Just Because Medicare Is Excluded Doesn't Mean the Risk Is
At some point in your career as a physician or group owner, someone will bring you an
arrangement. It could be about durable medical equipment, a compound pharmacy, or a
workers’ comp program.
When you get the contract, the economics will look attractive, and when you hesitate,
the person offering it will make this reassuring sentence:
“Don’t worry. This only involves commercial and workers’ comp patients,
no Medicare or Medicaid, so the federal fraud and abuse laws don’t apply.
Our attorneys vetted it.”
That sentence meant to reassure you is called a federal carve-out. Over the years, I have
seen physicians get false comfort from it, and in this piece, I’ll explain the danger of it.
The Theory and Why It Sounds Airtight
The logic of a carve-out is simple. The three main federal fraud and abuse laws — the
Anti-Kickback Statute, the Stark Law, and the False Claims Act — are premised on
healthcare dollars from the federal government: Medicare, Medicaid, and other
programs.
So, if an arrangement is structured to involve only private-pay, commercially insured,
and workers’ comp patients, the theory applies as it sits outside those laws. It means no
federal dollars, no federal problem, and on paper that is true as far as it goes.
However, there is a problem: it does not go nearly as far as the people selling the
arrangement make it seem.
What the Government Thinks of Carve-Outs
The Office of the Inspector General (OIG) has made how it views carve-outs clear. In 2011, it released an advisory opinion and reiterated the same sentiment in a special fraud alert in 2014.
The advisory read in part that the OIG has a “longstanding concern about arrangements pursuant to which parties carve out federal healthcare program beneficiaries or business generated from federal healthcare programs from otherwise questionable financial arrangements. Such arrangements implicate and may violate the Anti-Kickback Statute by disguising remuneration for federal business through the payment of amounts purportedly related to non-federal business.”
The key word here is “disguising.” The government’s theory is that if I pay you an inflated amount for your commercial patients and you send me your Medicare patients too, the carve-out is not a shield.
Instead, it is a camouflage, and the private-pay side of the arrangement becomes the vehicle for a kickback on the federal side. And the careful structuring that was supposed to keep you safe becomes the evidence of how exactly the parties thought about the kickback.
The Mechanical Trap
Let’s set aside the disguised-kickback theory for a moment, and look at a more practical problem. It takes just one patient covered by the federal healthcare program to pull the entire arrangement inside the Anti-Kickback Statute.
You might think you can screen for that, but do you know when a patient presents a UnitedHealthcare card, whether it is commercial UnitedHealthcare or UnitedHealthcare acting as a third-party administrator for a federal program? Do you know when a federal program is sitting behind a claim as a secondary payer?
You should know that no matter how perfect you think you can monitor this, doing it forever for every patient in the arrangement is much harder than the salesperson’s confident assurance. And the standard should not be “we mostly get it right,” not when you could end up on the wrong side of the law.
A True Story That Made the Front Page
If you still think you can engage in carve-out arrangements and nothing happens, then you need to know how it ended for some physicians in my home state of Illinois. This story made the headlines of the Chicago Tribune in January 2007, and it read, “Doctors Took MRI Kickbacks, Suit Says.”
The scheme was a clever one involving MRI operators and doctors. The MRI operators offered physicians a per-click lease. They asked doctors to send their patients to their imaging center, and for the duration of the scan, the doctor would be charged roughly $400 to $500 to lease the scanner.
Then, the doctor bills the patient’s commercial insurer $1,000 or $1,500. This way, the doctor pockets the spread without ever buying a scanner or building out a suite. It was easy money, and it was structured as a true federal carve-out: commercial and workers’ comp patients only, no Medicare, no Medicaid.
The carve-out worked, and the federal government never brought a case, even though it could have invoked the disguised-kickback theory. But the Illinois Attorney General did under the state’s Insurance Claims Fraud Prevention Act.
The case was brought under Illinois law because the parties footing the bill for the sham lease were insurance companies. The case was also brought under the state’s consumer fraud statute because patients were steered into scans that were profitable for the referring doctor, whether or not they were necessary.
The case was settled with the MRI centers paying fines and unwinding relationships. The doctors escaped relatively unscathed, but they were scared and spent months answering patients who asked if they sent them to one of those centers.
So, it is evident that these arrangements have consequences.
In the health law community, there is a popular saying: you do not want your name on the front page of the Chicago Tribune. Having your name in negative press on the front page of a newspaper in 2007 was bad, but today, in the era of social media, it would be much worse.
The world of social media is more pervasive, more permanent, and far less forgiving. The reputational math on carve-outs has only gotten worse, so it is best to avoid it. But it does not end here.
There’s one more thing worth mentioning. In 2018, Congress passed EKRA, a kickback statute aimed at addiction recovery and lab arrangements. Notably, it does not limit itself to federal healthcare dollars.
It reaches commercial businesses, and whatever your specialty, EKRA tells you what is possible. The assumption that federal law only ever follows federal dollars is already out of date, and enforcement is only ramping up.
The Vetting Lawyer Matters
This brings me to what I feel most strongly about on this topic: it is not just about the carve-outs, but about trust.
Carve-out arrangements are almost always promoted by the people selling the underlying product or service, and the reassurance is that their lawyer vetted it. This should not reassure you, as their attorneys work for them, not you.
You don’t know if their attorney knows healthcare fraud and abuse law, whether the arrangement was actually vetted, or what the opinion, if there’s one, actually says. The salesperson’s confidence is not a legal opinion, and even a real legal opinion written for the seller does nothing to protect the physician who signs on.
It reminds me of the scene in Animal House where the fraternity brothers wreck the borrowed Lincoln Continental, and Otter puts his arm around a distraught Bluto and delivers the immortal consolation: hey, you messed up. You trusted us. Do not be Bluto. Your attorney owes you loyalty, while the vendor’s attorney owes you nothing. Therefore, before you enter any arrangement that leans on a federal carve-out for its legality, get your healthcare counsel to vet it. Ensure the comfort is real. In my experience, when a deal only works because an entire category of patients has been carefully excluded from it, that is not a feature of the deal. That is the deal telling you what it is, so listen. This is what I discussed in the latest episode of my Group Practice with Neal Goldstein podcast. You can listen to the whole episode by clicking the button below.
Neal T. Goldstein is a healthcare attorney and partner at Patzik, Frank & Samotny Ltd., representing physician groups and individual physicians in corporate and transactional matters. This article is general commentary, not legal advice for any specific arrangement.