March 5, 1999
Hon. June Gibbs Brown
Inspector General
Office of the Inspector General
U.S. Dept of Health & Human Services
330 Independence Avenue, SW
Washington, DC 20201
Dear Inspector Brown:
The Office of the Chief Counsel for Advocacy of the U.S. Small Business Administration was created in 1976 to represent the views and interests of small businesses in federal policy making activities. (1)The Chief Counsel participates in rulemakings and other federal agency activities when he deems it necessary to ensure proper representation of small business interests. In addition, the Chief Counsel takes a position when existing laws and regulations have an adverse impact on competition among businesses of differing sizes. Finally, the Chief Counsel monitors agencies’ compliance with the Regulatory Flexibility Act (RFA),(2) and works with federal agencies to ensure that their rulemakings demonstrate an analysis of the impact that their decisions will have on small businesses.
A potentially troublesome matter has been brought to the attention of the Office of Advocacy pertaining to certain pricing arrangements between suppliers of portable x-ray services and skilled nursing facilities (SNFs). The separate billing of Part A and Part B Medicare service(3) is causing some SNFs to seek deep discounts from suppliers in exchange for future business. Under this billing structure, suppliers apparently feel compelled to accept discounted prices under Part A in return for future (and perhaps more lucrative) payments from SNF Part B referrals when a patient is no longer covered under Part A. Under Medicare’s regulations, this result could be construed as illegal inducement on the part of the SNFs.
The Balanced Budget Act of 1997 (BBA) created a new prospective payment system (PPS) for SNFs. Prior to implementation of PPS, suppliers billed Medicare directly for services provided under Parts A and B to SNF patients. When PPS went into effect, Parts A and B were required to be billed separately—Part A was to be billed by SNFs and Part B by suppliers. Also included in the new PPS is a not-yet-implemented requirement for SNF consolidated billing. Consolidated billing would require SNFs to bill Medicare directly for services provided under Parts A and B, and then reimburse suppliers for Part B services. Implementation of the consolidated billing portions of the PPS has been postponed indefinitely because of Y2K and other software problems at HCFA.
Under current law, since SNFs must contract with suppliers of Part B services before Part A ends, SNFs are able to negotiate substantial discounts for Part A. Although the Office of Advocacy is not aware of any overt threats by SNFs to refuse referrals under Part B when Part A ends, the suppliers are keenly aware that a failure to accept the discounted Part A service makes it unlikely for them to receive a Part B referral.
The Office of Advocacy does not know how widespread this problem is, but our office has obtained some documentation that illustrates the existence of a potential problem. In one case, a Florida supplier offers a 20% discount for Part A services (below the prevailing Medicare fee schedule). In another case, a New York supplier (that provides service to over 45% of the SNF market in NY state) offers a capitated rate of $ .37 per Part A resident per day for portable x-ray services – in addition to a five percent discount off of the Medicare fee schedule. In comparison, the Florida supplier offered a capitated rate of $ .75. Smaller suppliers cannot compete with these deep discounts that are negotiated by the SNFs.
The existence of discounts, in itself, does not give rise to a violation of the Medicare anti-kickback statute. HCFA must first make a determination as to whether or not the discounts amount to illegal remuneration. This determination probably hinges on whether the discounts are substantially below fair market value.(4) HCFA must also make the determination that the SNFs knowingly and willingly intended to solicit the discounts in return for future Medicare business.
The anti-kickback statute, 42 U.S.C. § 1320a-7b, prohibits any person or entity from "knowingly and willfully" making or accepting payment for referrals for federally funded medical services in return for a kickback. The statute states in pertinent part,
b. Illegal remuneration
(1) whoever knowingly and willfully solicits or receives any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind--
(A)service for which payment may be made in whole or in part under a federal health care program, or
(B)in return for purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing or ordering of any good, facility, service, or item for which payment may be made in whole or in part, under a federal health care program, shall be guilty of a felony and upon conviction thereof, shall be fined not more than $25,000 or imprisoned for not more than five years, or both.
(2)whoever knowingly and willfully offers or pays any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person—
(A)to refer an individual to a person for the furnishing or arranging for the furnishing or any item or service for which payment may be made in whole or in part under a federal health care program, or
(B)to purchase, lease, order or arrange for or recommend purchasing, leasing or ordering any good, facility, service or item for which payment may be made in whole or in part under a federal health care program, shall be guilty of a felony and upon conviction thereof, shall be fined not more than $25,000 or imprisoned for not more than five years, or both.(5)
Although the knowing and willful elements of the statute have yet to be proven in the instant case, there certainly seems to exist an appearance of impropriety sufficient to warrant further investigation by HCFA. Anecdotal reports from a group representing the portable x-ray industry indicate that many in the industry will be forced to close their doors very soon—because the alleged inducement on the part of some SNFs makes competition impossible.(6)
In any event, the alleged activity seems to involve more than just a little creative marketing. Courts have interpreted the statute broadly so that its application encompasses more than just kickbacks per se. Under the prevailing interpretation of the anti-kickback statute, it is a violation of the law if "one purpose of the payment was to induce future referrals, even if the payments were also intended to compensate for professional services."(7) In yet another case, the court held that while the financial relationship itself if not illegal, its is a violation of the anti-kickback provision when that relationship induces remuneration.(8)
It is important to note that the eventual implementation of consolidated billing may or may not be the cure-all for the current billing improprieties. Consolidated billing, after all, is likely to trigger other problems as well.(9) Even when SNFs begin to bill Medicare directly for Part A and Part B services under consolidated billing, portable x-ray providers and other SNF suppliers may still be at the mercy of the SNFs during contract negotiations because their reimbursement will come from the SNFs—not directly from Medicare. Currently, however, consolidated billing has been postponed indefinitely and the billing problems encountered by suppliers are in the here and now. Whether the reported incidents of inducement are isolated or widespread needs to be investigated immediately so that appropriate action can be take as soon as possible.
This inducement problem deals with more than suppliers losing money or going out of business. The evil imposed by kickbacks/illegal remuneration is the danger of improperly influencing the professional judgment of health care providers; and ultimately, the danger of harming the patients to whom health care providers owe a duty of care. When professional judgment and patient care are guided by the "bottom line" rather than healthy competition and fair market value, then quality of care can suffer greatly. The Office of Advocacy urges you to investigate this matter.
Please do not hesitate to contact our office if you have any questions, 202-205-6533.
Sincerely,
Jere W. Glover
Chief Counsel for Advocacy
Shawne Carter McGibbon
Asst. Chief Counsel for Advocacy
ENDNOTES
1. Pub. L. No. 94-305 (codified as amended at 15 U.S.C. §§ 634a-g, 637).
2. Pub. L. No. 96-354, 94 Stat. 1164 (1980) (to be codified as amended at 5 U.S.C. §§ 601-612)
3. Medicare Part A is hospital insurance. It provides coverage for inpatient hospital services, skilled nursing facilities, home health services and hospice care. Medicare Part B is medical insurance. It helps pay for the cost of physician services, outpatient hospital services, medical equipment and supplies and other health services and supplies.
4. Several Medicare and IRS regulations suggest that remuneration is illegal if it exceeds fair market value. See, e.g., 42 CFR 411.351 (In this regulation, remuneration—any payment, discount, forgiveness of debt, or other benefit made—does not include circumstances where a physician receives a payment from an insurer for the furnishing of health services to a beneficiary if the amount of the payment is set in advance, does not exceed fair market value, and is not determined in a manner that takes into account directly or indirectly the volume or value of any referrals. Fair market value is defined in this regulation as an arm’s-length transaction, consistent with the general market value).
5. See also, U.S. ex rel. Thompson v. Columbia/Healthcare Corp., 125 F.3d 899, 901 (5th Cir. 1997) ("The Medicare anti-kickback statute prohibits (1) the solicitation or receipt of remuneration in return for referrals of Medicare patients, and (2) the offer or payment of remuneration to induce such referrals.")
6. Suppliers simultaneously have to deal with the extreme financial burdens placed on them by recent severe reductions in the Medicare fee schedule for portable-x-ray providers.
7. United States v. Greber, 760 F.2d 68 (3d Cir.), cert. denied, 474 U.S. 988 (1985). In this case, a company that sold cardiac monitoring equipment paid kickbacks to doctors for using the company’s diagnostic services in interpreting monitor results.
8. See Hanlester Network v. Shalala, 51 F.3d 1390, 1398 (9th Cir. 1995). This case deals with physician self-referral joint ventures.
9. Under past and current law, payments to suppliers have been slow in many cases (--prompt payment laws notwithstanding). Implementation of consolidated billing is likely to result in further delays because payments will be billed by SNFs, and suppliers will be reimbursed.