Fifth Circuit and Anti-kickback Statute | Criminal Defense Blog

Fifth Circuit Defines Limits of the Anti-Kickback Statute

Medicare Fraud Law

The federal code contains numerous regulations aimed at curtailing waste and fraud within federal programs.  One of the more wasteful programs, and thus a hotbed for federal regulations, is Medicare.  It is estimated that the government wastes billions of dollars each year paying providers for services that are medically unnecessary or never performed.  This reality has led to the government maintaining a vigilant focus on providers who bill Medicare.  The investigations that arise from this microscope include classic Medicare fraud as well as financial crimes linked to medical services.

A key component in the fight against Medicare waste is the Anti-kickback statute (AKS) found at 42 U.S.C. §1320a.  This statute makes it criminal for any person to solicit, receive, or offer anything of value (remuneration) in return for a referral of a person for the purpose of providing a service where a federal healthcare program may be billed.  In simpler terms, the AKS makes it criminal to pay certain fees to induce referrals of medical services.

For example, let’s assume a neurologist is receiving referrals from a family care practitioner.  There is nothing wrong with that referral process.  Presumably, the family care practitioner is referring patients based on the competency of the neurologist and the patient’s need for a specialist.  However, the neurologist is prohibited from paying the family care practitioner for the referral under the AKS.  The reasoning for this rule is straight forward.  The federal government does not want to allow incentives for providers to make referrals that may be medically unnecessary.  If the family practitioner is receiving $1,000 per referral to the neurologist, there will be an incentive to send as many patients to the neurologist as possible to maximize the referral fees.  This structure would promote waste in the system and likely result in Medicare or other health care programs paying for procedures or visits that were unneeded.

This general understanding of the AKS has been solid since its inception in the 1970s.  The overarching rule within the medical industry was “do not pay doctors for referrals.”  More recently, the government has launched criminal probes into the more nuanced areas of the AKS.  Notably, the government has targeted provider payments to marketers and advertisers as well as physicians.  These payments are not clear cut under the AKS as the marketers and advertisers do not actually make the decision to refer patients (the referral).  These marketing professionals merely influence the doctors decisions through connections with various clinics. As we will review in this post, there is a fine line between legitimate marketing and a criminal violation.

The Government’s Expansive Reading of the AKS

Though medical businesses deal with complicated health issues, they are still profit driven entities.  The goal of most clinics, labs, pharmaceutical companies, or other medical businesses is to maximize their profit.  This includes use of the same marketing and investment vehicles that we find in businesses across the United States.

Though the goals are the same, the rules surrounding medical businesses are vastly different.  The AKS, and other medically focused regulations, attempt to curtail certain practices in hopes of diminishing waste in the medical industry.  For instance, most business owners can pay a person for a good referral.  In the medical field, that same business owner could be committing a violation of the AKS for that same referral fee.

At this intersection of business and regulation lies the land mines.  If the AKS is taken at face value, it appears no medical service provider can pay another person for referrals.  This would seem to implicate all marketers, advertising companies, and other business generation arms from being paid at all.  Understanding this absurdity under the plain reading of the AKS, the federal government has carved out “safe harbors” under the AKS.  These safe harbors outline specific business setups that do not qualify as remuneration under the AKS.  42 C.F.R. § 1001.952.

The safe harbor provision contains over thirty-five specific payments that do not qualify as remuneration under the AKS.  Importantly, the safe harbor provisions include 1) payments to marketers/advertisers if the marketer is under contract and payments are not based on referral volume, 2) payments made pursuant to the sale of a provider’s practice, 3) payments made pursuant to a lease agreement, 4) payments made under an investment interest, and 5) payments made by employers to employees with a bonafide relationship.  This list is not exhaustive and certainly oversimplifies the requirements under each section.  However, it should provide a taste of the regulatory framework and the expectations given to medical businesses across the United States.

Medicare Fraud Law

The Government Views Any Renumeration as a Violation of the AKS

The government has been pursuing prosecutions against medical businesses that violate the safe harbor provisions of the AKS. Notably, the government has held the position that a medical business that pays marketers outside the confines of the safe harbor provisions has violated the AKS.  That is, they have paid remuneration for the referral of a patient where Medicare could be billed for the services.

While this stance may be correct regarding the remuneration element, it fails to understand the referral element of the AKS, and more importantly, the goal of the AKS.  The error in their views collided with the Fifth Circuit in 2024 in United States v. Marchetti.

In Marchetti, the defendant (Marchetti) was charged with a violation of the AKS for various financial transactions relating to billed medical services.  A co-defendant, Vantari, owned a lab that performed tests at the request of providers.  Some of these tests were billed to Medicare or other healthcare programs.  To drum up business, Vantari paid a network of distributors, or marketers, to syphon tests to the lab.  In return, Vantari paid the marketers a percentage of the proceeds for each referral.  Marchetti was one of the distributors that pushed tests to Vantari.

As business grew, Marchetti was able to cut contracts with Vantari and others to receive 35-50% of the proceeds for all tests referred to the labs.  Shortly thereafter, Vantari and his partners became concerned about the legality of the payment structure (for good reason under the AKS safe harbor regulations.)  Vantari approached Marchetti regarding an employee model for payment; this was promptly rejected by Marchetti.

Marchetti was charged with conspiracy to violate the AKS.  He was convicted at trial and sentenced to 48 months in prison.  Marchetti appealed his conviction and sentence to the Fifth Circuit in New Orleans, arguing the evidence was insufficient to show he violated the AKS.

The Fifth Circuit found the evidence sufficient, but not before providing clear guidance on the intersection between the safe harbor provisions and the AKS.  The Court drew a distinction between a payer’s intent to improperly induce referrals, which is illegal, and payments for advertising, which is not.  The government attempted to argue the evidence was sufficient because payments were based on the volume of referrals; a clear reference to the safe harbor provisions.  The Court stated the structure of the contract alone, volume based or not, is not sufficient to carry a conviction under the AKS.

Under the AKS, the government must prove the defendants intended to improperly influence the people making decisions on behalf of patients.  Normally, the decision maker is the treating physician.  Under those circumstances, the government must show the payments were meant to unduly influence the doctor.  Simply showing the payments were made in violation of the safe harbor provisions is not enough.  The Courts may agree those payments are remuneration under the federal regulations.  However, those payments must also improperly induce the referral.  If the marketer is not making the decision on behalf of a patient, the link required for an AKS conviction is not present.

Though the Fifth Circuit found evidence showing volume-payments alone were insufficient to carry the AKS conviction, they affirmed the convictions on other grounds.  Aside from the Vantari scheme, Marchetti also worked as a marketer for another defendant, Codon.  Under that scheme, it was apparent that Marchetti decided which service provider would receive the work.  His selection was never overruled and largely kept secret from the doctor and the patient.  In that instance, Marchetti became the decision maker, and thus, direct payments were in violation of the AKS.

Beyond Marchetti

This area of the law is evolving throughout the Circuits in the United States.  The Fifth Circuit was forced to make their decision fit neatly within their prior decisions in Miles (where advertising facilitates an independent decision to purchase a healthcare service, and where there is no evidence the advertiser unduly influenced or acted on behalf of the referrer, the mere fact the advertiser was compensated for each referral is insufficient under the AKS) and Shoemaker (the referrer was paid to exploit his access and unduly influence the decision maker under the AKS).

While the outer contours of the law will undoubtedly continue to evolve, the baseline rules should persist – 1) the payment must be remuneration outside the guidance of the safe harbor provisions and 2) the payments must unduly influence the decision maker by either a) being paid directly to the decision maker or b) being paid with the understanding the payee will exert undue influence over the person that is making decisions.  Where the government failed in Marchetti is focusing solely on the remuneration provision of the safe harbor clause.  They failed to address the gravamen of an AKS violation – undue influence of the decision maker.  Undue influence lies at the core of the AKS as the statute’s goal is to curb incentives for wasteful services.