Health Law Scan

Legal Insights and Perspectives for the Healthcare Industry

We hope you were able to join us for our July Fast Break on the US Court of Appeals for the Fourth Circuit's recently affirmed $114 million judgment in United States v. Mallory. If not, you missed a great session, featuring Katie McDermott and Howard Young analyzing this protracted suit filed under the qui tam provisions of the False Claims Act (FCA) against the owners of two specialty clinical laboratories and a contracted sales and marketing company.

Katie and Howard provided an overview of the background of the Anti-Kickback Statute (AKS), as well as sales and healthcare marketing arrangements, before digging into the details of the Fourth Circuit opinion in Mallory. We highlight key industry takeaways for independent sales agent relationships in light of this Fourth Circuit opinion below.

Marketing in healthcare is often performed by independent contractors compensated by volume-based percentage commissions or per head referral/order. These arrangements have never been protected under the AKS by any safe harbor provision and are generally disfavored, but the Office of the Inspector General (OIG) has not taken the position that such arrangements are a per se violation of the statute. The OIG in its advisory opinion process has undertaken a totality of the circumstances assessment for such arrangements.

In Mallory, the court found that volume-based compensation to an independently contracted sales force was a clear prohibition of the AKS and could form the underlying basis of an FCA violation. The court also cited substantial evidence that the labs, the marketing firm, and the sales team had received prior in-house and outside counsel legal opinions advising of the high risks of an AKS violation for the percentage-based compensation. The cautionary lawyers’ advice was used to support the willful knowledge element of the AKS offense.

There is also a clear trend in judicial decisions to read the AKS literally as a matter of statutory construction so the prohibition on unprotected compensation as an inducement to arrange or recommend products and services is given unforgiving force, unlike more sub rosa guidance or OIG advisory opinions that are more nuanced and forgiving of technical violations that do not negatively impact federal healthcare programs or beneficiaries and are subject to enforcement discretion.

The AKS employee safe harbor remains the most protective of compensation arrangements including bonuses and volume-based compensation. Despite a few unreasoned lower court opinions, the weight of the case law supports the clear intent of the AKS bona fide employee exception and safe harbor not to outlaw volume- and value-based compensation for bona fide sales and marketing employment arrangements.

The OIG’s updated personal services safe harbor may help organize contracted sales and marketing arrangements, due to recent amendments effective January 21, 2021, but those updates do not suggest any flexibility for volume-based compensation (percentage or per referral). Notably, the compensation methodology must be set in advance, but not the aggregate amount. Compensation that is not based on volume or value of referrals is still required to meet the elements of the personal services safe harbor. Outcomes-based compensation appears to be more flexible so long as the model is not a reward for referrals. It is not likely that marketing activities would fall into this new area.

If you missed Katie and Howard’s presentation, catch up now.

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