The Eliminating Kickbacks in Recovery Act (“EKRA”) was enacted in 2018 in an effort to address fraud occurring in substance use disorder (“SUD”) treatment. EKRA prohibits paying, receiving, or soliciting remuneration in return for patient referrals to laboratories, recovery homes, and clinical treatment facilities.[1] Under EKRA, clinical treatment facilities are defined broadly to include, “a medical setting, other than a hospital, that provides detoxification, risk reduction, outpatient treatment and care, residential treatment, or rehabilitation for substance use, pursuant to licensure or certification under State law.”[2] Notably (and in contrast to the federal Anti-Kickback Statute (the “AKS”)), EKRA applies to providers who bill commercial health insurance payors, as well as state and federal healthcare programs.[3] EKRA is a criminal statute providing penalties of up to $200,000 in fines and/or imprisonment for up to 10 years for each violation.[4]
Enforcement of EKRA
In January 2020, the U.S. Department of Justice (“DOJ”) announced the first conviction under EKRA.[5] An office manager of a SUD treatment facility pleaded guilty to soliciting kickbacks from a laboratory in exchange for urine drug test referrals. However, to date, there have been limited EKRA enforcement actions. As a result, healthcare providers and courts alike have struggled to interpret EKRA – specifically, EKRA’s employee safe harbor. The employee safe harbor exempts:
(2) a payment made by an employer to an employee or independent contractor (who has a bona fide employment or contractual relationship with such employer) for employment, if the employee’s payment is not determined by or does not vary by—
(A) the number of individuals referred to a particular recovery home, clinical treatment facility, or laboratory;
(B) the number of tests or procedures performed; or
(C) the amount billed to or received from, in part or in whole, the health care benefit program from the individuals referred to a particular recovery home, clinical treatment facility, or laboratory.[6]
Two cases, a civil case from Hawaii and a criminal case from California, have provided a judicial analysis (albeit a conflicting one), of EKRA’s employee safe harbor.
In S&G Labs Hawaii, LLC v. Graves, the U.S. District Court for the District of Hawaii addressed the issue of whether commission-based payments to employees of a clinical lab violate EKRA.[7] The Graves case involved a dispute between a clinical laboratory and its former employee. The former employee had been employed by S&G as a manager overseeing S&G’s client accounts. The former employee was compensated in part based on percentages of the monthly net profits generated by his client accounts and by the client accounts handled by the S&G employees whom he managed.[8] S&G claimed that it had received legal advice that if it continued to pay its marketing employees a commission-based compensation that varied depending on the number of tests performed or revenue received for testing, it would violate EKRA.
One of the issues faced by the Graves court was what effect, if any, EKRA had on Graves’s employment agreement. The Court determined that the commission-based compensation provisions of Graves’s employment contract with S&G did not violate EKRA.[9] In reaching its conclusion, the critical issue before the Court was whether the compensation paid by S&G to Graves was to “induce a referral of an individual” to S&G.[10] The term “Individual” is not defined under EKRA. As such, the Court looked to the definition of an “individual” proscribed by the AKS, reasoning that it was appropriate to do so as the statutes are part of the same overall “statutory scheme.”[11]
The Court reasoned that under the AKS, an “individual” is not an artificial entity, stating, “[u]ndoubtedly, Graves’s commission-based compensation structure induced him to try to bring more business to S&G, either directly through the accounts he serviced himself, or through the accounts of the personnel under his management.” However, the “client” accounts S&G serviced were not individuals whose samples were tested at S&G. Their “clients” were “the physicians, substance abuse counseling centers, or other organizations in need of having persons tested.”[12] As such, the Court determined there was no remuneration paid to Graves by S&G for the referral of “individuals” and therefore no violation of EKRA.
In USA v. Schena, the U.S. District Court for the Northern District of California expressly disagreed with the holding in Graves[13] and emphasized that both direct and indirect remuneration for referrals violate EKRA.[14] The Schena Court was faced with the question of whether EKRA applied to a situation in which marketers obtained referrals of patients indirectly through physicians rather than working with individual patients directly.[15] In Schena, the government alleged that Mark Schena, the President of a clinical laboratory, paid illegal kickbacks and bribes to marketing companies and others in exchange for arranging for healthcare providers to collect blood samples and order allergy testing to be performed by the clinical lab. Unlike the Graves Court, the Schena Court determined that EKRA should not be read in light of the AKS and its definitions.
The Schena court reasoned that EKRA does not provide a blanket authorization for all payments made by an employer to an employee, but discusses situations in which payments are permissible. As such, the Court found that because EKRA bans the payment or offer of payment to induce an individual to use laboratory or clinical services, inducement through a third party, such as a physician, is still a violation of EKRA. In sum, the Schena court held that commissions for employees based on “indirect” referrals are a violation of EKRA.
The conflicting Schena and Graves decisions are not controlling law in Arizona, where neither the Federal District Court nor the Ninth Circuit Court of Appeals has interpreted the provisions of EKRA’s employee safe harbor. However, both the Schena and Graves cases are currently on appeal before the Ninth Circuit. Any opinions rendered by the Ninth Circuit regarding the interpretation of EKRA will create binding authority in Arizona.
Effects on Employment Arrangements
To avoid potential violations of EKRA arising out of employment compensation arrangements, laboratories, recovery homes, and clinical treatment facilities should not pay their employees (particularly those in sales and marketing roles) compensation that varies based on the number of referrals received from third parties, compensation received by the employer for tests or procedures performed, or the amount billed to or received from any health insurance payor. Instead, the safer approach is for laboratories, recovery homes, and clinical treatment facilities to pay such employees flat, fixed compensation that is set in advance.
[1] 18 U.S.C. § 220.
[2] 18 U.S.C. § 220(e)(2).
[3] 18 U.S.C. § 220(e)(3); 18 U.S.C. § 24(b).
[4] 18 U.S.C. § 220(a).
[5] https://www.justice.gov/usao-edky/pr/jackson-woman-pleads-guilty-soliciting-kickbacks-making-false-statements-law.
[6] 18 U.S.C. § 220(b)(2).
[7] See S&G Labs Hawaii, LLC v. Graves, No. 1:19-cv-310, 2021 WL 4847430 (D. HI Oct. 18, 2021).
[8] Id. at 2.
[9] Id. at 1.
[10] Id. at 11 (emphasis added).
[11] Id. at 10.
[12] Id.
[13]See USA v. Schena, 2021 WL 1720083 at *1 (N.D. Cal. May 28, 2022).
[14] See Id. at 4, stating “Moreover, there is no requirement of “directness” in the text of EKRA. Rather, by its terms, it applies to situations where someone “pays or offers any remuneration,” to “induce” an individual into using laboratory or clinical services. 18 U.S.C. § 220(a). Notably missing is any requirement of direct interaction between the marketer and the individual.”
[15] Id. at 2.
