Labs Should Be Cautious about ‘Surprising’ EKRA Ruling

In civil case in Hawaii, judge rules a clinical laboratory sales rep’s commission did not violate the law

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CONFUSION ABOUT WHEN IT IS LEGAL UNDER TWO FEDERAL LAWS to pay commissions to sales reps based on volume and/or revenue has existed since the passage of the federal Eliminating Kickbacks in Recovery Act of 2018 (EKRA). Now, a district court judge in Hawaii has surprisingly ruled that payments of percentage-based sales commissions to clinical lab sales representatives do not violate EKRA. 

From its enactment in 2018, the language in EKRA has clashed with provisions in the Anti-Kickback Statute (AKS), particularly regarding the permissibility of sales commissions for clinical laboratory sales reps. The AKS makes an exception for commissions paid to employees who receive a W2 tax form, while EKRA does not. Laboratory sales teams have faced confusion from the conflict. 

However, attorneys familiar with the case warn clinical laboratory directors and pathologists to be wary of the Hawaii judge’s opinion. 

Caution about Judge’s Ruling 

“I would definitely urge caution,” said Alexander Porter, a partner at Davis Wright Tremaine in Los Angeles. “The ruling does carry some weight because it’s the only court to have actually interpreted what EKRA means. But that doesn’t mean that other courts are necessarily going to follow what this court said.” 

It’s also not clear yet how the U.S. Department of Justice (DOJ), which enforces EKRA, thinks about the ruling, said Porter, who is a former Assistant U.S. Attorney and Health Care Fraud Coordinator in California. “What is DOJ’s view on EKRA? Do they agree with this case? My bet is they don’t,” he noted. 

EKRA Rules and Termination 

The Hawaii case, S&G Labs Hawaii vs. Darren Graves, stems from an employment contract dispute. Graves, the defendant, was a sales account manager at S&G Labs. He received an annual base salary of $50,000 plus percentages of monthly net profits generated by his client accounts and by the client accounts handled by the employees whom he managed, according to records from U.S. District Court in Hawaii. Graves’ total annual compensation could have reached $1 million. 

In early 2019, the company’s general counsel informed the CEO that EKRA prohibited S&G from compensating sales employees based on the number of tests S&G performed for their client accounts. The CEO attempted to renegotiate Graves’ contract but was unsuccessful; she later suspended Graves and then fired him in September 2019, at least partially because Graves had contacted a competing lab about working there and urged other S&G sales representatives to also leave. 

S&G filed suit against Graves in March 2020 for breach of contract. Graves filed a counterclaim against S&G for unlawful termination and for not paying his previously agreed upon compensation. 

A hearing was held on July 16, 2021, to address the applicability of EKRA aspects to the case. The court issued its ruling on EKRA on Oct. 18, 2021. Other parts of the case will continue to trial. 

“The commission-based compensation provisions of Graves’ employment contract with S&G did not violate EKRA, and therefore S&G’s failure to pay him according to those provisions constituted both a breach of contract and a violation of Hawaii [law],” concluded U.S. District Judge Leslie Kobayashi. 

Attorney David Gee, a partner at Davis Wright Tremaine, observed that the ruling bucks the general belief that payments of sales commissions that are based on the volume or value of patient referrals from the sales rep’s account run afoul of EKRA and—for contract sales reps who receive a 1099 tax form—the AKS. 

“The opinion is a little bit surprising from my standpoint as somebody who has advised labs since EKRA was issued,” Gee said. “There are also some Anti-Kickback Statute cases that have followed the same reasoning as the Hawaii court, that a sales rep isn’t really referring anything. But that’s a minority view.” 

Specific Language in EKRA 

Kobayashi centered her decision on a specific part of the EKRA law that states it is illegal to: 

  • Receive any payment or renumeration in return for referring a patient to a recovery home, clinical treatment facility, or laboratory; 
  • Pay or offer renumeration to induce a referral of an individual to a recovery home, clinical treatment facility, or lab; 
  • Pay or offer renumeration in exchange for an individual using the services of a recovery home, clinical treatment facility, or laboratory. 

The judge drew a distinction between an individual as noted in the law and an organization. 

Kobayashi’s reasoning was that Graves, by virtue of his employment, was not referring specific individuals to S&G for testing, but rather received commission for getting client organizations to use S&G. 

“Undoubtedly, Graves’ commission-based compensation structure induced him to try to bring more business to S&G, either directly through the accounts he serviced himself or through the accounts of the personnel under his management,” Kobayashi wrote. “However, the ‘client’ accounts they serviced were not individuals whose samples were tested at S&G.” 

Rather, the clients were physicians, substance abuse counseling centers, or other organizations in need of having people tested, she emphasized. 

Other EKRA Arguments 

It didn’t take long for another party in an unrelated case to try and use the Hawaii decision to dismiss similar allegations. 

Mark Schena, president at Arrayit in Sunnyvale, Calif., faces various charges of healthcare fraud from federal prosecutors. In part, the government alleges Schena and others paid one or more marketers to recruit physicians to order blood-based allergy testing from Arrayit for their patients. 

On February 3, 2022, Schena’s lawyer filed a motion in the U.S. District Court of San Jose, Calif., to have some counts against his client dismissed based on the Hawaii ruling. “Based upon the analysis in S&G Labs [and] the text of EKRA itself … this court should dismiss counts four through six of the superseding indictment because the conduct that is alleged in those counts is not cognizable as an offense under EKRA,” according to the motion to dismiss. 

Two important points stand out to Gee and Porter regarding the U.S. vs. Schena case. First, the DOJ criminally indicted Schena and will prosecute EKRA’s provisions in that light. The S&G vs. Graves case, however, is a civil matter that raised issues about enforceability under EKRA of the compensation terms of a sales employee agreement, Gee said. 

“The burden of proof is different for criminal and civil,” he explained. “And it’s not entirely clear what precedent the Hawaii case has as far as the breadth of EKRA because it’s a criminal statute. It’s prosecuted by the Department of Justice.” 

In criminal cases the prosecution shoulders the burden of proving guilt beyond a reasonable doubt. 

But in civil cases the plaintiff has the burden of proving the matter by a preponderance of the evidence. In other words, that it is more likely than not that the claim is true, according to the Legal Information Institute at Cornell Law School in Ithaca, N.Y. 

Put another way, what Graves had to prove regarding EKRA in the Hawaii case is likely a different standard than what Schena will have to show. 

Yet to come is the second, and bigger, point of the U.S. vs. Schena motion: the DOJ’s response to it. 

The government is expected to file an opposition to the motion to dismiss on Feb. 28. The Dark Report will provide updates in future issues. 

The opposition statement will likely reach far beyond the U.S. vs. Schena case, Porter said. 

DOJ Will Explain Its View 

“My guess is that the Department of Justice is going to say, ‘We don’t agree with the Hawaii case, and this is why,’” he commented. “If that’s the position the DOJ takes, it doesn’t mean they’re necessarily right. 

“But it still means that from an enforcement perspective, that’s the approach that the DOJ is going to take until they’re told that they’re wrong by many different courts, or the Court of Appeals, or the Supreme Court,” he added.

Many eyes will be on the DOJ’s wording in its opposition given that there is little official guidance on EKRA from the government. 

So where does the Hawaii decision leave clinical laboratories and pathology groups? From Gee’s perspective, that answer is simple: Continue trying to comply with EKRA. 

“There have been lots of efforts to get the attention of the DOJ and Congress to do something else with EKRA,” Gee said. “To my knowledge, nothing has yet happened. Keeping in mind that it’s a criminal statute, labs need to take steps to demonstrate that they’re not intending to break the law.” 

For lab leaders, that means crafting careful compliance and compensation programs. 

Lab Compliance with EKRA 

“You’ve got to think about what you can do to make your sales compensation program avoid the things the government has had such a problem with, even if you’re not sure exactly how to compensate under the language of EKRA or how you’re supposed to develop a useful incentive compensation plan when you can’t pay commissions,” Gee explained. 

Expect other cases involving alleged lab fraud to jump on the Hawaii opinion. “If there are cases involving labs with significant resources, they will challenge the language of the EKRA statute,” he said. 

Laboratory directors and pathologists should pay close attention to government’s reaction to the Hawaii case and how the DOJ responds to the U.S. vs. Schena motion to dismiss. Savvy observers will note that regardless of the immediate noise these cases are making about EKRA, any significant changes will take years to happen, if at all.  

Contact David Gee at 206-757-8059 or davidgee@dwt.com; Alexander Porter at 213- 633-6876 or alexporter@dwt.com. 

EKRA Confused Labs from the Start 

IT WAS CONGRESSIONAL EFFORTS TO COMBAT THE OPIOID CRISIS IN THE U.S. that spawned the Eliminating Kickbacks in Recovery Act of 2018 (EKRA). 

EKRA was part of the related Communities and Patients Act that lifted restrictions on medications for opioid addiction and sought to limit overprescribing of opioid painkillers. Originally, EKRA 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. (See TDR, Dec. 3, 2018.) 

A long-standing point of contention is that EKRA’s anti-kickback provisions cover all payers, while the Anti-Kickback Statute (AKS) applies just to federal healthcare programs. 

Thus, conduct protected under the AKS is treated as a criminal offense under EKRA—including certain common clinical lab practices, such as compensating sales reps on a commission-based formula related to any third-party-payer business they generate. 

The first conviction under EKRA occurred in January 2020. The case involved a provider who requested a bribe from a clinical laboratory in exchange for referring patient specimens to the laboratory. (See TDR, Feb. 17, 2020.) 

Theresa Merced, a manager at an opioid treatment center, pleaded guilty to three counts: soliciting a bribe, making a false statement, and attempting to alter evidence in the case. 

Merced was sentenced to five months in prison followed by five months of home detention, and she was ordered to pay a $55,000 fine, according to the U.S. Department of Justice.

DOJ Views COVID-19 Fraud via EKRA Lens 

ONE INTERESTING TWIST WITH FEDERAL ENFORCEMENT of the Eliminating Kickbacks in Recovery Act of 2018 (EKRA) is the government’s willingness to go after fraud allegations related to SARS-CoV-2 testing. 

The case U.S. vs. Malena Badon Lepetich provides a good example of this. Lepetich was the owner of MedLogic, a clinical laboratory in Baton Rouge, La. She allegedly solicited and received kickbacks in exchange for referrals of urine specimens for medically unnecessary tests, according to the U.S. Department of Justice. 

In addition, Lepetich allegedly offered to pay kickbacks for referrals of specimens for COVID-19 and respiratory pathogen testing. Court documents claim Lepetich filed more than $10 million in laboratory test claims to Medicare, Medicaid, and Blue Cross Blue Shield of Louisiana for panels of expensive respiratory testing that was medically unnecessary. 

A grand jury indicted Lepetich on various healthcare fraud charges last year. At the time Congress passed EKRA, the law was primarily aimed at fraudulent activity in opioid treatment centers, including related lab testing. Thus, the government’s use of the EKRA statute in the prosecution of Lepetich is notable and establishes a precedent. 

“The government had really only used EKRA in the context of addiction treatment space,” said Alexander Porter, a partner at law firm Davis Wright Tremaine in Los Angeles. “The Lepetich case shows that the government’s going to use EKRA beyond that context and go into other areas where they think that it can be useful—in particular, in the area of COVID-19 testing.” 

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