The Antikickback Law, Civil Monetary Penalty Laws and the Safe Harbors

The Antikickback Law, Civil Monetary Penalty Laws and the Safe Harbors

The following analysis will primarily focus on the Anti-Kickback Law, as the CMP Law uses civil monetary penalties to prohibit conduct in violation of the AKL.

The AKL is violated in any instance where one purpose of a given arrangement is to induce referrals. The AKL is extremely broad and covers a host of common business transactions including many that would otherwise seem innocuous (e.g., the sale of a medical practice). Congress, recognizing that the AKL casts such a potentially wide net and that the consequences of AKL violations are severe, directed OIG to propagate a series of "safe harbor" regulations which, if complied with, will insulate conduct that might otherwise be prohibited by the AKL. In addition to the safe harbors, the AKL itself contains several key exceptions.

The Employee Exception and Safe Harbor provision of the AKL contains a specific exception for payments made to employees, including part-time employees. This exception clearly states that the AKL does not apply to "any amount paid by an employer to an employee (who has a bona fide employment relationship with such employer) for employment in the provision of covered items or services."

There is also an AKL safe harbor that contains very similar language, except that it states specifically that the term "employee" is to be defined in accordance with another federal law, 26 USC §3121(d)(2). If the ostensible kickback (in the form of salary paid to a physician) is immunized under the AKL exception and/or safe harbor for employees, neither the AKL nor the CMP Law should prevent the billing physician entity from paying an employee healthcare provider for services that were delivered within the ordinary scope of his/her license.

More specifically, neither the AKL nor the CMP Law prohibit a Proposed Arrangement if: (i) each of the purported employed physicians fall within the meaning of the term "employee" under 26 USC §3121(d)(2); and (ii) the employment relationship between the physicians and the employer is deemed to be a "bona fide" employment relationship. If the Proposed Arrangement does not satisfy these requirements, the physicians would be treated as independent contractors (and not employees). This is a critical distinction, because there is no AKL exception for independent contractors, and AKL safe harbor protection will not be available to insulate the Proposed Arrangement if compensation paid to the doctor does not reflect fair market value or in any way reflects the value or volume of referrals. These "fair market value" and "value or volume" requirements do not apply in the case of a bona fide employment relationship.

Notably, conduct that is not covered by a safe harbor or a statutory exception does not automatically violate the AKL or the CMP Law—rather, there is only a risk that a violation will be deemed to exist. The level of risk varies upon a number of factors including the specifics of the transaction involved and the likelihood that OIG or other federal authorities will elect to prosecute, if and when, it is brought to their attention.

As stated above, the AKL employee safe harbor defines the term "employee" with reference to 26 USC §3121(d)(2). Perhaps not surprisingly, 26 USC §3121(d)(2) defines an employee as any individual who has the status of an employee under "the usual common law rules" used in determining the existence of employer-employee relationships. These common law rules are spelled out in detail in numerous court and administrative decisions as well as IRS regulations. In essence, the common law rules provide that a person who performs services for an employer is an employee if the employer has the right to both control what the employed physicians do for the practice and how they do it, even if the employed physicians are given considerable freedom of action. The determination of whether or not a violation has occurred is to be made in light of all relevant circumstances.

Typically, three (3) different factors are used to determine whether the degree of control is suggestive of an employment relationship on the one hand, or an independent contractor relationship on the other, as follows:

  • Behavioral Control. Behavioral control exists if the practice has the right to directly control how the physicians perform the work for which they were hired, a determination that is traditionally made on the basis of instructions provided by the employing entity. The key factors include whether the employer instructs the physician when and where to work, where to obtain supplies and services, what work must be performed and the sequential order to follow. While these kinds of instructions are not particularly applicable in the context of health care practices, there is recognition that the amount of instruction needed may vary, especially in cases involving professionals. Even if no instruction is given, sufficient behavioral control may exist if the employer has the right to control how work results are achieved. The key consideration of behavioral control is whether or not the employer has the right to control the details of the physicians' performance or instead gives up that right.

  • Financial Control. Here, the inquiry is whether the employer has a right to control the business aspects of the physician's position. Where an employee is guaranteed a regular wage amount for an hourly, weekly or other period of time, this payment plan usually indicates that the health care provider is an employee, since independent contractors typically are paid a flat fee for a particular task. Some professional contractors, however, are either paid on an hourly or per service basis.

  • Allocation of Risk and Potential for Profit. An important fact to consider is whether the physicians are eligible to make a profit or loss under the Proposed Arrangement. Other factors for consideration include whether the physicians have significant unreimbursed business expenses in connection with the Proposed Arrangement, have sizable investment in facilities they use in performing their services, and whether individual physicians are generally free to seek out other business opportunities (all of which suggest the existence of an independent contractor relationship).

  • Type of Relationship. The final factors to be considered in determining whether the physicians are employees or independent contractors are whether there are written contracts describing the relationship the parties intended to create, whether the employer provides the physicians with employee benefits (e.g., insurance, vacation pay, etc.) and the permanency of the relationship (i.e., an engagement contemplating an indefinite relationship would suggest that the chiropractor is an employee). Also relevant is the extent to which services performed by the chiropractor are key parts of the employer's regular practice. If the physicians are providing services as important aspects of the employer's usual business, it is more likely that the employer will be deemed to have the right to direct and control the physicians' activities.

The foregoing is largely a summary of the IRS' interpretation of the common law rules and a more detailed summary of the same would, in and of itself require a separate letter of considerable length. Nevertheless, the aforesaid should provide meaningful guidance as to whether the physicians employed by the employer will likely be treated as employees (as distinguished from independent contractors). At a minimum, they are strongly suggestive of what steps and measures should be undertaken by the employer's physicians to insure that a legitimate employment relationship will be deemed to exist between them.

In this regard, written employment agreements between the employer and each physician are only a starting point. These agreements must specifically state that the employer has the right to control the physicians' activities in as many respects as possible including the right to supervise the performance of their professional services. It is critical for the employer to provide the physicians with as many indicia of employment as possible including an outline of benefits. Of course, how the arrangements between the employer and physicians are structured in practice will matter most. The mere existence of an employment agreement and the payment of benefits will not necessarily carry the day, if the relationship otherwise suggests that the physicians are essentially independent contractors.

The real issue of concern resides in the details of the day-to-day transactions and occurrences in the context of the client’s practice. Here, we provide our greatest service in making ourselves available, as well as keeping our practice current on the operations, relationships, sensitivities, strengths and weaknesses of each of our clients' practices. In the ordinary tensions, motivations, pressures and demands of our clients' practices lies the temptation to violate carefully drafted, mutual agreements. Here to reiterate, we provide our greatest service by making ourselves available to counsel clients on specific anecdotal problems, pushbacks and vulnerabilities that can impair an otherwise well functioning and accommodating business model. We work with our clients in the ordinary course and through their challenges to keep their business model profitable and compliant. Toward this end, while CMS and OIG have further constrained healthcare business opportunities, we use caution in creating both realistic and durable business models that allow clients to expand their practices rather than subsist under the radar. The OIG has, for a long time, taken the position that an arrangement that appears to fit within a safe harbor—but is really designed to circumvent the AKL prohibitions—will be disregarded and instead analyzed by the substance of the transaction. Accordingly, there is at least the possibility that OIG (or another federal enforcement agency) will take the position that the Proposed Arrangement is not bona fide. This involves something of a "smell test" more than anything else.

The first issue concerns the nature and extent of the physicians' duties for the employer—are they performing any services other than the profitable services that are the mainstay of their engagement in the practice? If so, it will greatly enhance the argument that the physicians are bona fide employees who are not merely being paid for the referrals of business or the delivery of specialized profitable services. The more important issue, however, concerns the physicians' compensation. If the physicians are each being paid amounts well in excess of a reasonable estimate of the value of their services, it would strongly suggest that the Proposed Arrangement is simply a disguised method for compensating the physicians for their referrals or delivery of limited profitable services to the employer.


Under Education Law 6509-a, it is illegal for a physician or any other healthcare professional to participate in a division, rebate or splitting of professional fees, except under certain circumstances. However, there is a specific exception under §6509-a that permits licensed professionals to practice in a group and to pool group fees for professional services rendered by group members and employees. The pooling of fees, however, is not permitted with respect to care and treatment under the Worker’ s Compensation Law and No-Fault Law, except as expressly authorized there under.

Any Proposed Arrangement that carries with it an appearance of impropriety will be examined carefully by the OIG if brought to attention. This is why physicians' compensation as well as the scope of services that they are employed to provide are so important.

At first blush, the Proposed Arrangement may seem to involve precisely what the AKL and the CMP prohibit. If a Proposed Arrangement, however, is properly structured as a bona fide employment relationship or another bona fide safe harbor exception between the client and the participating physicians, the relationship may be perfectly legal. In essence, something other than bona fide and/or as a circumvention scheme designed to avoid the reach of the AKL, the CMP Law and other applicable laws and regulations mentioned above must be in put into effect.

© 2024 Peter Birzon & Associates
400 Jericho Turnpike, Suite 100, Jericho, NY 11753
| Phone: (516) 942-9100

About PBA | Practice Areas | Our Attorneys | Work With Us