Attorney Explains Risks from New ‘Support Act’

Under new legislation, paying sales commissions for clinical lab test referrals could be a criminal act

CEO SUMMARY: Legislation signed into law on Oct. 24 was designed to stem the nation’s opioid crisis. But in addition to applying to sober homes and addiction treatment centers, the law also applies to clinical laboratories. Called the ‘Support for Patients and Communities Act,’ the law could authorize criminal penalties for labs that pay sales commissions to employees. Of particular concern, the law applies to labs that serve all payers, not just federal government health programs, such as Medicare.

TUCKED DEEP INSIDE A RECENTLY PASSED FEDERAL LAW intended to stem the nation’s opioid crisis are provisions that are not yet widely known and that threaten common practices among clinical laboratories. In addition, the law applies to labs that serve commercial payers, not just federal government agencies, such as Medicare and Medicaid.

This new law has the potential to increase compliance risk for nearly every clinical laboratory. Plus, it establishes a new precedent because it applies to all payers, not just federal government health programs.

In Section 8122 of the Support for Patients and Communities Act, Congress added a new Section 220 to the U.S. Criminal Code that could authorize criminal penalties for one of the most common practices of clinical labs, paying commissions to employees or independent contractors who do sales and marketing, said lawyers familiar with the new law.

Signed into law on Oct. 24, the Support Act lifts restrictions on medications for opioid addiction, allows more types of healthcare providers to prescribe drugs, and seeks to limit overprescribing of opioid painkillers. Originally it was designed to target practices of sober homes and substance abuse treatment centers. Late in the process of drafting the bill in Congress, clinical laboratories were added to the list of providers named in the act, said Jeffrey J. Sherrin, President of the law firm O’Connell & Aronowitzin Albany, N.Y., and General Counsel for the National Independent Laboratory Association.

Criminal Liability Penalties

In a section titled, “Eliminating Kickbacks in Recovery,” the law tracks the federal Anti-Kickback Statute’s prohibitions on payments to induce referrals, but imposes criminal liability penalties on recovery homes, clinical treatment facilities, and laboratories. In addition, the law applies to all payers rather than the usual federal practice of having laws apply only to those medical services covered by federal health programs.

The fact that most labs pay sales staff based on commissions raises serious questions that so far are unanswered, Sherrin said. “That provision alone will have a tremendous impact on labs,” he added. “If labs cannot pay their own employees on a commission basis, that provision could have a bigger impact than PAMA. Commissions are the incentives that generate new business for clinical labs.”

PAMA is the Protecting Access to Medicare Act, which has resulted in steep annual cuts in payments to labs. The first of those cuts were effective on Jan. 1 of this year.

“Originally, this new law was intended to address referrals to recovery homes and substance abuse treatment facilities,” Sherrin explained. “At the last minute, Congress added labs to the law. It did not explicitly limit the application of the statute to labs that do toxicology testing for recovery homes and substance abuse treatment facilities. Instead, Congress used the same definition of labs that is in the CLIA statute.

“This new law raises many serious compliance questions that need to be answered,” he continued. “For example, must labs that pay commissions to sales staff immediately change that compensation arrangement or risk prosecution? And does this law apply to all CLIA labs and not just labs that do toxicology testing for recovery homes or clinical treatment facilities?

“Someone in the clinical lab industry may have to get prosecuted before we get some clarity, unless the Secretary of HHS issues clarifying regulations,” he predicted.

No Safe Harbor Provision

One confusing aspect of the Support Act is that it does not include a safe harbor against prosecution for a bona fide employment relationship that allows for commission payment, as does the federal Anti-Kickback Statute (AKS), Sherrin explained.

“One way this new law seeks to prevent fraud is by making payments for certain referrals illegal,” he noted. “But it may be doing far more damage than good in this one instance. In the face of the current opioid crisis, accessible toxicology testing is critical, but this law can put tox labs out of business.

“By comparison, there is a safe harbor in the AKS that covers compensation paid in the context of a bona fide employment relationship,” he added. “That’s the vehicle that labs use to pay sales and marketing personnel on a commission, based in whole or in part on the business they generate.

Sequencing Technologies

“Under the AKS, your lab can satisfy a safe harbor if it has entered into a bona fide employment relationship even when compensation is based on commissions,” noted Sherrin. “But your lab doesn’t fall into this employment safe harbor if it pays sales commissions to independent contractors.”

“That’s why our law firm always recommends that, if labs pay sales people on commission, then those sales people should be employees and not independent contractors,” he said. “Many clinical lab companies don’t follow that advice, but at some risk. Neither the AKS nor the Support Act necessarily makes that practice illegal, but doing so comes with real risk.

“We know that the inspector general believes that under the AKS, sales and marketing people generate referrals from providers and, therefore, if your lab pays them a commission based on those referrals, it’s arguably a payment for the referrals,” Sherrin added. “The Support Act does not have the safe harbor for employees that the AKS does.”

By way of explanation, Sherrin quoted from the new law. “The Support Act says, the safe harbor is ‘a payment made to an employee or independent contractor (who has a bona fide employment agreement or contractual relationship with such employer) for employment, if the payment is not determined by or does not vary by the number of individuals referred … or the number of tests or procedures performed or the amount billed to or received.’

“That seems to say that even if your lab pays an employee on a commission basis, that relationship does not fall within the safe harbor,” he explained. “Therefore, the same relationship for which there is a safe harbor under the AKS does not enjoy a safe harbor under this new statute.

“The new statute doesn’t say this provision is limited at all,” emphasized Sherrin. “In fact, it says that it applies to all laboratories. That raises the important question: How do you read this statute? Is it consistent with the AKS?

“If an employee is paid on a commission basis, does that constitute an illegal kickback under this statute even though there might be a safe harbor under the AKS?” he asked. “It appears so if the commission is paid for business generated from sober homes or substance abuse treatment facilities, regardless of payer.

“The question is whether this potential illegality extends also to laboratories that are not engaged in this area of toxicology,” he said. “The legislative history would indicate that it does not, but that battle may still have to be fought.”

In Letter to HHS, ACLA Raises Concerns Over Safe Harbors

IN A LETTER TO THE FEDERAL DEPARTMENT OF HEALTH AND HUMAN SERVICES, the American Clinical Laboratory Association (ACLA) said the new Support Act does not address conduct that is protected under existing safe harbor provisions, such as those in the Anti-Kickback Statute (AKS).

“The legislation adds a new section 220 to the U.S. Criminal Code, titled ‘Illegal remunerations for referrals to recovery homes, clinical treatment facilities, and laboratories,’ that would authorize the imposition of criminal penalties for some conduct that currently is permissible under Anti-Kickback Statute safe harbors,” wrote Sharon L. West, ACLA’s Vice President, Legal and Regulatory Affairs. The section in question is section 8122 titled, “Eliminating Kickbacks in Recovery” (or EKR).

“As written, section 8122 of the legislation applies to all laboratories, not merely laboratories that perform testing for recovery homes and clinical treatment facilities, and to all services covered by all payers, rather than only items and services covered by the federal healthcare programs.”

Confusion over Pre-Emption

Another confusing provision in the Support Act involves pre-emption. Some new federal laws pre-empt state laws and other federal laws, but others do not. The Support Act addresses pre-emption, but in a confusing way, Sherrin said.

“There are two pre-emption provisions, one regarding federal law and one for state law,” he explained. “The federal pre-emption provision addresses the section on Eliminating Kickbacks in Recovery by saying it, ‘shall not apply to conduct that is prohibited under the AKS,’” he said.

“I don’t understand that,” he commented. “Instead, it should say that ‘this provision does not apply to conduct that is legal under the AKS,’ meaning that if it fell within a safe harbor under the AKS

then the new law would not criminalize this activity,” he explained. “If it’s prohibited under the AKS, meaning it’s an illegal kickback, then it would be illegal under the Support Act.

“Based on these and other problems in the statute, it seems safe to say that the law will result in litigation,” he concluded. “In the meantime, we need to know more about the scope of this law as it relates to the AKS, and does this law apply to all clinical labs or only to those labs that do toxicology testing?”

Contact Jeffrey J. Sherrin at 518-462-5601 or jsherrin@oalaw.com.

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