This year the U.S. Court of Appeals for the Fourth Circuit affirmed a Department of Justice (DOJ) victory in a False Claims Act (FCA) case predicated on commission-based arrangements with contracted sales organizations found to have violated the Anti-Kickback Statute (AKS). More noteworthy than the panel’s opinion was DOJ’s press release, which broadly characterized commission-based salesforce compensation arrangements unprotected by a safe harbor, including those with nonemployee contract salesforces — standard in some sectors of the healthcare and life sciences industries — as unlawful remuneration given to “recommend” products. This stance departs from DOJ’s recent practice of moderating its enforcement positions in an effort to comply with judicial recognition of First Amendment protections for truthful, nonmisleading commercial speech. The pronouncement also underscores the importance of structuring arrangements with contract sales organizations so they comply with a safe harbor where possible.
In 2015, DOJ intervened in an FCA suit filed against a blood testing laboratory, its owner, and leadership from the lab’s independent contractor sales company, BlueWave. Only the lab owner and two BlueWave executives litigated the case to conclusion. There were three theories of alleged AKS violations at issue in the case: “processing and handling” fees paid by the lab to ordering physicians, commission-based compensation paid by the lab to BlueWave for sales of the lab’s blood tests, and commission-based compensation paid by BlueWave to its independent contractor sales representatives.
The AKS prohibits offering or paying remuneration “in return for purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, or ordering” any federally reimbursable item or service. AKS cases often focus on remuneration in exchange for purchases, prescriptions, or orders of federally reimbursable items and services, but in this case, the less frequently litigated “arranging for or recommending” language formed the crux of the government’s case.
DOJ’s complaint-in-intervention took aim at the lab’s contract with BlueWave, which included a monthly base fee plus a percentage-based commission on revenue generated from sales in BlueWave’s territory. DOJ pointed out that as an independent contractor, BlueWave could not take advantage of the employee safe harbor and that the arrangement did not satisfy all of the requirements of the personal services safe harbor, including that compensation for the services performed not take into account the volume or value of referrals. DOJ also asserted that for the same reasons, the commission-based compensation BlueWave paid to its own independent contractor salesforce violated the AKS.
DOJ’s press release broadly characterizes commission-based compensation that cannot be safe harbored as unlawful by asserting that the arrangements at issue “constituted ‘remuneration’ intended to induce BlueWave’s sales representatives to sell as many blood tests as possible,” and furthermore the AKS “prohibited BlueWave from paying its salespeople for recommending the tests.”1
These descriptions are inconsistent with the nuanced, facts-and-circumstances analysis that the Department of Health and Human Services Office of Inspector General (OIG) has articulated when assessing the legality of salesforce compensation arrangements that do not satisfy a safe harbor. OIG has identified certain “suspect characteristics” that “appear to be associated with an increased potential for program abuse,” including
- “compensation based on percentage of sales”
- promotion of items or services that are separately billable
- direct billing of federal healthcare programs by the seller
- “direct contact between” the seller’s sales agents and federal healthcare program beneficiaries or physicians who can order the seller’s items
- use of sales agents who are healthcare professionals (i.e., so-called “white coat marketing”)2
But OIG has explained that while it will subject arrangements to greater scrutiny when more factors are present, a violation of the AKS is still contingent on the requisite intent to induce referrals. Although the underlying BlueWave case is indeed consistent with many of OIG’s “suspect” factors, DOJ’s description of the misconduct in the press release adopts a much blunter approach than OIG’s more nuanced framework of analysis.
DOJ’s press release is also in tension with judicial recognition in off-label promotion cases that commercial speech is protected by the First Amendment when it is truthful and not misleading. Since suffering major court losses in this context, DOJ has noticeably elected to focus its off-label promotion efforts on cases involving false and/or misleading statements about off-label uses.
Similarly, DOJ has historically exercised its enforcement discretion under the AKS in a way that steers clear of potential First Amendment battles over truthful speech that recommends products. Notably, First Amendment defenses were not presented to or resolved by the Fourth Circuit.
DOJ’s press release contains characterizations that present a troubling departure from past practice and suggest that at least some within DOJ may become more interested in scrutinizing financial arrangements between providers and life sciences companies and their independent contractor sales personnel. To avoid getting caught flat-footed by a shift in enforcement discretion, companies should review their salesforce compensation arrangements and ensure that, where possible, they are in compliance with the employee or personal services safe harbors. Where that is not possible, it is more important than ever to confirm that compliance guardrails are in place to ensure that the compensation arrangement does not appear to induce medically unnecessary sales and that the sales representatives’ statements are truthful and not misleading.
1 Press Release, DOJ, Fourth Circuit Court of Appeals Affirms $114 Million Judgment Against 3 Defendants Found Liable of Defrauding Medicare and Tricare (Mar. 8, 2021), https://www.justice.gov/usao-sc/pr/fourth-circuit-court-appeals-affirms-114-million-judgment-against-3-defendants-found
2 See, e.g., OIG, Advisory Op. No. 99-33 (Mar. 1993), https://oig.hhs.gov/fraud/docs/advisoryopinions/1999/ao99_3.htm.
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