The Ninth Circuit’s (also referred to as the “Court”) decision in U.S. v. Schena (“Schena“) marks the first appellate interpretation of the Eliminating Kickback in Recovery Act of 2018 (“EKRA”). The Ninth Circuit held that EKRA extends to payments made to third-party marketers indirectly influencing referrals for medical testing services, expanding its scope beyond payments made directly to referring physicians. The Court further clarified that percentage-based compensation, while alone does not violate EKRA, runs afoul of the statute when such compensation is paid to an intermediary who engages in misleading conduct to induce referrals.
Background
Congress enacted EKRA as part of the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act of 2018. EKRA prohibits paying, receiving or soliciting any remuneration in return for referrals to recovery homes, clinical treatment facilities or laboratories. Importantly, EKRA applies to all laboratories, not just those that perform testing related to substance abuse and recovery services. Please visit our previous article for a more detailed overview of EKRA.
“Individual” Definition and Direct vs. Indirect Referral Arrangements
Since EKRA’s enactment, ambiguity has persisted around two core elements of the statute: 1) who qualifies as the “individual” making or receiving the referral; and 2) what constitutes “direct” vs. “indirect” remuneration.
While the identity of the “individual” remains somewhat unsettled, enforcement actions have provided increasing clarity on the second issue—whether EKRA prohibits only direct referrals or also captures indirect referral arrangements. Enforcement authorities have taken the position that EKRA may be violated in situations where a laboratory manager is compensated on a percentage basis for influencing physicians to use the lab’s testing services, even if the manager does not interact with patients directly. In such cases, the indirect nature of the referral does not insulate the arrangement from scrutiny under EKRA. Although district courts have issued inconsistent rulings on this issue thus far, the Ninth Circuit recently conducted a detailed statutory analysis in Schena, providing the first appellate-level interpretation of the statute’s reach.
The Ninth Circuit’s Analysis
Prior to the Ninth Circuit’s decision in Schena, two district courts had considered EKRA’s scope. In S&G Labs Hawaii, LLC v. Graves (“Graves“), the Court interpreted the term “individual” in EKRA’s prohibition against inducing “a referral of an individual” to mean a person whose specimen is sent to a laboratory for testing. Under this reading, a marketing representative meeting with physicians to promote lab services was not considered within the statute’s reach. However, the district court in Schena reached the opposite conclusion—a view later affirmed by the Ninth Circuit.
In its analysis, the Ninth Circuit clarified that, for purposes of EKRA, “individual” refers to the natural person who is the ultimate recipient of the medical service. Applying this interpretation, the Court reviewed the facts in Schena, where the owner of a medical technology company was accused of orchestrating a scheme to induce physicians to order medically unnecessary allergy tests. The company employed marketers who were compensated with a percentage of revenue generated from those orders, regardless of the clinical value of the tests.
The owner relied on the Graves reasoning and argued that he was not liable under EKRA because the company’s marketers worked with physicians to obtain referrals rather than directly with individual patients. However, the lower court determined that EKRA does not require direct interaction between the marketer and an individual. The Court deemed it irrelevant that the company’s marketers conveyed the allegedly false representations to physicians instead of directly to patients and found that this did not insulate the owner from EKRA liability. The Ninth Circuit affirmed the lower court’s reasoning and held that EKRA applied to this conduct because the payments were aimed at inducing referrals of individuals (i.e., patients) for covered services.
As this was the first federal appellate interpretation of EKRA’s inducement standard and of the statute in general, the Ninth Circuit looked to the Anti-Kickback Statute (“AKS”) precedent for guidance. Under the AKS, “inducement” must rise to the level of undue influence. The Court referenced a Fifth Circuit decision holding that no violation occurred where a marketing firm promoted a provider’s services but did not influence the choice of provider. In contrast, the Ninth Circuit emphasized that while percentage-based compensation alone does not automatically violate EKRA, such arrangements can become unlawful when marketers are instructed to mislead providers about the necessity or effectiveness of services.
Ultimately, the Court concluded that the marketers in Schena exercised undue influence by misrepresenting the value of the allergy tests, and thus the payments violated EKRA. Notably, the Court affirmed the lower court’s holding that no directness requirement exists between the marketer and an individual patient to violate the statute.
Practical Takeaways
In light of the current judicial decisions and ever-evolving EKRA enforcement climate, it is recommended that:
- Health care providers remain aware that indirect referrals can be sufficient to trigger EKRA liability.
- Clinical laboratories, recovery homes and clinical treatment facilities carefully evaluate any percentage-based compensation arrangements with third-party intermediaries, particularly those in advertising or marketing roles, to ensure compliance with EKRA.
- Clinical laboratories, recovery homes and clinical treatment facilities maintain proactive compliance efforts by closely monitoring ongoing enforcement actions and other applicable guidance that may be established from time to time.
If you have any questions or would like any additional information about this topic, please contact:
- Alyssa James at ajames@hallrender.com or 317-429-3640;
- Katherine Schwartz at kschwartz@hallrender.com or 317-977-1432;
- Erin Drummy at edrummy@hallrender.com or 317-977-1414;
- Caulin McGraw at cmcgraw@hallrender.com or 317-977-1421;
- Kennedy Bunch at kbunch@hallrender.com or 317-977-1420; or
- Your primary Hall Render contact.
Special thanks to Summer Associate Kelsey Linzell for her assistance with the preparation of this article.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.
