A fundamental shift is underway in the U.S. health care system. Payors and providers are increasingly transitioning away from traditional “fee-for-service” models, in which reimbursement is based on the quantity of items or services provided to patients, toward value-based models designed to reward the quality and efficiency of care.1 As insurers, providers, drug and device manufacturers, and various partners and supporting organizations, such as health information technology companies, population health management experts, and other consultants, seek to collaborate on innovative delivery and supply models, they must navigate a regulatory environment that is poorly suited to value-based models of care.2 These challenges are compounded by novel and aggressive theories of liability under the Anti-Kickback Statute (“AKS”) often advanced by creative whistleblower counsel and recently adopted by regulators, prosecutors, and courts. Such expansive interpretations of AKS liability may hinder the development of the innovative collaborations necessary to improve quality and reduce costs for payors (including the federal government) and patients alike.
The AKS Potentially Implicates a Broad Array of Arrangements in the Health Care Space.
The AKS, a criminal statute, prohibits the payment or receipt of “remuneration” in exchange for patient referrals or the ordering of products or services paid for by federal health care programs.3 The statutory restriction is both nebulous and broad: remuneration includes anything of value, and the statute has been interpreted to cover any arrangement in which even one purpose of the remuneration is to induce referrals.4 The Affordable Care Act included amendments to the AKS that lessened the intent standard5 and made it easier to bring a claim under the civil False Claims Act (“FCA”) for claims allegedly tainted by AKS violations,6 compounding the overall enforcement risk and scope of liability for health care providers.
Recognizing the broad scope of arrangements potentially implicated by the AKS, Congress has provided for certain statutory exceptions7 and authorized the U.S. Department of Health and Human Services (“HHS”) Office of Inspector General (“OIG”) to promulgate additional safe harbors to protect innocuous, or even potentially beneficial, business and payment practices.8 OIG has promulgated safe harbors protecting, for example, certain kinds of investment interests, rental of space and equipment, personal services and management contracts, sales of physician practices, warranties, discounts, bona fide employment relationships, and group purchasing organizations.9 To qualify for protection, all elements of the applicable safe harbor must be satisfied. When a health care arrangement exists outside of an exception or safe harbor, the government and courts must examine a number of factors to determine if the AKS is implicated.10
Government Authorities Continue to Expand the Scope of AKS Enforcement Beyond Traditional Kickback Schemes.
Consistent with the statute’s underlying purposes—namely, protecting against the cost-, quality-, and competition-related effects of improper referral arrangements11—early AKS enforcement cases centered on barely disguised bribes or kickback schemes in which hospitals, labs, drug companies, and other providers made cash payments to physicians in exchange for patient referrals.12 As health care providers and their compliance programs have evolved, however, kickback cases have become more complex. Now, cases often involve one or more intermediaries and implicate payments or other forms of remuneration that arguably fall within a safe harbor.13
One recent focus of OIG guidance and Department of Justice (“DOJ”) investigations and enforcement actions are patient assistance programs run by co-pay foundations. Co-pay foundations are 501(c)(3) charitable organizations—largely funded by donations from manufacturers—that provide financial assistance to patients who cannot afford the cost-sharing obligations of drugs prescribed by their physicians. These charities primarily assist Medicare Part D patients because Medicare often requires patients to pay significant out-of-pocket costs for life-saving drugs14 and federal law prohibits manufacturers from providing direct financial assistance to federal beneficiaries as they can for commercially insured patients. In contrast to more straightforward kickback schemes, which present clear risks of overutilization that would drive up costs for both beneficiaries and the government,15 the cost- and quality-related effects of industry-funded co-pay foundations are less apparent.
OIG has long acknowledged both the valuable safety net provided by co-pay foundations and the potential for abuse, establishing safeguards through a series of advisory opinions and special advisory bulletins. As summarized in OIG’s 2005 Special Advisory Bulletin, “the independent charity PAP must not function as a conduit for payments by the pharmaceutical manufacturer to patients and must not impermissibly influence beneficiaries’ drug choices.”16 The OIG guidance, therefore, prohibits manufacturers from exerting any direct or indirect influence or control over the charity or from receiving data from the charity that would enable the manufacturer to correlate the amount or frequency of its donations with the number of subsidized prescriptions for its products.17 Although manufacturers may earmark their contributions for specific disease funds supported by the charities, the disease funds must be defined “in accordance with widely recognized clinical standards and in a manner that covers a broad spectrum of available products.”18
Since 2015, co-pay foundations have been the focus of a number of ongoing DOJ investigations. Companies including Valeant Pharmaceuticals, Gilead Sciences Inc., and Celgene Corp., among others, have disclosed subpoenas requesting information related to their donations to co-pay foundations.19 News reports suggest that DOJ has advanced a theory that manufacturers have violated the AKS through their attempts to influence the charities in order to channel donations to patients who are prescribed the manufacturers’ own products, thereby inducing Medicare patients to purchase expensive drugs that they otherwise could not afford and shielding those patients from increases in drug prices. These investigations appear to mark a shift in DOJ’s focus in AKS cases from pursuing alleged kickbacks to physicians to induce prescription writing to kickback theories involving remuneration paid to the patient to induce the filling of prescriptions. To be sure, these investigations do not involve direct payments from manufacturers to patients; rather, they involve alleged payments made by the manufacturers indirectly to patients via a co-pay foundation with which the manufacturers have no formal affiliation.
While there is no case law that directly tests the government’s theory, cases involving other indirect remuneration schemes may preview the arguments the government would make in cases against co-pay foundations and their donors. The United States recently filed an amicus brief in U.S. ex rel. Greenfield v. Medco, a case before the Third Circuit Court of Appeals.20 In Medco, a former vice president of Accredo Health Group, Inc., a provider of specialty pharmacy services to hemophilia patients, contends that his former company and related defendants paid kickbacks to two charities in order to induce the charities to refer hemophilia patients to Accredo and to recommend that the patients use Accredo’s services. The district court, in granting defendants’ summary judgment motion, held that, even assuming the relator had proven that Accredo violated the AKS, he had not established that the kickbacks caused the charities’ referrals and recommendations, or that those referrals and recommendations caused the patients’ decisions to use defendants’ services. Without any evidence that particular patients chose Accredo because of its donations, the court concluded that the relator could not sustain a claim under the False Claims Act.21
Even though the United States, in its amicus brief, agreed with the district court that, to establish a false claim, the claims Accredo submitted for federal beneficiaries must have resulted from the alleged kickbacks paid to the charities (i.e., those claims must be tainted by the kickbacks), the government argued that the district court erred by requiring a causal connection between the kickbacks and the false claims.22 According to the government, the FCA does not require “that the kickbacks in fact corrupted the charities’ decision to refer patients to Accredo and recommend Accredo’s services, and that those referrals and recommendations in fact corrupted the patients’ decisions to use Accredo’s services.”23 The government’s position is that, to establish a false claim, a plaintiff need only show that the claimed medical care was not provided in compliance with the AKS or that the underlying transaction did not comply with the AKS.24
The United States’ position in the Medco appeal may be a reaction not only to the lower court’s decision, but also to a decision issued last year by a California district court in U.S. ex rel. Brown v. Celgene Corp.25 In Celgene, the relator alleged a number of claims under the FCA, including that the company violated the AKS by “directing money through co-pay foundations to induce patients to buy its [multiple myeloma] drugs.”26 The court soundly rejected this argument on the grounds that there was no evidence that Celgene’s donations were contingent on the foundation’s agreement to purchase or recommend Celgene’s drugs. In fact, the evidence suggested the opposite was true: the foundation supported a number of multiple myeloma drugs that were manufactured by companies other than Celgene.27
While the United States did not intervene in Celgene, the government’s position in Medco suggests that it would dispute any notion that either the AKS or FCA requires evidence that the co-pay foundations recommended a donor’s products in exchange for donations or that the donations induced the patient’s purchase of drugs reimbursable by Medicare.
Novel Interpretations of the AKS Have Also Been Adopted by Courts in Commercial Litigation.
Expansive interpretations of the AKS have not been limited to the traditional criminal and civil false claims contexts. A recent decision involving an online auction arrangement, MedPricer.com, Inc. v. Becton, Dixon [sic] and Co.,28 highlights the risk of nontraditional AKS scrutiny in the commercial litigation context and the increased risk that courts will invalidate innovative health care arrangements. Online auction services provide a platform by which health care providers and hospitals can negotiate with suppliers of medical equipment through an online system of requests and bids. This system gives purchasers of medical equipment the opportunity to seek competitive pricing and to award business to suppliers that can provide necessary products at lower prices. Operators of the online auction portals facilitate the bid process and receive a commission when bids are accepted. In MedPricer, a federal district court in Connecticut held that an online auction service contract violated the AKS.29 The contract, the court reasoned, would result in payment for “arranging” for the purchase of goods for which reimbursement may be received from federal health care programs.
The case originated as a contract dispute between MedPricer.com, Inc. (“MedPricer”), the operator of an online medical equipment auction portal, and Becton, Dickinson and Company (“Becton”), a supplier of medical equipment. Hospitals and other providers engage MedPricer to facilitate negotiations with suppliers of medical equipment through an online system of requests for quotes (“RFQs”) and bids. MedPricer has no role in determining which suppliers are invited to participate in the bidding and which are ultimately awarded the business. Those decisions are controlled entirely by the hospitals and other purchasers. Each supplier that is invited to participate in online bidding agrees, if selected, to pay MedPricer a fee of 1.5 percent of the value of the transaction based on the volume of business as detailed in required monthly sales reports. After successfully participating in three sourcing events, Becton refused to provide sales reports or pay MedPricer the fee. As a result, MedPricer filed an action against Becton alleging breach of contract, among other claims. In briefing on cross motions for summary judgment, Becton argued that the contract was unenforceable under Connecticut law because it violated the AKS.
The court agreed with Becton’s argument that the contract “violates the AKS because it involves MedPricer’s receiving ‘remuneration’ for ‘arranging’ the purchasing of goods for which payment may be made in whole or in part under a federal healthcare program.”30 The court rejected MedPricer’s contention that, to be liable for “arranging” a sale, a party must have intended to sell the products at issue.31 The court concluded that MedPricer, through the sourcing events, “arranges” for the purchase or selling of goods even though MedPricer plays no role in selecting the suppliers that are invited to bid or in selecting which supplier is awarded a contract.32 Instead, by providing services that buyers and suppliers may utilize in the bidding process and receiving a commission based on sales, the court found that MedPricer “arranges” for the purchase or selling of goods. The court further held that, because Becton sold the items to a hospital that provides services reimbursable under a federal health care program, and the items themselves could be used in performing those services, the sales that MedPricer “arranges” consisted of items “for which payment may be made in whole or in part under a Federal healthcare program.”33
The MedPricer decision is significant not only because of the expansive interpretation of the AKS adopted by the court, but also because it raises the possibility that disgruntled parties will increasingly seek to invalidate innovative health care arrangements by arguing that the contract violates the AKS. Moreover, it is notable here that the court did not attempt to address how the arrangement in question would possibly increase federal health care expenditures,34 which, as noted above, is one of the primary purposes of the AKS. Rather, by invalidating a valuable tool that had enabled hospitals and providers to entertain competitive bids from suppliers, the decision is likely to make procurement decisions more opaque and have the very effect that the AKS was intended to guard against.
Expansive Theories of AKS Liability May Impede Innovation and Collaboration in the Transition Toward Value-Based Care.
Given the broad and nebulous scope of the AKS statutory prohibition, providers and other entities operating in the health care space traditionally have sought to structure all arrangements involving potential remuneration to fit within one of the AKS safe harbors.35 This is often not possible with value-based care initiatives, because at least some portion of the fees under such arrangements are “at risk” based upon a combination of cost savings, improved clinical quality, or patient outcomes—in contrast to the relevant safe harbors, which generally require that the aggregate compensation, fee, or discount (as applicable) be set in advance.36 Risk-sharing arrangements also complicate any fair market value analyses, making it even more difficult to satisfy the safe harbor requirements.
The Affordable Care Act authorized waivers of certain fraud and abuse laws, including the AKS, in connection with specific value-based care initiatives developed by the Centers for Medicare & Medicaid Services (“CMS”). OIG has promulgated model-specific waivers for the Medicare Shared Savings Program,37 the Bundled Payments for Care Improvement Initiative,38 the Comprehensive Care for Joint Replacement Model,39 and certain other value-based care initiatives. However, not all model-specific waivers are necessarily available to all participants in a given model, and a waiver will apply to a particular arrangement only if all conditions of the waiver are met. More importantly, such waivers are of no effect in the context of commercial value-based care initiatives, which account for a large and growing proportion of the value-based care market.40
In the absence of safe harbor protection or applicable waivers, companies typically seek to structure arrangements to meet as many of the elements of an applicable AKS safe harbor as possible. With respect to risk-sharing arrangements and other value-based care initiatives, companies also have looked to relevant sub-regulatory guidance from OIG, including advisory opinions highlighting certain safeguards that OIG has indicated may mitigate the risk of fraud and abuse.41 Such one-off advisory opinions and special fraud alerts, however, provide limited guidance for health care providers and other entities seeking to collaborate on value-based care initiatives, and there is a growing demand for OIG to adopt additional or modified safe harbors to better facilitate such collaborations.42 While OIG has acknowledged that the transition to value-based care “requires new and changing business relationships among health care providers,” and has vowed to “monitor changes” and “seek stakeholder input,”43 no such additional safe harbors appear forthcoming, at least in the near term.
Companies operating outside of a safe harbor will always face some degree of enforcement risk. However, the rise in novel and expansive theories of AKS liability—not just in the criminal and civil false claims contexts but also in commercial litigation, as discussed above—heightens the legal and business uncertainty faced by payors and providers in every sector of the health care industry. Such uncertainty will not reverse the inexorable shift to value-based care or prevent companies from participating in value-based initiatives that seek in good faith to adhere to limited, existing guidance and to mirror, to the extent possible, the government’s own forays into value-based arrangements. However, the combination of the absence of clear guidance and aggressive enforcement will hamper the creativity and innovation that is critical to improving quality and reducing costs for payors and patients alike. Thus, even as DOJ and the courts continue to view AKS enforcement as a tool to address rising health care costs,44 recent enforcement activity and litigation may have exactly the opposite effect.
1 See generally, e.g., Bruce Merlin Fried and Jeremy David Sherer, Value Based Reimbursement: The Rock Thrown Into the Health Care Pond, Health Affairs Blog (July 8, 2016). For in-depth articles, complimentary CLE offerings, and other tools and resources designed to assist clients from every segment of the health care industry in their transition to value-based health care, see https://www.ropesgray.com/Value-Based-Health-Care-Initiative.aspx.
2 See Timothy M. McCrystal, Deborah L. Gersh, and Jennifer L. Romig, Brave New World: Compliance and the Transition to Value-Based Care (May 23, 2017).
3 See 42 U.S.C. § 1320a-7b(b) (prohibiting the knowing and willful solicitation, receipt, offer, or payment of any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for either referrals of federal health care program patients or the arranging, recommending, leasing, or ordering of any item or service reimbursed by a federal health care program).
4 See United States v. Kats, 871 F.2d 105 (9th Cir. 1980); United States v. Greber, 760 F.2d 68 (3d Cir. 1985), cert. denied, 474 U.S. 988 (1985). But see United States v. Bay State Ambulance & Hosp. Rental, Inc., 874 F.2d 20, 32 (1st Cir. 1989) (upholding a jury instruction that the “primary purpose” must be improper).
5 As amended, the AKS provides that to establish a violation “a person need not have actual knowledge of [the AKS] or specific intent to commit a violation of [the AKS].” 42 U.S.C. § 1320a-7b(h).
6 Prior to the ACA, courts disagreed over whether an underlying violation of the AKS was enough to establish falsity under the FCA; as amended, however, the AKS now expressly provides that “a claim that includes items or services resulting from a violation of [the AKS] constitutes a false or fraudulent claim for purposes of [the FCA].” 42 U.S.C. § 1320a-7b(g).
7 42 U.S.C. § 1320a-7b(b)(3).
8 Medicare and Medicaid Patient and Program Protection Act of 1987, Pub. L. No. 100–93, § 14, 101 Stat. 697, 697–98.
9 See generally 42 C.F.R. § 1001.952.
10 OIG has the authority to issue civil monetary penalties. 42 U.S.C. § 1320a-7a(a)(7). This can result in treble damages plus $50,000 for each violation and may also exclude individuals and entities from participating in federal health care programs, a virtual death sentence for many providers and other health care entities. 42 U.S.C. § 1320a-7(a).
11 Cf. United States v. Ruttenberg, 625 F.2d 173, 177 (7th Cir. 1980) (noting the “obvious truisms that, while unnecessary expenditure of money earned and contributed by taxpaying fellow citizens may exacerbate the result of the crime, kickback schemes can freeze competing suppliers from the system, can mask the possibility of government price reductions, can misdirect program funds, and, when proportional, can erect strong temptations to order more drugs and supplies than needed”); 56 Fed. Reg. 35,952, 35,957, Medicare and State Health Care Programs: Fraud and Abuse; OIG Anti-Kickback Provisions (Jul. 29, 1991) (factors including the degree to which an arrangement promotes overutilization, interferes with patient freedom of choice, diminishes the quality of care provided, increases costs to federal health care programs, or interferes with competition are “useful in determining the extent to which a particular arrangement is abusive, and therefore likely to be prosecuted”).
12 Initially, the AKS prohibited only “kickback[s] or bribe[s]” and “rebate[s] of any fee or charge.” Social Security Amendments of 1972, Pub. L. No. 92–603, § 242(b), 86 Stat. 1329, 1419. Even after the statutory scope was expanded to include other forms of remuneration, enforcement of the AKS tended to focus on cases involving bribes paid to physicians. See David Kirman & Alexander Wyman, Anti-Kickback Statute Enforcement Trends, 28 Health L. 43, 43 (2015) (“While cases involving cash payments and travel in exchange for patient referrals . . . still exist, they are primarily last decade’s problem.”); Jeffrey Schwartz, Elaborating on Sham Transactions as Evidence of Violations of the Anti-Kickback Statute, 13 Wash U. J.L. & Pol’y 357, 363 (2003) (noting that, even after the scope of the AKS was broadened, “Congress wanted to continue the original intent of the [AKS] to cease practices that were draining federally funded health care programs’ resources through fraudulent transactions”).
13 See Kirman & Wyman, supra note 11, at 43 (“Settlements in 2015 have . . . demonstrated that AKS enforcement is evolving and cases are becoming more complex. . . . The current AKS battleground—especially for institutional providers—are payments that arguably fall within a safe harbor.”).
14 Avalere Health, Majority of Drugs Now Subject to Coinsurance in Medicare Part D Plans (2016), available here.
15 Cf. Michael E. Paulhus, The Medicare Anti-Kickback Statute: In Need of Reconstructive Surgery for the Digital Age, 59 Wash. & Lee L. Rev. 677, 680, 691–92 (2002) (discussing early application of the AKS to address the cost of health care).
17 OIG Special Advisory Bulletin: Patient Assistance Programs for Medicare part D Enrollees (2005); OIG Supplemental Special Advisory Bulletin: Independent Charity Patient Assistance Programs (2014).
18 2005 OIG Special Advisory Bulletin.
19 Benjamin Elgin & Robert Langreth, Celgene Accused of Using Charites ‘Scheme’ to Gain Billions, BloombergBusinessweek (Aug. 1, 2016); Benjamin Elgin & Robert Langreth, How Big Pharma Uses Charity Programs to Cover for Drug Price Hikes, BloombergBusinessweek (May 19, 2016).
20 Brief for the United States as Amicus Curiae in Support of Neither Party, United States of America, ex rel. Greenfield v. Medco Health Solutions, Inc. (3d Cir. Apr. 17, 2017).
21 Id. at 1, 3 (noting that the FCA imposes civil liability on “any person who . . . knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval”).
22 Id. at 8–9.
23 Id. at 15.
24 Id. at 21.
25 No. CV 10-03165, 2016 WL 7626222 (C.D. Cal. Dec. 28, 2016).
26 Id. at *15.
27 Id. at *19.
28 MedPricer.com, Inc. v. Becton, Dixon [sic] and Company No. 3:13-cv-1545, 2017 WL 888479 (D. Conn. March 6, 2017). The correct caption of the case is: MedPricer.com, Inc. v. Becton, Dickinson and Company, No. 3:13-cv-1545.
30 Id. at *4.
31 Id. at *5.
32 Id. at *4.
33 Id. at *8. The court further held that Becton was not required to establish that MedPricer “knowingly and willfully” solicited remuneration because the scienter requirement only applied to criminal enforcement actions and was not required to find that a contract violates the AKS. Id. at *9.
34 See id. at *8 n.11 (“The record does not definitively resolve [whether MedPricer’s services lower the price of medical equipment], but it is not material to whether the [c]ontract violates the AKS.”).
35 See McCrystal et al., supra note 2, https://www.ropesgray.com/newsroom/alerts/2017/05/Brave-New-World-Compliance-and-the-Transition-to-Value-Based-Care.aspx.
36 See generally 42 C.F.R. § 1001.952.
37 80 Fed. Reg. 66,726 (Oct. 29, 2015).
38 See Notice of Waivers of Certain Fraud and Abuse Laws in Connection with the Bundled Payments for Care Improvement Model 2 (July 26, 2013), available here.
39 See Notice of Waivers of Certain Fraud and Abuse Laws in Connection with the Comprehensive Care for Joint Replacement Model (Nov. 16, 2015), available here.
40 See, e.g., UnitedHealth, Aetna, Anthem Near 50% Value-Based Care Spending, Forbes (Feb. 2, 2017), (noting that UnitedHealth, Aetna, and Anthem—three of the nation’s largest health insurers—report paying out almost half of their reimbursements through value-based care initiatives).
41 Such safeguards include features designed to ensure that: (i) cost-savings and quality measures are objective and verifiable, clearly and separately identified, and transparent; (ii) any risk-sharing program does not incentivize inappropriate reductions or limitations in services; and (iii) the organization conducts periodic reviews to protect against any inappropriate results, such as reductions or limitations in services. See, e.g., Advisory Opinion 12-22 (Jan. 7, 2013).
42 Each year, OIG is required by law to develop and publish an annual notice in the Federal Register formally soliciting proposals for modifying existing safe harbors to the AKS and for developing new safe harbors and special fraud alerts. See 42 U.S.C. § 1320a-7d. In response to the most recent such solicitation, OIG received six comments—five of which requested additional or modified safe harbors to facilitate participation in value-based care initiatives. See Solicitation of New Safe Harbors and Special Fraud Alerts, 81 Fed. Reg. 95,551 (Dec. 28, 2016) (comments available here).
43 See Revisions to the Safe Harbors Under the Anti-Kickback Statute and Civil Monetary Penalty Rules Regarding Beneficiary Inducements, 81 Fed.Reg. 88,368, 88,370 (Dec. 7, 2016).
44 Cf. generally Anne W. Morrison, An Analysis of Anti-Kickback and Self-Referral Law in Modern Health Care, 21 J. Legal Med. 351 (2000) (discussing the role of the AKS as a tool to address the rising cost of health care in the 1990s).
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