Clinical laboratories need to review how they compensate sales personnel following the passage of the Eliminating Kickbacks in Recovery Act of 2018 (“EKRA”) (Section 8122 of the SUPPORT Act) which is effective as of October 24, 2018.  The SUPPORT Act is a combination of more than 70 bills aimed at fighting the opioid epidemic, with EKRA intended to address patient brokering in exchange for kickbacks of individuals with substance abuse disorders.  However, as written, EKRA is far more expansive.

EKRA adds an all payor (public and private) anti-kickback rule to the health care fraud laws concerning improper remuneration for patient referrals to, or in exchange for an individual using the services of, a recovery home, clinical treatment facility or clinical laboratory.  This broad language enables the federal government to monitor provider arrangements intended to generate business for any laboratory services, not only those related to individuals in treatment for substance abuse disorders, payable by a federal health care program (“FHCP”) or commercial health insurer.

The prior version of the bill entitled “Opioid Crisis Response Act” (passed in the Senate on 9/17/18) did not include EKRA provisions, and it appears that laboratories were thrown into EKRA at the last minute, as multiple House bills proposing the addition of EKRA to the SUPPORT Act did not include laboratories.  Congressman Pallone expressed his concerns with EKRA in that “[i]t did not go through regular order and was not properly vetted . . . it was added at the very last minute . . .”  He further states that: “multiple stakeholders have raised concerns that the language does not do what we think it does. It may have unintended consequences.”  This is evident in our review and analysis of the EKRA provisions.

With regard to payment arrangements with sales personnel, one statutory exemption provides that compensation paid to both W-2 employees and 1099 contractors would not violate EKRA if the payment is not determined by or does not vary by:

  • the number of individuals referred;
  • the number of tests or procedures performed; or
  • the amount billed or received

By inclusion of the statutory exemption in EKRA, Congress indicates that payments to any employee or contractor related to the business they generate is prohibited unless the laboratory can meet the specific criteria under the three-prong exception.

As a comparison, the federal Anti-Kickback Statute (“AKS”)[1] prohibits improper remuneration “in return for referring an individual” or “purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, or ordering any good, facility, service, or item” directly or indirectly reimbursable by a federal health care program.  We know that the Office of the Inspector General (“OIG”) for the Department of Health and Human Services imposes a broad interpretation of the AKS (especially the phrase “arranging for or recommending”) and has taken the position that a pure marketing relationship to generate FHCP business could be a violation of the AKS.  However, compliance with the regulatory criteria under the Bona Fide Employee safe harbor[2] has been heavily relied upon in the health care industry to permit commission-based payments to sales personnel based on FHCP business they generate.[3]

On its face, EKRA would seem to make such commission-based payments to W-2 sales personnel, otherwise permissible under the AKS safe harbors, a criminal act that can carry up to $200,000 in fines and imprisonment up to (10) years for each occurrence.  However, Congress includes an exemption provision that states: “[t]his section shall not apply to conduct that is prohibited under section 1128B of the Social Security Act (42 U.S.C. 1320a–7b) [Anti-Kickback Statute].”  We are uncertain why Congress used the term “prohibited” instead of “not prohibited” or “permitted” in this provision.  This may have been a mere drafting error, but CMS will need to clarify whether it believes payments to sales personnel permitted under a AKS safe harbor are now prohibited by EKRA.  If that is the case, then the exemption should apply to the business generated by W-2 sales personnel for all payors (public and private) under EKRA.

Prior enforcement actions illustrate that the federal government takes the position that sales personnel can be deemed to induce patient referrals in violation of the federal AKS; however, to our knowledge this position has not been fully litigated and we do not believe this is a strong position.  Generally, sales personnel are in a position to solicit referrals and promote laboratory services but are not in a position to make a patient referral; exert undue influence on medical decision-making; or control an individual’s election of a laboratory service.  This distinction should be relevant to a criminal or civil prosecution; especially in the context of laboratory services where coverage requires an order by a physician or other authorized person.

Notwithstanding the above, EKRA would appear to permit a payment arrangement with sales personnel similar to the type that meets the criteria of the Personal Services and Management Contract safe harbor under the AKS.[4]  That safe harbor permits payments to sales personnel if the compensation is fixed in advance and not determined by the volume or value of the FHCP business they generate, which means commission-based payments do not qualify since there would be a nexus between the compensation and volume or value of business they generate.[5]

Finally, Congress does not address whether intent requires actual knowledge of the statute or specific intent to commit a violation, which is the standard in most criminal laws.  Multiple House bills proposing the addition of EKRA to the SUPPORT Act included intent language that did not ultimately make it into EKRA (“Neither actual knowledge of this section nor specific intent to commit a violation of this section shall be an element of an offense under this section.”)[6].  CMS will need to provide clarity.

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[1]  42 U.S.C. § 1320a-7b(b)(1)

[2] 42 C.F.R. §§ 1001952(i)

[3] 54 Fed.Reg. 3088, 3093 (1989)

[4] 42 C.F.R. §§ 1001952(d)

[5] See 64 Fed.Reg. 36360; OIG Advisory Opinion No. 98-10.

[6] See H.R. 6878 (Sept. 25, 2018).

The pace of health care transactions is robust, purchase price multiples are increasing, and many health care businesses are taking advantage of a sellers’ market.  Recently, our clients have increasingly turned to representation and warranty (“R&W”) insurance, finding a market more amenable to the nuances of health care deals than in the past. In the right deal, R&W insurance can limit risk to both seller and buyer and increase value to a seller by allowing for “walk-away” or “naked” deals.  R&W insurance may also be used as a tool by a buyer to increase the attractiveness of its offer in a competitive environment.

The acquisition of a company or its assets is typically governed by a purchase agreement and related transaction documents. The purchase agreement will contain various representations and warranties by the seller regarding a variety of matters, such as the seller’s assets and financial performance (including growth projections), and the accuracy of its billings for services, and its compliance with law (including healthcare laws and regulations). The buyer must do its own diligence before consummating a transaction, but in connection with such diligence it also relies on the seller’s representations and warranties. Following the closing of the transaction, if it is determined that one of the seller’s representations was incorrect (i.e., breached) and the buyer suffers damages as a result, the buyer usually has a right to compensation pursuant to the purchase agreement and related transaction documents.  Frequently, however, those agreements limit the amount that the buyer may recover, either in total, or by using various formulas, deductibles, and/or caps.   Even in the absence of these limits, if the cash purchase price has been distributed by a seller to its creditors and owners, a buyer seeking recovery may face a complex and difficult process.

The most common way to protect a buyer from potential losses that may be difficult to recover using simple indemnification is to escrow a portion of the purchase price from which claims may be paid. The amount of the escrow and how long it must be held are important negotiated terms in the purchase agreement. At the conclusion of the agreed-upon escrow period, the funds remaining in the escrow account will be released to the seller. Naturally, a buyer will want the most protection (and a large escrow amount), while a seller will want to retain the largest portion of the purchase price (and a small escrow amount). That’s where R&W insurance comes in.

R&W insurance shifts the risk of liability for breaches of representations and warranties from the seller to the insurance company in order to provide the parties to the transaction with greater protection post-closing. By utilizing R&W insurance, a buyer will be more comfortable placing a smaller portion (or even none) of the purchase price in escrow, resulting in a larger portion of the purchase price being paid to the seller at closing. In the event a breach of covered representations and warranties by the seller is discovered post-closing, the buyer may look to the insurance company rather than to the escrow (and therefore to the seller) to be made whole.

R&W insurance is an interesting way to shift the risk involved in a transaction and to provide a buyer with greater certainty of collection in the event of a breach. Further, making R&W insurance a component of a bid may provide a buyer a way to favorably distinguish itself from other bidders in a typical “sale process” run by investment bankers (or in auction-style sale). There are many other considerations, however, when deciding whether to use R&W insurance in lieu of the traditional escrow model. Such considerations include, among others:

  • The size of the policy needed for the transaction, and whether the resulting cost of the policy makes good business sense. The size of a policy can range significantly, in theory covering losses up to the full purchase price, which will impact the cost of the insurance.
  • Whether, and the extent to which, the buyer wants the seller to have “skin in the game” post-closing (i.e., in the form of an escrow), potentially making R&W insurance less desirable.
  • Which representations and warranties the policy excludes. If significant claims are excluded (e.g., Medicare claims, HIPAA violations, or specific matters already under government investigation or subject to litigation), there may be a weaker business case for buying R&W insurance.
  • Who will pay for the R&W insurance (buyer? seller? split?).
  • Some healthcare deals are harder to insure for representations and warranties relating to billing and coding compliance, such as providers with a higher percentage of government payor reimbursement and a greater number of “high-end” CPT codes.
  • The policy’s requirements for a buyer to make (and collect) a claim under the policy. For example, does the policy contain a materiality requirement?  Are the policy requirements consistent with the term of the purchase agreement?

Buyers and sellers should be aware of the existence of R&W insurance, as well as the above considerations, when analyzing and negotiating transactions. It may provide a valuable alternative to the traditional indemnification escrow model.

As we ended the summer of 2012, the Obama administration touted one of the more popular aspects of the Affordable Care Act – the requirement that health insurers spend at least 80 cents of every premium dollar on medical care and health care quality (85 cents for large employer groups purchasing health insurance), and if they do not, requiring these insurers to rebate the difference back to subscribers or their employers. According to the Administration, the “80/20 Rule” or the “Medical Loss Ratio (MLR) Rule,” as it alternately known, resulted in 12.8 million Americans receiving directly or indirectly more than $1.1 billion in health insurance rebates this past August. The 80/20 Rule sets this national minimum MLR standard that can only be lowered by a state’s insurance commissioner applying for, and receiving, a waiver from HHS. To receive a waiver, the state has to demonstrate that the application of the 80 percent threshold may destabilize the individual market. These waivers have been hard to come by – at least 18 states and territories have sought HHS approval to permit their insurers to spend below the 80 percent threshold on medical care and quality in the individual and/or small group markets (and therefore to spend more than 20 percent for administrative expenses and profits). Yet HHS has only approved six of these waivers, and most at levels, and for durations, different than requested by the state. On the flip side, states that want to impose a higher MLR threshold – like Massachusetts at 90 percent, and New York at 82 percent — have done so without federal approval.

Meanwhile, this past month, House Republicans have advanced legislation that would give states the authority to adjust the MLR down in the individual and small group markets in their state without federal approval, thereby giving insurers greater flexibility to spend more on administrative expenses, and to earn higher profits. House Bill 1206 is primarily designed to allow insurers to count broker fees as “medical expenses” in their MLR calculation, a policy choice that continues to be hotly debated between the broker industry and consumer advocates. But buried in the bill is a provision that would require the Secretary of HHS to “defer to the State’s findings and determinations regarding destabilization” of their individual and small group markets in justifying lower MLR thresholds. The bill has over 200 sponsors, bipartisan support, and was recently approved by the House Energy and Commerce Subcommittee.  

What is particularly interesting in following the proposed tweaking of the MLR Rule is that there appears to be an acknowledgment by lawmakers on both sides of the aisle, and many stakeholders across the health care spectrum, that some minimum MLR requirement on insurers makes sound public policy. But does it?

Not necessarily. As recently posted by David Kestenbaum on NPR’s Planet Money Blog, “as is sometimes the case, what is popular with the people is not so popular with economists.” Kestenbaum spoke with six health care economists, and he claims that none thought the MLR would do much good, “and several thought it could be harmful.” In particular, he cites Jonathan Gruber, an MIT economist who helped write the ACA, as opposing the idea of a minimum MLR requirement, and indicating that “the rule has the potential to do exactly the wrong thing — to drive up the cost of health care.” Here are a couple of my own thoughts on some of the problems with relying on a minimum national MLR requirement as opposed to addressing health care costs directly:

  • It assumes there are no competitive health insurance markets   in competitive insurance markets (like in Massachusetts), competitive forces provide the incentives that drive insurers to offer consumers the highest quality products at the lowest possible premium rates. Massachusetts insurers are consistently the highest quality insurance plans in the country (as ranked by the NCQA), while having among the lowest administrative costs and margins. This has been the case even before Massachusetts lawmakers recently required these insurers to meet a 90 percent MLR for 2012 and 2013 – by far the most stringent threshold in the country. Ironically, some of the states with the least competitive insurance markets (the ones that, arguably, would benefit from a more stringent MLR requirement), are those states that received waivers from HHS that allow their insurers to meet lower MLR thresholds. 
  • It penalizes the most efficient insurance carriers – in a competitive market (without an MLR requirement), if an insurer is able to reduce medical expenses below targets, it is rewarded with additional margin that it can invest in innovation and infrastructure, making it an even more competitive and efficient market participant. But under the MLR Rule, it must give that money back. As one insurance executive has observed, the MLR Rule gives plans the incentive to spend money on staff and systems that could reduce medical expenses and improve quality, but little incentive to actually achieve those savings and quality improvements.

Of course, many stakeholders and policy makers believe health insurance markets are far from competitive, and argue that the MLR requirement – which is essentially a form of rate regulation – is necessary to force insurers to become more efficient. They may be right – in the short term. But in the long term, as Professor Gruber observed, the MLR requirement may prove counter-productive in the fight to reduce actual health care costs. 

EBG counsels insurance carriers on MLR compliance as well as ACA implementation requirements. For more information, contact the author at jcaplan@ebglaw.com.