HME companies have learned—sometimes through painful experience—to live with the restrictions the Medicare antikickback statute places on their relationships with physicians, hospital discharge planners, and other potential referral sources.

In language that has become all too familiar to some HME providers, the statute makes it a felony to pay “any remuneration” to a person to induce that person to refer an individual for an item or service that a federal health care program may pay for. But the same statute also includes a less-known clause that prohibits recommending and/or paying to induce a person to purchase, lease, or order an item or service covered by a federal health care program.

This can cause unexpected problems for HME providers with marketing arrangements. According to the Office of Inspector General (OIG), marketing and advertising activities are within the scope of this portion of the statute. Therefore, any payment to marketing representatives that is based on the volume of business they generate may violate the law.

Since most marketing representatives earn part or all of their pay from sales commission, HME suppliers must take the antikickback statute and the related safe harbor regulations into account when structuring relationships with their marketing personnel.

A good defense is the best offense
The safest way to structure these relationships—though not always the most practical—is to retain marketing representatives as employees rather than as independent contractors. One of the antikickback safe harbors protects “any amount paid by an employer to an employee, who has a bona fide employment relationship with the employer.”

However, simply calling a marketing representative an employee and withholding taxes from his or her paycheck will not necessarily qualify the relationship for safe-harbor protection. Employee status is determined according to Internal Revenue Service rules, which apply a 20-factor test to determine whether a relationship should be characterized as an employment or as an independent contractor relationship.

The factors generally concern the degree of control exercised by the employer over the performance of the employee’s services. For example, the OIG may consider a marketing representative who works entirely independently to be an independent contractor under the antikickback statute even if he or she receives a W-2 form from the employer. If the relationship is a genuine employment relationship, however, the employer is free to pay the representative by any method, including a straight commission on sales.

Personal Services and Management Safe Harbor
Some arrangements simply cannot be structured as employment relationships. For HME companies that must retain a company, rather than individuals, to provide marketing service, the only possible protection is the “personal services and management contracts” safe harbor.

However, several of the requirements of this safe harbor make it difficult to bring marketing agreements under its protection. For example, one of the principal requirements of this safe harbor is that the contract must have a term of at least a year and the aggregate compensation for the term of the agreement is set in advance.

Both the HME company and the marketing service company are unlikely to approve of a compensation arrangement that lacks incentives. But even if the two parties agree to a flat-fee compensation arrangement, there is yet another difficulty.

The personal services and management contracts safe harbor requires that the agent’s compensation be “consistent with fair market value.” However, that compensation may not be “determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties.”

Complying with this requirement is simple when the services provided are unrelated to marketing. But it is very difficult to determine the fair market value of marketing services without any reference to the amount of business those services generate.

Determining Your Risk
Because complying with the personal services and management contracts safe harbor is so difficult, most HME companies that do not employ their own marketing personnel are unable to obtain safe harbor protection for their marketing arrangements.

For those companies, deciding how to structure the compensation provisions of their marketing agreements requires assessing the amount of risk of antikickback enforcement the parties are willing to live with.

The OIG has identified some of the factors it considers when determining whether a particular marketing arrangement may lead to overuse and increased costs to federal health care programs. These factors can help assess the level of risk a particular arrangement exposes an HME company to and include:

• Whether the agent’s compensation is based on percentage of sales. If none of the other factors listed below is present, then commission-based compensation alone does not necessarily mean that the arrangement presents a high risk of antikickback enforcement. If a number of the other factors are present, however, the parties should consider other compensation structures.

• Whether the seller bills federal health care programs directly for the item or service sold by the sales agent. For example, the OIG is more likely to pay attention to the marketing practices of an HME provider that bills Medicare directly than a wholesaler.

• Whether the marketing representative has direct contact with physicians who are in a position to order items or services that are then paid for by a federal health care program. The OIG believes that where marketing representatives deal directly with physicians, they may be in a position to “exert undue influence on medical decision-making.” This risk is not present where the representatives deal with institutional purchasing managers or others who do not order services directly.

• Whether the marketing representative has direct contact with federal health care program beneficiaries. The OIG believes that elderly Medicare beneficiaries are particularly vulnerable to abusive sales practices.

• Whether the sales agents are health care professionals or persons in a similar position to exert undue influence on purchasers or patients. For example, the use of respiratory therapists as marketing representatives is suspect because they may have more credibility than other sales personnel. Therefore, their recommendations may carry more weight with physicians and patients.

• Whether the items or services marketed are separately reimbursable by a federal health care program. The OIG is less concerned with marketing of supplies to hospitals, for example, where Medicare payment for the supplies is bundled into the diagnosis-related group (DRG) payment, than with marketing of HME items that are separately reimbursable.

Because of the nature of the HME business and government payment programs, many of these “suspect” features will necessarily be present in many HME marketing arrangements. There is no ideal way to structure these arrangements, but companies may wish to consider the following suggestions:

1) Companies that are already on the radar screens of the enforcement agencies, or know that they are likely to attract scrutiny for some other reason, should consider employing their marketing representatives rather than engaging them as independent contractors. Representatives can be engaged on a part-time basis and still be considered employees for purposes of safe-harbor protection, but the employment arrangements must be structured carefully, with the help of a lawyer, to incorporate enough employer control so the government will consider marketing representatives as bona fide employees.

2) If employing marketing representatives is impractical, the parties should explore compensation arrangements other than straight commission arrangements. For example, a marketing agreement might provide for a flat base fee and a bonus based on factors specified in the agreement. The parties should bear in mind, however, that any incentive compensation paid to an independent contractor is a potential violation of the antikickback statute, and the more closely the “bonus” is tied to production, the greater the risk.

3) Companies that are entering into independent contractor marketing arrangements should consider obtaining an outside opinion from an independent consultant or accounting firm to determine the fair market value of the services for which they are contracting.

For companies that do not employ marketing representatives, structuring effective marketing arrangements without incurring unacceptable risks under the antikickback statute is a difficult challenge. There is no magic solution to this problem, but companies must understand the issues in order to make informed business decisions.

Tim Webster, JD, is an attorney with the Health Care Group of Brown & Fortunato, PC, Amarillo, Tex. He represents HME companies, pharmacies, and other health care providers throughout the United States and Puerto Rico. He can be reached at (806) 345-6347; twebster@bf-law.com.