A recent Fourth Circuit decision, United States v. Mallory (988 F.3d 730), upheld damages and penalties for more than $100 million for violations of the Anti-Kickback Statute (42 U.S.C. § 1320a-7b(b)) (the “AKS”) and the False Claims Act (31 U.S.C. § 3729) by a blood testing laboratory and its contracted sales agents.  The Court held that commission payments made by the laboratory to its sales agents (sales companies that, in turn, hired and contracted salespeople to sell the laboratory blood tests), which were based on the percentage of revenue the sales agents generated for the laboratory through marketing services, constituted improper “remuneration” that intended to induce the sales agents to sell as many laboratory tests as possible. The defendants failed to show that the arrangements fit within an AKS Safe Harbor.

Courts and the Department of Health and Human Services Office of the Inspector General (the “OIG”) have frequently addressed whether commission-based payments to independent contractors violated the AKS. The OIG has long advised that applicable providers and suppliers make all commission-based salespeople bona fide employees. But given the common industry practice of outsourcing or contracting with third party sales agents, the OIG and Courts have addressed the arrangements with mixed results.

The only safe harbor these arrangements would be eligible for is the Personal Services Arrangements Safe Harbor. Historically, however, these arrangements would be disqualified because commission-based payments, by their nature, vary with the value and volume of referrals or other business generated.

The new AKS Safe Harbor Regulations published in its Final Rule on December 2, 2020 with an effective date of January 19, 2021, however, created a potential opportunity for commission-based payments to fall within the Personal Services Arrangements Safe Harbor. Notably, the new Personal Services Arrangements Safe Harbor requires not that the aggregate compensation not take into account volume or value of referrals or other business generated (as historically was the case), but that the methodology for determining the compensation not do so. The OIG, in both the Proposed Rule and Final Rule commentary and preamble of the new AKS Safe Harbor Regulations, clearly stated it did not intend on protecting arrangements that varied with the volume or value of referrals, but a plain reading of the new Personal Services Arrangements Safe Harbor appears to indicate otherwise.

While the Mallory opinion was issued after the effective date of the new AKS Safe Harbor Regulations on February 22, 2021, the actions in question occurred prior to the publication and effective date of the new AKS Safe Harbor Regulations. Additionally, the Mallory case contained particularly bad facts including, among other things, direct payments to physicians by the sales agents for the processing and handling of blood draws for the laboratory tests. However, the Court found the Government’s arguments regarding commission-based payment to independent contractors compelling and held that such arrangements should be scrutinized. Volume-based payment arrangements with independent contractors may be possible under the ASK, but caution should be heeded until additional guidance is provided.

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Photo of Edward S. Kornreich Edward S. Kornreich

Past long-standing chair of Proskauer’s Health Care Department, Ed Kornreich is a recognized authority on the legal, regulatory and business issues related to health care services.

Ed works primarily on health care transactions, regulatory compliance, health care payment and governance issues for varied…

Past long-standing chair of Proskauer’s Health Care Department, Ed Kornreich is a recognized authority on the legal, regulatory and business issues related to health care services.

Ed works primarily on health care transactions, regulatory compliance, health care payment and governance issues for varied providers (both for-profit and not-for-profit), vendors, GPOs, distributors and entrepreneurs. His approach combines sensitivity to meeting regulatory business goals with a comprehensive and realistic assessment of the health care environment, and he is particularly experienced in dealing with the complex issues related to integrated health care systems.

After working for the Legal Aid Society, Ed entered private practice, where he helped represent a major public hospital corporation in a series of reimbursement disputes with the state and federal governments, and counseled New York area hospitals and nursing homes on reimbursement and operational issues. Thereafter, Ed served as General Counsel of St. Luke’s-Roosevelt Hospital Center, one of the largest teaching hospitals in New York. After leaving St. Luke’s-Roosevelt Hospital Center, Ed joined Proskauer as a Partner in 1990.

Ed frequently writes and lectures on Medicare and Medicaid reimbursement, health care integration, not-for-profit law and corporate governance issues, and the application of federal and state anti-kickback and “Stark” laws to health care transactions.

Photo of Peter J. Eggers Peter J. Eggers

Peter Eggers is an associate in the Corporate Department and a member of the Health Care Group. He regularly counsels clients on corporate matters including mergers and acquisitions, joint ventures, professional services arrangements and general business planning. He also provides legal advice on…

Peter Eggers is an associate in the Corporate Department and a member of the Health Care Group. He regularly counsels clients on corporate matters including mergers and acquisitions, joint ventures, professional services arrangements and general business planning. He also provides legal advice on health care regulatory matters such as fraud and abuse, licensure and enrollment, Medicare reimbursement, and other compliance issues. He combines his passion for health care with an interest in each client’s business objectives to help identify opportunities for them to overcome challenges within their organizations and the health care industry.

Peter earned his J.D. with a Certificate in Health Law from the Saint Louis University School of Law. While in school, Peter served as the Editor-in-Chief of the Saint Louis University Journal of Health Law & Policy. Peter later served as an adjunct faculty member of the Center for Health Law Studies at Saint Louis University School of Law teaching Transactional Health Care Law.