The Eliminating Kickbacks in Recovery Act (the “EKRA”) has caused considerable consternation for laboratory industry participants and healthcare attorneys alike.  It represents a new, powerful enforcement tool for the federal government, and the extent of its reach and application have not yet been fully explored.

One of the greatest areas of confusion is the effect that the EKRA will have on laboratory marketing and advertising programs.  A major contributing factor to this confusion is that the EKRA takes a very different approach to the significance of the W2/1099 distinction than other state and federal statutes take, most notably the federal Anti-Kickback Statute (the “AKS”).  Along with flat-fee contracts structured to fit the personal services safe harbor, utilization of an all-W2 sales and marketing staff is one the major ways that laboratories have structured their marketing programs in compliance with the AKS.  Payments to bona fide W2 employees are generally exempted from scrutiny under the AKS, and HHS-OIG has clarified its view of the importance of the W2 relationship.  In response to the “many commenters [who] urged the OIG to extend this exception [the W2 Safe Harbor] to apply to independent contractors paid on a commission basis … We [HHS-OIG] continue to reject this approach because of the existence of widespread abusive practices by salespersons who are independent contractors and, therefore, who are not under appropriate supervision and control. Although two commenters asserted that they could achieve appropriate supervision and control of independent contractors by including restrictive terms in the contract, we cannot expand this provision to cover such relationships unless we can predict with reasonable certainty that they will not be abusive. We are confident that the employer-employee relationship is unlikely to be abusive, in part because the employer is generally fully liable for the actions of its employees and is therefore more motivated to supervise and control them.”

The EKRA has abandoned this distinction, protecting W2 and 1099 payments alike only to the extent that they are not based value or the volume or value of tests performed.  This change could appear to eliminate any protection for commissioned, W2 sales personnel.  As a commissioned W2 sales force forms the backbone of many laboratories’ marketing and advertising programs, the EKRA has provoked no small panic from laboratory owners and other stake holders.  This discomfort is exacerbated by the fact that there the EKRA does not currently contain and there is little reason to believe that it will incorporate previous guidance softening the government’s stance on “passive” advertising: stating that while “we [the OIG] believe that many marketing and advertising activities may involve at least technical violations of the statute. We, of course, recognize that many of these advertising and marketing activities do not warrant prosecution ….”

Despite this change, there is good reason to believe that the EKRA does not signify the death knell for commissioned W2 sales forces and for passive marketing that does not meet the formal requirements of the AKS safe harbors.  The language of the EKRA suggests that its scope may be significantly more limited than the AKS in certain respects.  A primary feature of the AKS is that it applies to a wide variety of different financial relationships.  While the core of the AKS is focused on payments to referral sources and payments to beneficiaries, its actual language is incredibly broad and prohibits payments for the “arranging for or recommending purchasing, leasing, or ordering any … service or item ….”  The OIG has specifically identified this “arranging for or recommending” language as the basis of its contention that the AKS reaches marketing payments, even if those marketing payments do not involve payments to referral sources or beneficiaries.  On one level, this inclusion makes sense in light of investigations into “abusive practices by salespersons.”  But on the other hand, it is deeply imperfect as a uniform standard, as the abusive potential of a payment to a referring physician is very different than the abusive potential of a per-click advertising agreement with a social media platform.  This tension is reflected in the OIG’s statement that many passive marketing agreements, while technically violative, do not warrant prosecution.

The EKRA does not adopt the broadly inclusive language of the AKS.  It does not prohibit payments that are made for “arranging for or recommending.”  Instead, the EKRA prohibits payments made to “induce a referral” or “in exchange for an individual using the services.”  In our view, the first restriction prohibits payments to referral sources, and the second prohibits inducing payments to beneficiaries.  These are some of the most rampant and problematic types of payments in the laboratory and recovery home spaces, and there is significant reason for the government to put in place greater safeguards against such payments.

The government certainly could implement additional safeguards or rules relating to the other category of payment that has caused some concern on the part of regulators, payments to marketers (independent or W2), but there is little evidence that it did so or intended to do so through enactment of the EKRA.  While the EKRA is similar to the AKS, it is not identical, and the differences are material, particularly in regard to advertising and marketing prohibitions.  We feel that if the government intended to reverse its previous position that “the employer-employee relationship is unlikely to be abusive” it would have done so unambiguously and with sufficient clarity that industry participants would reasonably be on notice of their legal obligations.

While the EKRA may not ultimately have a significant impact on laboratories’ W2 advertising and marketing programs, it will greatly impact other laboratory business arrangements.  One area in which we see the EKRA being particularly relevant is in the context of physician-laboratory ownership relationships.  Ownership arrangements, whether directly in the laboratory or indirect (through an MSO or similar investment vehicle) have been a growing focal point of government enforcement activity, and the government has struggled in many instances of dealing with commercial-only arrangements that it views as problematic but that do not fit neatly into the prohibitions of the AKS.  The EKRA presents a charging mechanism that may simplify the government’s approach and expand the government’s reach.

One thing is certain, that the regulatory framework applicable to laboratories is complex and difficult to navigate.  It is changing rapidly.  The EKRA’s proper application is still uncertain and likely to evolve over the coming months and years.  We urge laboratories not to go it alone.  It is incredibly important to retain counsel early to evaluate and provide guidance on these difficult issues so that missteps can be avoided and strong compliance plans can be put in place.  If you have compliance questions regarding the EKRA or other laboratory compliance questions, please do not hesitate to contact Michael Elliott at 469.758.4152 or Chris Quinlan at 214.454.6376.