy may not be offered to a physician who is a Medicare beneficiary unless there is a showing of financial need
  • The insurer must be informed in writing if coinsurance is reduced or waived
  • The arrangement cannot violate the federal anti-kickback statute

Non-Monetary Compensation

About the Author
Marla P. Spindel, Esq. Marla P. Spindel, Esq. is counsel for the law firm of Powers, Pyles, Sutter and Verville, PC in Washington, D.C.

Further, the phase II regulations clarify the non-monetary compensation exception established by the phase I rule by providing that the value limit will be indexed to inflation. This exception permits you to give non-cash gifts to physicians that do not exceed an aggregate value of $300 per year so long as the gifts:

  • Are not determined in a manner that takes into account the referrals generated by referring physicians
  • Are not solicited by the physician or the physician’s practice
  • Do not violate the federal anti-kickback statute.

Civil Monetary Penalties Law

The Civil Monetary Penalties Law (CMPL; (42 U.S.C. 1320a-7a), enacted in 1981, allows administrative monetary penalties and assessments to be sought against an individual or entity who presents or causes to be presented claims to a federal health program that the individual “knows or should know” were not provided as claimed. Under the CMPL, liability can be imposed for claims that contain false or misleading information or involve illegal remuneration to Medicare or Medicaid patients. In addition, penalties can be assessed for claims made or services provided during a period when the health care professional or entity was excluded from Medicaid or Medicare.

Penalties for violations of the CMPL include up to $10,000 per claim or up to $15,000 for each individual with respect to whom false or misleading information was given. In addition, violators can be assessed up to three times the amount claimed or three times the amount of remuneration “offered, paid, solicited or received.” As with the anti-kickback statute, violators are excluded from participation in federal health care programs.

False Claims Act

The federal civil False Claims Act (FCA; 31 U.S.C. 3729-3733) has become a key piece of legislation in the federal government’s fight against fraud and abuse in the health care arena. Originally enacted during the Civil War in 1863 and amended by Congress first in 1943 and then again in 1986, the FCA imposes liability upon any individual who knowingly presents or makes a false or fraudulent claim or conspires to defraud the government.

For individuals or entities convicted of misdemeanor health care fraud, the exclusionary period is discretionary, with a minimum of 3 years unless the Secretary of the Department of Health and Human Services deems a longer or shorter period is appropriate.

Under the FCA, proof of specific intent to defraud is not required; rather, individuals who have “actual knowledge” of the information or who act with “deliberate ignorance” or “reckless disregard” of the truth can be held liable for civil penalties ranging from $5,500 to $11,000 for each false claim submitted plus treble the amount of the claim.

The FCA also includes qui tam, or whistleblower, provisions. Under the qui tam provisions, private individuals with information or evidence of fraud can file suit on behalf of the government. If the government decides to take over the suit after investigating the case, the qui tam plaintiff continues to be a party and is entitled to share in the recovery of damages. A qui tam plaintiff may recover between 15 percent and 25 percent of the amount awarded in a successful suit.

In cases in which the government decides not to take over a case, qui tam plaintiffs may choose to proceed on their own. In such cases, a qui tam plaintiff may be awarded up to 30 percent of the government’s recovery.

While the FCA is a broad civil statute that can be used to seek damages against any individual who commits fraud against the federal treasury, it has become an important and powerful tool in prosecuting fraudulent claims made against federal health care programs. Because the monetary penalties allowed under the civil FCA are assessed for each claim plus triple the amount of the claim, settlements against violators can reach millions or even billions of dollars.

For example, one of the largest settlements in a health care fraud case totaled $1.7 billion against HCA Inc. The settlement resulted from two separate agreements reached in 2001 and 2003, and comprised civil penalties and damages, criminal fines and an administrative settlement as the result of false claims submitted to Medicare and other federal health care programs. Almost $1.4 billion of the HCA settlement was recovered under the FCA. In fact, according to the Taxpayers Against Fraud Web site, 16 of the top 20 monetary recoveries obtained under the FCA involved health care fraud cases.

In addition to monetary penalties that can be imposed under the FCA, offenders can be excluded from the Medicare and Medicaid programs and also may be required to enter into a corporate integrity agreement (CIA) with the OIG. A CIA includes various administrative requirements to ensure proper claims are submitted and typically lasts 3 to 5 years. While a CIA usually is burdensome and expensive to implement, it can reduce damages assessed in a FCA prosecution.

Finally, providers accused of submitting fraudulent claims also may face a criminal FCA suit. Under a criminal case, a violation is considered a felony and is punishable by up to 5 years in prison.

Factors Considered in Investigating False Health Care Claims

Notice to the provider
Was the provider on actual or constructive notice, as appropriate, of the rule or policy upon which a potential case would be based?

Clarity of the rule or policy
Under the circumstances, is it reasonable to conclude that the provider understood the rule or policy?

Pervasiveness and magnitude of the false claims
Is the pervasiveness or magnitude of the false claims sufficient to support an inference that they resulted from deliberate ignorance or intentional or reckless conduct rather than mere mistakes?

Compliance plans and other steps to comply with billing rules
Does the health care provider have a compliance plan in place?
Is the provider adhering to the compliance plan?
What relationship exists between the compliance plan and the conduct at issue?
What other steps, if any, has the provider taken to comply with billing rules in general or the billing rule at issue in particular?

Past remedial efforts
Has the provider previously on its own identified the wrongful conduct currently under examination and taken steps to remedy the problem?
Did the provider report the wrongful conduct to a government agency?

Guidance by the program agency or its agents
Did the provider directly contact either the program agency (e.g., the Health Care Financing Administration [now the Centers for Medicare and Medicaid]) or its agents regarding the billing rule at issue?
If so, was the provider forthcoming and accurate, and did the provider disclose all material facts regarding the billing issue for which the provider sought guidance?
Did the program agency or its agents, with disclosure of all relevant, material facts, provide clear guidance?
Did the provider reasonably rely on such guidance in submitting the false claims?

Prior audits or other notice to the provider of the same or similar billing practices
Other information that bears on the provider’s state of mind in submitting the false claims
Source: “Guidance on the Use of the False Claims Act in Civil Health Care Matters.” June 1998 memorandum from the Office of the Deputy Attorney General, U.S. Department of Justice to All U.S. Attorneys, All First Assistant U.S. Attorneys, All Civil Health Care Fraud Coordinators in the Offices of U.S. Attorneys and All Trial Attorneys in the Civil Division Commercial Litigation Section. Available at: http://www.usdoj.gov/04foia/readingrooms/chcm.htm.

Stark Laws

The key elements of the Stark I and II laws (42 U.S.C. 1395nn) cover self-referral and place limitations on physician referrals. First enacted in 1989, the Stark law is a civil statute intended as a “bright line” prohibition on physician self-referral. The Stark law is similar to the anti-kickback statute in that both apply to financial relationships between providers and physicians, and both were designed to prohibit physicians from profiting from their ability to direct referrals of Medicare and Medicaid business. Interim final Phase II regulations of the Stark II law recently were published in the March 26 issue of the Federal Register and are scheduled to go into effect at the end of next month.

Escalating Costs of Medicare
and Medicaid Programs
  1990: $183.8 billion
  1998: $381.7 billion
  1999: $400.3 billion
  2000: $428.5 billion
  2001: $470.8 billion
  2002: $517.5 billion
  2003*: $550.1 billion
  2004*: $587.9 billion
  2005*: $628.5 billion
  Source: www.cms.hhs.gov/statistics/nhe/projections-2003/t3.asp

Stark I, which became effective in 1995, prohibited physicians from making referrals to a clinical laboratory services facility with which the physician or an immediate family member has a financial relationship. Stark II is much broader and prohibits physicians from referring Medicare and Medicaid patients for certain “designated health services” to entities with which the physician or an immediate family member has a financial relationship. Designated health services include:

  • Clinical laboratory services
  • Physical therapy services
  • Occupational therapy services
  • Radiology and certain other imaging services
  • Radiation therapy services and supplies
  • Durable medical equipment and supplies
  • Parenteral and enteral nutrients
  • Home health services
  • Outpatient prescription drugs
  • Inpatient and outpatient hospital services

Both Stark I and II outline statutory and regulatory exceptions. Among some of the exceptions allowed are employment, personal services arrangement, fair market and de minimis exceptions. Additional exceptions created under the Stark II regulations include Medicaid managed care plans, professional courtesy arrangements, certain inadvertent and temporary lapses in compliance with an existing exception, charitable contributions by physicians to entities that furnish designated health services, payments made by a hospital or federally qualified health center to a physician to retain the physician’s needed medical practice in a health professional shortage area and technology items or services furnished to physicians to enable their participation in a community-wide health information system.

Penalties imposed for violation include no payment for the services, refund of amounts collected and civil monetary penalties of up to $15,000 per item or service. In addition, arrangements made by physicians and entities to circumvent the referral restriction law may be subject to a civil monetary penalty of up to $100,000 per occurrence.

Statute of Exclusion

One of the penalties that can be imposed on violators under most of the statutes covering health care fraud and abuse is exclusion from federal health care programs. The Statute of Exclusion From Federal Health Care Programs (42 U.S.C. 1320a-7) specifies the exclusion penalties that can be imposed.

For individuals or entities convicted of a program-related crime, a criminal offense relating to patient abuse or neglect, or a felony offense related to health care fraud, the minimum period of exclusion from the Medicare and Medicaid programs is 5 years. The exclusionary period is extended to 10 years for violators with one prior conviction, and for violators with two prior convictions, exclusion from Medicare and Medicaid is permanent.

For individuals or entities convicted of misdemeanor health care fraud, the exclusionary period is discretionary, with a minimum period of 3 years unless the Secretary of the Department of Health and Human Services (HHS) deems a longer or shorter period is appropriate. Discretionary exclusions also can be imposed for license revocation or suspension, exclusion or suspension from a federal or state health care program, excessive charges or the provision of medically unnecessary services, and failure to provide required information.

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