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Civil enforcement of fraud and abuse laws

By Andrea M. Kahn-Kothmann, Esq.

Over the past decade, the nation’s courts have had numerous opportunities to interpret and apply both federal and state fraud and abuse laws. Most of the industry’s discussion of fraud and abuse centers on the exercise of the government’s civil and criminal enforcement authority under these laws, particularly the federal anti-kickback and anti-physician-self-referral (or so-called “Stark”) statute.

With increasing frequency, however, courts are being called upon to evaluate the legality of relationships between providers and third-parties in the context of civil litigation. Private parties have asserted both federal and state anti-kickback laws as a basis to excuse performance under a variety of contractual arrangements, including marketing, real estate leasing, physician recruitment and exclusive hospital department arrangements.

Federal Anti-Kickback Statute

The majority of cases in this line assert violations of the federal Anti-Kickback Statute. This law prohibits persons from knowingly and willfully soliciting, receiving, offering or paying any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for or to induce referring an individual for the furnishing of, or purchasing, leasing, ordering, or arranging for, any item or service paid for in whole or in part under a federal health care program.

The Anti-Kickback Statute is a criminal statute and is intent-based, meaning that a party can be found to have violated the law only if it is shown that the party acted “knowingly and willfully.” A conflict continues to exist among federal courts that have applied the Anti-Kickback Statute in government enforcement actions concerning how to apply this intent standard. Parties can assure than an arrangement will be immune from scrutiny under the Anti-Kickback Statute by structuring their relationship to satisfy any one of the available regulatory “safe harbors” published by the Department of Health and Human Services’ Office of Inspector General (OIG).

Zimmer: The Facts

Although there have been a number of reported decisions involving private parties’ assertions of illegality under the Anti-Kickback Statute, the facts and decision in Zimmer, Inc. v. Nu Tech Medical, Inc. illustrate well many of the issues that arise in these matters.

Zimmer, Inc., a manufacturer of orthopedic products, and Nu Tech Medical, Inc., an entity “engaged in ‘the business of acting as a “supplier” of medical items,’” entered into an agreement in July 1997. Under this agreement, Zimmer would consign a quantity of Zimmer products to Nu Tech for the purpose of stocking the supplies maintained by referring physicians. Nu Tech would submit claims in order to obtain reimbursement for items actually sold and then forward the payment, less Nu Tech’s fees, back to Zimmer. Nu Tech’s fee was 25 percent of the receivable for each item until total sales revenues reached $2 million, and it decreased as sales revenues increased.

Also under the agreement, Nu Tech would provide certain training services to Zimmer for a total of 100 days, at a rate of $1,000 per day. Zimmer agreed to pay 60 percent of the total training fees within 30 days after execution of the agreement; however, in August 1997, Nu Tech learned that Zimmer did not want to make this payment. According to Nu Tech, only after Nu Tech asserted in writing that this refusal constituted a breach of the contract, did Zimmer inform Nu Tech that it believed that performance of the agreement constituted a violation of various federal health care laws.

Zimmer suggested that the parties file a joint request for an OIG advisory opinion on the agreement, but Nu Tech refused. Zimmer submitted an advisory opinion request on December 18, 1997 and, two days prior to that submission, it filed a declaratory judgment action with the District Court. On Zimmer’s motion for summary judgment, the Court found that the agreement between Zimmer and Nu Tech violated the Anti-Kickback Statute. As a result, the Court held that the contract was unenforceable and granted summary judgment in favor of Zimmer.

Zimmer: The Decision

In rendering its decision, the Court first discussed the advisory opinion that Zimmer obtained from the OIG. Although it acknowledged that the arrangements could be characterized in other ways, the OIG had adopted Zimmer’s characterization of the arrangement as one in which Nu Tech was paid a fee for marketing and billing services. The OIG labeled the agreement’s percentage compensation mechanism as “problematic,” and refused to issue a favorable opinion. The OIG expressed concern about the arrangement because the volume-based compensation terms created financial incentives for the parties that could increase the risk of abusive marketing and billing practices and the chance that the parties would unduly influence referral sources and patients through active marketing and direct contacts. While acknowledging that the OIG’s advisory opinions are not binding authority, the Court agreed with Zimmer that the OIG’s opinion should be entitled to deference.

Nu Tech took issue with the manner in which both the OIG and Zimmer had characterized the relationship between the parties. Nu Tech possessed a durable medical equipment supplier number from Medicare and asserted that, under the arrangement with Zimmer, it would operate as a retailer of goods to patients. In Nu Tech’s view, the agreement with Zimmer constituted a contract for the acquisition of inventory from the manufacturer/wholesaler of the goods. Monies received by Nu Tech were merely net revenue arising from its own retail sales, and payments to Zimmer were merely in exchange for the acquired products.

The District Court, however, rejected Nu Tech’s characterization of the agreement as unreasonable. The Court cited language from the contract that described the arrangement as one in which Zimmer-owned goods were consigned to Nu Tech and in which Zimmer purchased marketing and billing services from Nu Tech.

On the issue of intent, the Court rejected Nu Tech’s assertion that a conclusion on whether an arrangement violates the Anti-Kickback Statute cannot be reached without knowing the “true intent” of the parties. The Court regarded inclusion of the percentage-based compensation scheme as evidence that the parties’ actions under the agreement “could be motivated” by their desire and ability to increase sales of Zimmer products that might be paid for by federal programs. The Court ultimately concluded that it was sufficient that “in light of [the] ruling, any future performance under the Agreement would appear likely to amount to knowing and willful action” (emphasis added).

After concluding that the agreement was illegal and, therefore, unenforceable, the Court also refused Nu Tech’s request to limit the summary judgment to Medicare- and Medicaid-related business between the parties. The Court did not believe that such a revision of the arrangement would be practicable or appropriate.

Lessons from Zimmer

The facts and outcome in Zimmer illustrate a number of important observations that derive from the line of cases involving civil enforcement of the fraud and abuse laws.

First, many business arrangements in the health care industry are amenable to disparate characterizations depending on the motive one chooses to attribute to the participants. For instance, was the Zimmer-Nu Tech relationship one of supplier to independent contractor, as the Court concluded, or was the relationship one of manufacturer to equipment supplier, as Nu Tech and, arguably, the Medicare program viewed it? Under the latter view, the fee paid to Nu Tech merely represented the parties’ arms’-length determination of the fair market value of the inventory purchased by Nu Tech for resale and not a kickback for referrals.

Second, Zimmer demonstrates that care should be taken in drafting agreements to ensure that they accurately reflect the parties’ view of the arrangement. Nu Tech’s case was clearly hurt by the language in the agreement that contradicted its characterization of the relationship with Zimmer.

Third, the Court that decided Zimmer is similar to many other judicial bodies that have struggled with how to apply the Anti-Kickback Statute’s “knowing and willful” requirement in the context of a civil suit. Few of these courts have followed the line of government enforcement cases and actually required that the improper intent of at least one party to the arrangement be demonstrated as a prerequisite to finding a violation of the Anti-Kickback Statute.

Fourth, Zimmer clearly illustrates how a plaintiff’s decision to request an advisory opinion from the OIG can work to its distinct advantage in litigation against the other party to a contract, particularly since the OIG has taken a conservative approach in opinions issued to date. However, the OIG’s statutory authority to issue advisory opinions sunset on August 21, 2000, thereby denying (at least temporarily) this tool to litigants.

Fifth, and finally, Zimmer highlights the potential strength of the Anti-Kickback Statute and other fraud and abuse laws as a tool to void contractual arrangements. However, providers are advised to wield the fraud and abuse laws as a weapon in litigation with care. It always remains a possibility that a party’s assertions made in an effort to extricate itself from a contract could be used against it by the government in a separate—perhaps, criminal—enforcement action.

Andrea M. Kahn-Kothmann, Esq., is a senior associate with the law firm of Reed Smith Shaw & McClay, LLP in the Health Care Group of the firm’s Philadelphia office.

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