The US Court of Appeals for the Seventh Circuit recently issued a decision that has important implications for stakeholders in the durable medical equipment (DME), medical device, and telehealth space as well as future civil and criminal enforcement efforts by the US government under the federal Anti-Kickback Statute (AKS). In United States v. Sorensen, the court overturned the conviction of an owner of a DME distributor and found that the US Department of Justice (DOJ or Government) did not present sufficient evidence at trial that payments by the distributor to marketers and a DME manufacturer were intended to induce patient referrals.
We examine the implications of the decision, including the following main takeaways: [1]
In September 2019, a federal grand jury indicted Mark Sorensen, the owner of SyMed Inc., a DME distributor, with one count of conspiracy and three counts of offering and paying kickbacks in exchange for referrals of Medicare beneficiaries in violation of the AKS.
The alleged conspirators consisted of Sorensen’s distributor and (1) the owner of a DME manufacturer (PakMed, LLC), (2) the head of a marketing company (Byte Success Marketing), and (3) a representative from a medical billing agency (Dynamic Medical Management).The Government alleged that, together, these actors engaged in a scheme to advertise orthopedic braces to patients, obtain prescriptions for the orthopedic braces from providers, and then collect Medicare reimbursement from those prescriptions.
According to the Government, the entities operated a multistep business model. First, the marketing company would publish advertisements for orthopedic braces. Patients would submit information in response to the advertisements to the marketing agency, which would in turn have sales agents call the patient to discuss ordering a brace and complete a prescription form.
Once the prescription form was completed, the sales agents would send the form to the patient’s physician for signature, who then had the discretion to approve or ignore the prescription form. If the physician approved the prescription, Sorensen’s company would coordinate with the DME manufacturer to ship the brace to the patient and the billing agency would bill Medicare for the brace.
The four stakeholders would then share in a percentage of the reimbursement, with the marketing firm receiving compensation based on its lead generation. These payments are what the Government alleged to have violated the AKS.
Sorensen was convicted at trial on all counts in January 2023, after which he moved for acquittal and a new trial under Federal Rules of Criminal Procedure 29(c) and 33. After the trial court denied his post-conviction motions, Sorensen appealed to the Seventh Circuit arguing that the court should overturn his conviction based on insufficient evidence.
The Seventh Circuit agreed with Sorensen and concluded that there was not sufficient evidence to uphold the conviction. The central question before the court was “whether Sorensen intended to induce referrals, which is illegal, or whether he intended to compensate advertisers, which is permissible.” The court held that the payments made by Sorensen did not constitute payments for “referring” patients as defined by the AKS because the entities Sorensen paid were not in positions to influence healthcare decisions.
The opinion emphasized that the AKS prohibits remuneration to individuals who can influence patient choices, typically physicians or decisionmakers with informal power over patient referrals. But, since the payments at issue were made to nonphysicians, there must be evidence demonstrating the recipient of the payment “leverage[d] fluid, informal power and influence over health care decisions” to support a conviction. The court ultimately found that the actors Sorensen paid did not have such influence, and therefore there was insufficient evidence to show the payments violated the AKS.
Factually, the Seventh Circuit concluded that there was no evidence that the DME manufacturer and advertisers who received payments leveraged their position to influence healthcare decisions. Indeed, a key piece of evidence that demonstrated a lack of such influence was that 80% of the physicians that received the prefilled order forms returned or ignored them entirely. Ultimately, this supported the court’s distinction between payments for aggressive advertising efforts, which do not implicate the AKS, and payments to individuals who take advantage of their existing relationships with patients or other healthcare providers, which do.
The decision is a welcome development for stakeholders in healthcare sectors such as DME and medical devices. The Seventh Circuit’s analysis provides a guidepost as to the outer limits of the AKS with respect to advertising efforts, at least within the Seventh Circuit. It is likely that the decision will prompt stakeholders to consider revising or implementing marketing efforts that limit the contact with and purported influence on physician decision-making, but still “aggressively” promote products to patients.
The decision also provides a clear contrast to the Government’s prior criminal healthcare fraud enforcement efforts in the telehealth and DME space, such as the investigations and criminal cases initiated by Operation Brace Yourself. In most of those cases, the defendants allegedly engaged in schemes where DME manufacturers would receive unsigned prescriptions for orthopedic braces through call centers and telehealth companies and have “consulting physicians” sign the orders for patients without any preexisting doctor-patient relationship or regard for the medical necessity of the brace.
Indeed, unlike the case against Sorensen, the Government charged the majority of the targets of Operation Brace Yourself under the federal criminal healthcare fraud statute (18 USC § 1347) in addition to the AKS.
Industry stakeholders should not rely solely on the Seventh Circuit’s decision as reasoning to rush and modify existing marketing and lead generation arrangements or to create new ones that press the boundaries of the Sorensen decision as there are notable limiting factors, not the least of which is that its precedential value is limited to the Seventh Circuit.
The Government only charged Sorensen under 42 USC § 1320a-7b(b)(2)(A), the provision of the AKS that prohibits referrals of individuals. Section 1320a-7b(b)(2)(B) of the AKS also prohibits the arranging for and/or recommendation of specific goods and services in exchange for remuneration, and this provision may be the next avenue for DOJ to pursue enforcement actions for conduct similar to Sorensen. Indeed, the Fifth Circuit, which the Seventh Circuit cited favorably in Sorensen, has recognized that conduct may run afoul of one AKS provision but not the other, making the Government’s charging decisions an important part of enforcement actions going forward.[2]
Industry stakeholders should also consider the application of the AKS’s prohibition of payments intended to induce the arranging or recommending of reimbursable goods or services in the context of civil cases brought under the FCA. The US Circuit Court of Appeals for the Fourth Circuit in 2021 affirmed judgment against three defendants for violations of the FCA in a similar scheme to the facts alleged in Sorensen.
In United States v. Mallory, the Government alleged that the owner of a blood testing laboratory and two healthcare consultants entered into an exclusive contract to market and sell blood tests, with the consultants receiving a percentage of the laboratory’s revenue. [3] The consultants, who formed the company BlueWave Healthcare Consultants, Inc., contracted with independent salespeople to market the blood tests and receive commissions based on their volume of sales. The Government argued at trial that the volume-based commissions paid by the laboratory to BlueWave violated the AKS and the jury agreed, convicting the defendants on all counts.
On appeal, the Fourth Circuit upheld the judgment and found that commission payments to third parties can violate the AKS. Specifically, the court rejected the defendants’ argument that the payments to BlueWave’s sales representatives could not violate the AKS because the sales representatives did not “directly refer the [blood] tests to patients.” Citing to Section 1320a-7b(b)(2)(B) of the AKS, the court stated that the AKS prohibited third parties from receiving remuneration for “arranging for or recommending purchasing of healthcare services,” including “sales representatives who are compensated for recommending a healthcare service, like the [blood] tests.”
While Mallory was a civil FCA case premised on claims tainted by kickbacks instead of a criminal prosecution under the AKS, the Fourth Circuit’s reasoning could very well capture similar conduct that the Seventh Circuit ruled did not violate Section 1320a-7b(b)(2)(A) in Sorensen. The now majority view of “but for” causation in FCA cases based on AKS violations plays an important role in these actions going forward too, as there may be strong factual defenses that defendants deploy depending on which provision of the AKS the Government alleges was violated to taint the claims for payment.
The interplay between the differences of the two AKS provisions, criminal AKS prosecutions, and civil FCA cases brought based on alleged AKS violations will likely be a catalyst for evolving enforcement strategies and defenses going forward.
While the Seventh Circuit gave industry stakeholders a win by overturning the conviction in Sorensen, given related appellate decisions and the breadth of the AKS, its application may be limited. Stakeholders should closely monitor developments in similar cases to see whether the Government changes its approach to enforcement actions in this space going forward.
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