Independent contractor sales and marketing arrangements in laboratories

June 3, 2024

Alert

Many laboratories engage sales and marketing representatives to assist them in growing their laboratory business. Although for decades, the federal government has expressed concerns regarding the activities of certain sales and marketing representatives and potential violations of the Medicare and Medicaid Anti-Kickback Statute (AKS). The government has another more recent tool to address its concerns with the Eliminating Kickbacks in Recovery Act (EKRA). Examples of the investigation and prosecution of questionable arrangements involving sales representatives under both AKS and EKRA are discussed below.

Legal background

Federal Anti-Kickback Statute

AKS provides for civil and criminal penalties for anyone who knowingly and willfully offers, pays, solicits, or receives remuneration in order to induce or reward the referral of business reimbursable under any federal health care program such as the Medicare program or the Medicaid program. It is important to note that AKS applies not only to arrangements involving referrals from health care clinicians, but it also prohibits remuneration intended to induce or reward someone to arrange for or recommend that others obtain or order any good or service reimbursable by a federal health care program. This means that AKS can extend to sales and marketing representatives, even though they are not ordering health care providers, to the extent that the government considers their activities to include arranging for or recommending that a health care provider order a laboratory test or pathology service.

There is a safe harbor under AKS that protects many payments to bona fide W-2 employees of a laboratory. This employment safe harbor is broad enough to cover commission based compensation paid to a sales and marketing employee. Importantly, however, there is no comparable safe harbor under AKS that would protect commission based or other variable compensation paid by a laboratory to an independent contractor sales and marketing representative. This does not necessarily mean that commission based or other volume based compensation paid by a laboratory to an independent contractor sales and marketing representative or company is a de facto violation of AKS. Rather, it means that the compensation arrangement is subject to scrutiny by the federal government, and is potentially an arrangement that would violate AKS.

Eliminating Kickbacks in Recovery Act

EKRA provides for criminal penalties for anyone who knowingly or willfully pays any remuneration to induce a referral of an individual to a laboratory or in exchange for an individual using the services of that laboratory. Importantly, EKRA applies to services that are covered by both government as well as private health plans. It does not have a broad safe harbor analogous to the employment safe harbor under AKS (which permits variable compensation to bona fide W‑2 employees). Instead, the safe harbor under EKRA only permits payments that do not vary based on the volume of services or the amounts billed or received for the services. In other words, EKRA’s safe harbor only protects fixed payments (such as fixed hourly or monthly amounts) paid to an employee or independent contractor sales representative.

Recent government actions

During the COVID-19 pandemic, there was a well-documented and widely publicized increase in questionable laboratory arrangements involving the performance of medically unnecessary testing, fraudulent billing for services that were not provided, and the payment of kickbacks to induce the referral of testing. These abuses were not unique to the laboratory industry, and had parallels throughout other segments of the economy during the pandemic. Nevertheless, these “bad apples” deepened the government’s skepticism and increased its scrutiny of payments made by laboratories to their sales and marketing representatives.

As a result, there has been a surge in the number of government investigations and prosecutions regarding commission based payments to independent contractor sales and marketing representatives, primarily based upon alleged violations of AKS. While there are a few cases involving interpretations of EKRA, to date most of these cases have involved commercial contractual disputes between parties, rather than criminal prosecutions brought by the government. However, in current investigations of sales and marketing representatives by the federal government, the government is increasingly discussing EKRA as an additional grounds for enforcement action.

Provided below is a summary of some of these recent cases involving independent contractor sales and marketing representatives and alleged AKS violations:

Genotox Laboratories in Texas paid $5.9 million to settle allegations involving volume-based commissions paid to independent contractor marketers for unnecessary drug tests.
Genesis Reference Laboratories in Florida paid almost $2 million to resolve allegations that its independent contractor sales and marketing companies (Corum Group, Provision Medical Consultants and RMC Medical) paid kickbacks disguised as MSO payments to ordering physicians.
LabSolutions in Georgia and Pennsylvania, Performance Laboratories in Oklahoma, Lazarus Services in Louisiana, and Clio Labs in Georgia, and their owners were charged with paying kickbacks to sales and marketing representatives who set up telemarketing arrangements involving genetic testing that the government believed to be not medically necessary.
An independent contractor marketer in Florida, Ivan Andre Scott, was charged for his role in a scheme to provide Medicare patient information to physicians and telemedicine companies that then billed for medically unnecessary testing.

While all of the above AKS cases involve allegations of illegal activities, including kickbacks and medically unnecessary services, the key point is that the government was able to use AKS as a basis for the investigations, settlements and prosecutions because the commission based payments to independent contractors did not fall within any safe harbor.

As explained above, the recent cases that touch upon the interpretation of EKRA are primarily limited to commercial disputes between parties. Nevertheless, these cases indicate a split in the jurisdictions with respect to the interpretation of EKRA. Two courts have determined that volume based payments made to independent contractors are not per se illegal under EKRA, but could implicate both AKS and EKRA depending upon the facts and circumstances. In the third case, involving a laboratory executive that was clearly engaged in improper behavior, including securities fraud, the court determined that the compensation arrangement with the laboratory’s sales and marketing representatives implicated AKS and EKRA.

Considerations for laboratories

Given the increasingly aggressive stance of the federal government with respect to payments made to sales and marketing personnel by laboratories, particularly in light of the surge in abuse that occurred during the pandemic, it is critical that laboratories carefully assess how they structure their compensation arrangements with their sales and marketing representatives. Under EKRA, any commission or volume based payments to sales and marketing representatives could implicate the law, even if made to a bona fide W-2 employee. However, as explained above, AKS has a specific safe harbor that protects compensation arrangements made to bona fide employees, including commission based or other volume based compensation. While it is not possible to dismiss the risk under EKRA if volume based payments, such as commission compensation, are paid to a bona fide full-time W-2 employed sales and marketing representative, it is much riskier to pay such volume based compensation to an independent contractor individual or company where no safe harbor exists under AKS for such payments. The government is less likely to prosecute an arrangement involving commission based payments to a bona fide employee under EKRA if the same payments are protected by the AKS safe harbor. The lack of a safe harbor under AKS for volume based payments made to independent contractor places both the laboratories and the sales and marketing personnel at greater risk.

Many smaller laboratories may not have the resources to employ a sales and marketing representative on a full-time basis. These laboratories may wish to consider fixed payment arrangements with independent contractors for sales and marketing services. Such arrangements may not be as attractive from a business standpoint to either the laboratory or the sales and marketing personnel, but a flat fee arrangement (a fixed hourly fee or a fixed monthly fee, for example) would generally put the parties in a more secure position in terms of the AKS and EKRA.

Regardless of whether a sales and marketing representative is an employee or an independent contractor, is paid a fixed amount of variable compensation, it is absolutely imperative that laboratories ensure that their sales and marketing personnel undergo initial as well as continuing compliance training regarding legal and illegal sales and marketing practices.

If you have any questions, please contact Jane Pine Wood, the author of this article, at jwood@mcdonaldhopkins.com or 216-348-5428. You can also contact members of our national Healthcare Practice Group listed below.

	Elizabeth Sullivan Chair, Healthcare Practice Group esullivan@mcdonaldhopkins.com 216-348-5401		Emily Johnson Member, Healthcare Practice Group ejohnson@mcdonaldhopkins.com 312.642.1798
	Patrick Campbell Associate, Healthcare Practice Group pcampbell@mcdonaldhopkins.com 216.348.5405

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