Federal District Court Applies Expansive Definition of “Referral” to Find Liability under the Anti-Kickback Statute

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Despite its central importance to the application of the federal anti-kickback statute, 42 U.S.C. § 1320a-7b(b) (AKS), the term “refer” is not defined by statute or regulation, and it has seldom been interpreted by the courts or regulatory agencies. Following the lead of the U.S. Court of Appeals for the Seventh Circuit, a recent federal district court decision suggests that the term may reach further than many expect.

In Stop Illinois Health Care Fraud, LLC v. Sayeed et al., No. 12-cv-09306, 2021 WL 2331338 (N.D. Ill. Jun. 8, 2021), the U.S. District Court for the Northern District of Illinois found that a home health agency, Vital Home & Healthcare, Inc., two related entities, and their owner violated the AKS by paying a community care organization, Healthcare Consortium of Illinois, for access to Healthcare Consortium’s client files, which Vital Home used to market its home health services to federal healthcare program beneficiaries. To reach this conclusion, the district court applied a broad definition of “refer” under the AKS. Paying Healthcare Consortium to access its clients’ contact information to solicit these clients, the court reasoned, was the functional equivalent of paying Healthcare Consortium to refer its clients to Vital Home. Because Vital Home’s payments were intended to induce Healthcare Consortium to “indirectly refer” its clients to Vital Home, these payments violated the AKS, the court found.

The Anti-Kickback Statute

The AKS makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce, or in return for, the referral of a federal healthcare program business. 42 U.S.C. §§ 1320a-7b(b)(1)(A), (2)(A). The AKS also prohibits knowingly and willfully offering, paying, soliciting, or receiving any remuneration to induce, or in return for, the purchasing, leasing, ordering, or arranging for or recommending the purchasing, leasing, or ordering of any item or service payable by a federal healthcare program, 42 U.S.C. §§ 1320a-7b(b)(1)(B), (2)(B). While many AKS enforcement actions focus on the “referral” prong, the second prong, which extends the prohibition to not only purchasing, leasing, and ordering items or services, but also to “arranging for or recommending” the purchase, lease, or order of items and services payable by federal healthcare programs, supports a distinct theory of liability.

District Court Decision

The Sayeed case dates back to 2012, when a whistleblower filed a complaint under the qui tam provisions of the federal False Claims Act (FCA) and its Illinois analogue, alleging violations of both through violations of the AKS. After the United States and State of Illinois each declined to intervene in the case, and after years of pretrial proceedings, the court held a bench trial in July 2019. The operative complaint (now the fourth complaint) on which the case was tried set forth two theories of violating the AKS. The first was that the defendants violated the AKS by offering Healthcare Consortium’s caseworkers gift cards in exchange for referrals. The second was the so-called “file access theory,” where the plaintiff alleged that one of the defendants, Management Principles, Inc. (MPI), paid Healthcare Consortium $5,000 per month under a sham contract to access the latter’s client files and then used the information to solicit these clients for home health services provided by Vital Home and a related entity, Physician Care Services, S.C. (PCS).

At trial, the plaintiff offered scant evidence about the gift cards. A former supervisor at Healthcare Consortium denied knowledge of any caseworker receiving a gift card. An employee of one of the defendants testified that she handed out small gift cards ($5 or $10) as friendly birthday gifts but denied that the purpose was to induce referrals.

The bulk of the trial focused on the “file access theory.” The evidence demonstrated that MPI and Healthcare Consortium entered a vaguely worded management services agreement under which MPI paid Healthcare Consortium $5,000 a month. In exchange for the monthly payment, Healthcare Consortium was supposed to assist MPI in case management and appoint personnel to perform these services for MPI. But no personnel were ever appointed, and no such services were ever provided. What Healthcare Consortium did provide, however, was access to its client files. MPI copied these files and mined them for leads on potential patients for the two home health companies, Vital Home and PCS.

At the conclusion of the plaintiff’s case, the court granted the defendants’ motion for directed verdict (which, this being a bench trial, the court treated as a motion for judgment on partial findings), finding the evidence insufficient to prove a violation of the AKS under either theory. The court issued a brief written order explaining that the gift card evidence was insufficient to prove a violation of the AKS and, without delving into the specifics of the “file access theory,” that there was no evidence that the management services contract was intended to induce referrals. See Stop Illinois Health Care Fraud, LLC v. Sayeed et al., No. 12-cv-09306, 2019 WL 3386964 (Jul. 26, 2019). Unsatisfied, the plaintiff appealed to the Seventh Circuit.

Seventh Circuit Opinion

On appeal, the Seventh Circuit held that the district court’s failure to articulate the definition of “referral,” coupled with its cursory rejection of the file access theory, left open the question whether, in granting the defendants’ motion, it applied too narrow a definition of “refer.” See Stop Illinois Health Care Fraud, LLC v. Sayeed et al., 957 F.3d 743 (7th Cir. 2020). The Seventh Circuit leaned heavily on United States v. Patel, 778 F.3d 607 (7th Cir. 2015), where it held that a physician makes a “referral” under the AKS when certifying a patient as homebound (a Medicare requirement for home health), even if the physician never directs a patient to a particular home health agency.

In Patel, the evidence was undisputed that, after Dr. Patel determined a patient required home health, the patient chose a home health provider independently from a stack of brochures for an assortment of home health agencies. Dr. Patel did not direct the patients to any particular agency. But for each patient who happened to choose one particular home health agency, Grand Home Health Care, Dr. Patel would receive a cash payment from Grand for each certification or recertification he signed. Yet, because he never directed a patient to Grand, nor recommended Grand to a patient, Dr. Patel argued that he never made a “referral” under the AKS. For purposes of the AKS, he argued, the word “refer” means “to personally recommend to a patient that he seek care from a particular entity.” The Seventh Circuit rejected this narrow definition. Noting that Dr. Patel’s definition would defeat the purpose of the AKS, the court settled on a more expansive definition of “refer” that includes “a doctor’s authorization to receive medical care.”

Although the facts in Patel differed substantially from those below, the lesson, the Seventh Circuit explained in Sayeed, is “that the definition of a referral under the [AKS] is broad, encapsulating both direct and indirect means of connecting a patient with a provider.” This definition, the court continued, “goes beyond explicit recommendations to include more subtle arrangements[,] [a]nd the inquiry is a practical one that focuses on substance, not form.” Guided by its holding in Patel, and unconvinced that the district court applied “the correct definition of ‘refer,’” the Seventh Circuit remanded the case, instructing the district court to consider whether, under the “file access theory,” MPI was paying for indirect referrals from Healthcare Consortium.

District Court Proceedings on Remand

On remand, the district court found that the plaintiff introduced sufficient evidence to prove that Healthcare Consortium made a “referral” to MPI, within the meaning of the AKS, by granting access to client files that contained client information, which MPI then used to solicit patients. “Substantively,” the court explained in a November 2020 opinion, “this would have been the same outcome if [Healthcare Consortium] had directly referred those clients to MPI’s services.” Stop Illinois Health Care Fraud, LLC v. Sayeed et al., No. 12-cv-09306, 2020 WL 6896265, *3-4 (N.D. Ill. Nov. 24, 2020). Guided by the Seventh Circuit’s opinion, the district court found “that giving MPI access to client contact information that was used to solicit those clients should be classified as a referral under the [AKS].” The court therefore denied the defendants’ renewed motion for direct verdict, ordering the bench trial to continue with the defendants’ case.

The sole defense witness was defendant Sayeed, who the court noted offered limited additional insight on the file access theory of referral. Having already concluded in its November opinion that the access to client files constituted a referral, the court found that the $5,000 monthly payments were knowingly and willfully paid to induce Healthcare Consortium “to provide referrals (i.e., access to data).” The court then swiftly disposed of the defendants’ safe harbor defense, pointing out that the safe harbor for personal services and management contracts, 42 C.F.R. § 1001.952(d), requires among other elements that the written agreement “cover[] all of the services” under the arrangement. Here, because the contract was silent as to allowing MPI to access Healthcare Consortium’s client files, the court concluded that the elements of the safe harbor were not met. Left without refuge of the safe harbor, the district court found that the defendants violated the AKS by paying Healthcare Consortium $5,000 per month to induce it to grant MPI access to the client files, thereby making a “referral” under the AKS.

Concluding Thoughts

The alleged facts in Sayeed are far from sympathetic. The defendants paid Healthcare Consortium $90,000 over the course of 18 months to scour private records to solicit business. But the result is somewhat surprising. More surprising is the route the Seventh Circuit and district court took to get there. Although neither was precise in whether the violation of the AKS was a violation of 42 U.S.C. § 1320a-7b(b)(2)(A), the “referral” prong, or § 1320a-7b(b)(2)(B), the “purchase, lease, order, or arrange for or recommend” prong, both courts focus on the word “refer,” without reference to the “arrange for or recommend” language, which would be a better fit for the allegations. Indeed, when analyzing arrangements where one party connects another party to a healthcare provider, the Department of Health and Human Services, Office of Inspector General (OIG), typically analyzes the arrangement under the “arrange for or recommend” prong. See e.g., OIG Adv. Op. 20-03 (Jun. 26, 2020); OIG Adv. Op. 19-04 (Sept. 5, 2019).

By focusing on “refer” — and holding that one party makes an “indirect referral” when it provides information to another party that, in turn, uses the information to solicit business — the courts risk an overly expansive application of the AKS. After all, it seems that neither court required proof that Healthcare Consortium knew or intended for MPI to use the information to solicit patients. Rather, both courts considered MPI to be paying for an “indirect referral” from Healthcare Consortium simply because MPI purchased access to Healthcare Consortium’s information. And neither the Seventh Circuit nor the federal district court placed discernable limits on the “indirect referral” concept. Taken to its logical extreme, this rule could have far reaching effects that ensnare commonplace arrangements that would not ordinarily be considered to implicate the AKS.

Had the courts relied on the “arrange for or recommend” language, one could more readily identify precisely what conduct the courts found to run afoul of the AKS. By requiring the information custodian to arrange for or recommend (either directly or through another party) the party offering the remuneration, the courts would have drawn a perceptible line between, on the one hand, simply purchasing information and, on the other hand, accomplishing indirectly what the AKS plainly prohibits directly — namely, paying for referrals. It remains to be seen whether the defendants will appeal again to the Seventh Circuit and, if so, whether the Seventh Circuit will simply apply the same reasoning it did in 2020 or whether the court will more closely scrutinize the evidence through the lens of the AKS’s text. Meanwhile, anytime one is analyzing an arrangement under the familiar “arrange for or recommend” prong of the AKS, consider also the Sayeed courts’ interpretation of “refer.”