Last month, the Office of Inspector General (OIG) for the U.S. Department of Health and Human Services reaffirmed its longstanding position that an arrangement that “carves out” Federal health care program (FHCP) business is not dispositive with respect to whether such arrangement implicates the Federal Anti-Kickback Statute (AKS).  Specifically, OIG issued an unfavorable advisory opinion (AO 23-06), explaining that the Requestor’s proposed purchase of the technical component (TC) of anatomic pathology services payable by commercial health plans “could give rise to a significant incentive” for physicians being paid such TC by the Requestor to refer patients, including FHCP beneficiaries, to the Requestor.

The Proposed Arrangement

Under the Proposed Arrangement, the Requestor (which operates anatomic pathology laboratories across the U.S.) would enter into agreements with other laboratories (that may or may not be owned by or employ referring physicians) to perform the TC of referred commercial tests to the Requestor.  Because the other laboratories were out-of-network for the commercial health plans, the Requestor would bill globally for the TC and professional component (PC) of the tests and then remit a fair market value (FMV), per-specimen fee to the other laboratories for performing the TC of the referred test.  The Requestor certified to OIG that its agreements with these other laboratories would satisfy the conditions set forth in the “personal services and management contracts and outcomes-based payment arrangements” safe harbor (42 C.F.R. § 1001.952(d)) except the requirement that the aggregate services contracted for would not exceed those which are reasonably necessary to accomplish the commercially reasonable business purpose of the services.  It is upon this unmet requirement that OIG appeared to have hung its prosecutorial discretion hat when issuing AO 23-06.

OIG’s Analysis

First, OIG began its analysis of the Proposed Arrangement with the premise that arrangements that “carve out” FHCP business could be suspect under the AKS.  Consistent with and as has been elaborated in its 2014 Special Fraud Alert, OIG reasoned that such arrangements may implicate and potentially violate the AKS by “disguising” remuneration for FHCP business through the payment of amounts purportedly related to non-FHCP (e.g., commercial) business.

Such was the potential of the Proposed Arrangement, per OIG: “[T]he remuneration paid from Requestor to [the other laboratories] may increase the likelihood that these entities or their affiliated Referring Physicians would order services from Requestor that are billable to [FHCPs].  We cannot conclude that there would be no nexus between the remuneration paid as part of the Proposed Arrangement and potential referrals to Requestor for services reimbursable by [FHCPs].”

Second, the Requestor certified that its agreements with the other laboratories would not squarely fit within a safe harbor.  Thus, OIG was left with the task of evaluating the Proposed Arrangement under its “totality of the facts and circumstances” rubric.  For such analysis, OIG relied upon the Requestor’s certifications that (1) the Proposed Arrangement was likely to result in referrals of FHCP business from the other laboratories, (2) the Requestor, itself, was already equipped to perform both the TC and PC of most of the anatomic pathology services, and (3) the Requestor’s performance of both components was more efficient and cost-effective than paying another laboratory to do the same, in whole or in part.

Thus, OIG concluded that it was “difficult to discern any commercially reasonable business purpose for Requestor to enter into the Proposed Arrangement—forgoing the opportunity to bill and retain payment for both components of the anatomic pathology services [(the TC and PC)], in an arrangement that is both less efficient and more costly—other than the possibility that such payment may induce referrals of patients, including FHCP beneficiaries.”

Lastly, although the Requestor certified that it would remit an FMV, per-specimen fee to the other laboratories for performing the TC of the referred test, and despite OIG being statutorily prohibited, pursuant to 42 U.S.C. § 1320a-7d(b)(3)(A) of the Social Security Act, from opining on the aspects of FMV, OIG explained that such FMV fee would not protect the Proposed Arrangement from implicating and potentially violating the AKS.  On this point, OIG, again, relied on its 2014 Special Fraud Alert, reasoning that the AKS is implicated when a clinical laboratory pays a physician for services and that whether an actual violation of the AKS occurs depends on the intent, irrespective of whether such payment is FMV for services rendered.


OIG’s position in AO 23-06, despite being unfavorable, provides helpful guidance for the industry:

  • Arrangements involving non-FHCP business only may still implicate and potentially violate the AKS. “Carve outs” do not provide absolute protection from AKS enforcement.
  • The intent of the parties to such arrangements matters.
  • FMV is not an end-all be-all for regulatory compliance.
  • Commercial reasonableness is still very much important as it is not only a requirement for protection under certain safe harbors, but also can become part of OIG’s story for demonstrating the requisite intent under the AKS.

Proskauer is available to assist providers and suppliers desiring to evaluate its arrangements for purposes of regulatory compliance with the AKS and other laws, rules, and regulations.

Following New York State Governor Kathy Hochul’s proposal in February of this year (see our previous alert), the New York legislature passed and Governor Hochul signed a law on May 3, 2023, which significantly increases the state’s focus and visibility into physician practice management change‑of‑control transactions.[1] New York’s statute reflects a growing trend of states taking note of transactions that previously were not regulated by state administrative agencies. As we await the promulgation of regulations from the New York State Department of Health (“DOH”), we examine here how New York’s law compares to similar laws in other states, and describe precautions that operators in the physician management space — as well as those who do businesses with such operators — should take to safeguard themselves against major disruptions to operations.

Continue Reading New York’s New Notice Requirement for Practice Management Deals Demonstrates a Trend That Should be Carefully Watched

On July 27, 2023, California’s Office of Health Care Access and Information (the “Office”) released its long-awaited proposed regulations on the notice requirements for material health care transactions in California. The anticipated regulations follow the passing of SB 184 on June 30, 2022, which, in part, created the Office and granted it the authority to collect and analyze data related to health care costs, specifically via monitoring mergers and acquisitions in the health care industry. Following the lead of states like New York, whose wide-range health care transaction requirements were discussed in a previous blog post, California seeks to address the increasing costs of health care services by imposing significant notice and review requirements for mergers and acquisitions beginning in 2024.

Continue Reading California Releases Proposed Regulations on Health Care Transaction Notice Requirements

On June 27, 2023, the Office of Inspector General (“OIG”) for the U.S. Department of Health and Human Services (“HHS”) released its final rule (“Final Rule”) implementing penalties for information blocking.

The Final Rule codifies the prohibition on “information blocking” introduced by the 21st Century Cures Act (“Act”), which was enacted on December 13, 2016. In the Act, “information blocking” was defined as any activity that, in part, is “likely to interfere with, prevent, or materially discourage access, exchange, or use” of electronic health information (“EHI”).[1] The Final Rule provides an enforcement process for alleged information blocking violations by health information networks, health information exchanges, and developers of health IT certified by the HHS Office of the National Coordinator for Health Information Technology (“ONC”). Enforcement of the information blocking penalties will begin on September 1, sixty days after publication of the final rule in the Federal Register.

Continue Reading OIG Issues Final Information Blocking Enforcement Rule and Highlights the Potential for Referrals to the FTC and FCA Liability

On June 16, 2023, the Supreme Court (the “Court”) in United States ex rel. Polansky v. Executive Health Resources affirmed the federal government’s power to dismiss a False Claims Act (“FCA”) action brought under the qui tam provisions whenever it chooses to intervene. Polansky is the second FCA case this summer in which the Court has ruled in favor of the federal government—i.e., the Department of Justice, acting through the Attorney General (“DOJ”). Writing for an 8-1 majority, Justice Kagan explained that DOJ receives considerable deference, even over the objection of the individual who raised the action (i.e., the relator or whistleblower), to dismiss cases that are inconsistent with DOJ’s interests.

Continue Reading Recent Supreme Court Case Affirms Government’s Power to Dismiss Qui Tam Suits

In a unanimous opinion, the United States Supreme Court (“Court”) recently held that the False Claims Act’s (“FCA”) scienter requirement refers to a defendant’s knowledge and subjective beliefs, rather than what a hypothetical reasonable person could have known or believed.  As supported by the text of the FCA itself and by its common‑law roots, the Court explained that the “focus is what a defendant thought when submitting a claim—not what a defendant may have thought after submitting it.”  Consequently, the Court vacated the holding of the Seventh Circuit and remanded the matter for further proceedings consistent with the Court’s opinion.  Because the Seventh Circuit had affirmed a Federal district court’s grant of the defendants’ motions for summary judgment, the Court’s opinion effectively revives the FCA claim against the defendants.

Continue Reading The Supreme Court’s Ruling Narrows Available FCA Scienter Defenses

We previously wrote about the United States Department of Justice’s (“DOJ”) Civil Cyber-Fraud Initiative (“CCFI”), which “aims to hold accountable entities or individuals that put U.S. information or systems at risk by knowingly providing deficient cybersecurity products or services, knowingly misrepresenting their cybersecurity practices or protocols, or knowingly violating obligations to monitor and report cybersecurity incidents and breaches.”  In that post, we summarized DOJ’s first two False Claims Act (“FCA”) resolutions pursuant to the CCFI, which amounted to more than $9 million in recoveries.

Continue Reading Another Resolution by DOJ Pursuant to its Civil Cyber-Fraud Initiative Highlights Continued Efforts to Hold Companies Accountable for Ensuring Data are Secured

On April 5, the Centers for Medicare & Medicaid Services (“CMS”) released the 2024 Medicare Advantage and Prescription Drug Benefit Programs Final Rule (“Final Rule”), which will be codified at 42 C.F.R. Parts 417, 422, 423, 455, and 460. The Final Rule adopts a host of reforms aimed at improving health care access, quality, and equity for Medicare beneficiaries that receive coverage through Part C (“Medicare Advantage” or “MA”) and prescription drug benefits through Part D. As discussed below, the Final Rule also has some notable omissions compared to what CMS previously proposed in December (“Proposed Rule,” published at 87 Fed. Reg. 79452 (2022)). The Final Rule is effective June 5, 2023. Continue Reading 2024 Final Rule: CMS Announces More Changes to Medicare Advantage but Declines to Reform the “60 Day Rule”

In an important decision limiting the reach of the Federal Anti-Kickback Statute (42 U.S.C. 1320a-7b(b)) (“AKS”) and its application to violations of the False Claims Act (31 U.S.C. 3729, et seq.) (“FCA”), the U.S. Court of Appeals for the Sixth Circuit (“Sixth Circuit”) recently contended that, “[w]hile the word remuneration may be broad, it customarily requires a payment or transfer of some kind,” and mandated “but-for” causation standard for determining whether claims paid by Federal health care programs were tainted by an AKS violation such that they violated the FCA.  See U.S. ex rel. Martin et al. v. Hathaway, et al., Case No. 22-1463, at 11 (6th Cir.) (appeal from 1:19-cv-00915, ECF Doc. No. 108 (W.D. Mich.)) (emphasis added).

Continue Reading Recent FCA and AKS Litigation Highlights Use of Different Standards in Different Circuits

On Friday, March 31, 2023, the Centers for Medicare & Medicaid Services (CMS) released the Calendar Year (CY) 2024 Medicare Advantage (MA) Capitation Rates and Part C and Part D Payment Policies (Rate Announcement). This Rate Announcement follows CMS’s February 1 notice of planned changes to rates and the risk adjustment methodology, which provided an opportunity for the public to submit comments during a 30-day period (Advance Notice), as required by Section 1853(b)(2) of the Social Security Act (the Act). The Rate Announcement — providing for 60 days prior to the bid submission deadline of June 5, 2023 — provides notice of the annual capitation for MA for CY2024 related to the benchmark, risk adjustment, and other factors to be used in adjusting rates and responds to all substantive comments received from the Advance Notice.

We summarize the key factors and adjustments to the overall expected average rate increase of 3.32% (which is about $13.8 billion more than CY2023, and an increase from the 1.03% in the Advance Notice), and comments from CMS. We also highlight other key developments affecting MA rates, notably relating to the MA risk adjustment methodology (the 2024 Risk Model). Major changes identified in the Rate Announcement include updates to the risk adjustment model that uses International Classification of Diseases (ICD)-10 codes instead of the ICD-9 system, using data from 2018 diagnoses and 2019 expenditures, and the removal or reclassification of codes disproportionately coded in MA compared to Medicare Fee-For-Service (FFS) that CMS does not consider to accurately reflect increased costs to care for beneficiaries.

Continue Reading Medicare Advantage 2024 Rate Announcement – Further Impacts to Risk Adjustment