Use of ‘1099 Marketers’ and Lab Compliance Risk

Growing use by labs of third-party marketers to sell lab tests can generate serious problems

CEO SUMMARY: Experts in lab compliance predict that clinical laboratories and anatomic pathology groups must anticipate tougher enforcement of federal and state laws this year. One source of increased compliance risk for lab companies is the rising use of third-party marketing agreements. David Gee, an experienced lab industry attorney at Davis Wright Tremaine, said lab owners and executives need to understand all the compliance risks associated with use of “1099 marketers.”

ONE CONSEQUENCE of the deep cuts to the Medicare Part B clinical laboratory fee schedule this year will be increased competition for lab specimens. To offset the decline in revenue, labs will want to increase specimen volume. That means more intense competition for referrals of office-based physicians.

To do so, some lab companies may boost their sales efforts by entering into third-party marketing agreements. In recent years, the number of third-parties that market clinical laboratory tests has grown substantially.

Yet the use of third-party marketers— also called “1099 marketers”—presents lab companies with serious compliance and regulatory risks. That’s the opinion of attorney and Partner David Gee of Davis Wright Tremaine, LLP, of Seattle.

During a recent Dark Daily webinar, Gee selected third-party marketing arrangements as one of his three most significant lab compliance issues of 2018. The other two were the importance of effective regulatory compliance programs as the cornerstone of every lab’s risk management strategy and the memo that Sally Q. Yates wrote in September 2015 while serving as Deputy Attorney General in the federal Department of Justice. Called the Yates Memo, this directive increased the liability risk of laboratory administrators, pathologists, and staff for compliance violations of federal laws.

Third Party Lab Marketing

Gee explained why one of his lab compliance priorities for 2018 involves liability and fraud risk for labs contracting with 1099 marketers—particularly when compensation is based on a percentage of the dollars collected from the lab test claims billed to payers and patients.

“Compared with past years, it is more common today to see labs using third-party consultants, companies, and medical services organizations (MSOs) to sell lab testing services,” stated Gee. “The term ‘1099 marketers’ is the slang to distinguish these independent contractors from the sales representatives who are employees of the labs they represent.

“The challenge with these third-party marketing arrangements is that they have the potential to expose the owners and managers of a lab company to multiple and serious compliance risks,” he added. “You need to look no further than the jury verdict in the current ongoing case of the federal government against BlueWave Healthcare Consultants and other defendants previously associated with Health Diagnostic Laboratories.

“A lab company’s use of third-party sales representatives is central to this federal case and lab compliance officers and executives should be familiar with it,” recommended Gee. “This case shows the potential risk that labs assume when dealing with third-party marketing entities.

“Currently, certain parties of the BlueWave and HDL cases have reached settlements with the federal government for a combined total of more than $54 million,” he said. “Of the four remaining defendants, three are individuals.

Feds Say Percentage-Based 1099 Marketing Is Illegal

DOCUMENTS FILED BY THE FEDERAL GOVERNMENT in its case against BlueWave Healthcare Consultants and other defendants previously associated with Health Diagnostic Laboratories state that the payment of percentage-based sales incentives violates federal law.

During his webinar presentation on lab compliance, attorney David Gee of Davis Wright Tremaine showed the following quotations, which were taken from United States’ Application for Prejudgment Remedies Against Defendants BlueWave Healthcare Consultants, Inc., Floyd Calhoun Dent, III, and Robert Bradford Johnson, filed Feb 5, 2016:

  • BlueWave Defendants entered into Sales Agreements which, by virtue of their compensation scheme, fall directly within the class of relationships prohibited by the Anti-Kickback Statute (AKS).
  • [T]heSalesAgreements…and the ensuing performance under those Agreements was blatantly unlawful.
  • The Sales Agreements are illegal and are not saved by the safe harbor regulations.
  • [C]ourts as well as HHS OIG have repeatedly found commission-based sales agreements with independent contractors to violate the AKS. HHS OIG made a conscious choice to exclude such agreements from the AKS’ safe harbors due to the potential for program abuse. Finally, the plain language of the AKS precludes such arrangements. The Sales Agreements are unlawful.
  • Anti-Kickback Statute Language is “extremely broad.” [P]rohibited conduct includes not only remuneration intended to induce referrals of patients, but remuneration also intended to induce the purchasing, leasing, ordering, or arranging for any good, facility, service, or item paid for by Medicare or State healthcare programs.

Anti-Kickback Violation

“One compliance development from this case is that it demonstrates the long-standing position of federal enforcement authorities that percentage-based compensation for 1099 marketers violates the Anti-Kickback Statute and is a predicate for False Claims Act liability,” Gee explained. “The case was decided in a jury trial in early January, and any verdict will create further legal precedent on this issue for laboratory companies.”

In describing the types of third-parties engaged in these arrangements, Gee said, “MSOs and other 1099 marketers are middlemen. The concerns that the government has with 1099 marketers—such as MSOs and other ‘distributors’—apply equally to any kind of payment for services involving the ‘recommending or arranging for’ items and services that will be billed to Medicare or to Medicaid, including clinical laboratory tests.”

“When lab companies use third-party marketers to sell their lab testing services, they expose themselves to other forms of regulatory and compliance risk,” Gee noted. “Please understand that the risks with MSOs and third-party marketing agents don’t end at liability, they also carry financial risk and often undo the culture of compliance labs have worked to create and sustain,” he said. “

Labs Vulnerable To Risk

Labs are particularly vulnerable to increased risk when an MSO or third-party group calls on a doctor’s office and represents multiple interests, Gee explained. “They might use contact points for one lab company to sell other products for which they offer improper financial incentives to physicians, even if not tied directly to orders for lab testing. In this case, liability for the kickbacks could nevertheless fall on the laboratory.

“Labs sometimes fail to consider the significant economic risk that results from the lab’s lack of meaningful contact with the customer,” Gee said. “Third-party marketers often view those customers as their own. Should your lab’s business relationship sour or cease with the 1099 marketer, the third-party’s immediate recourse is to take your lab’s customer roster with them and divert those customers to your competitors. Because your lab did not directly create goodwill with the customer, there is little incentive for customers to remain loyal to the lab and not follow the sales group to the next destination.

Exposure To Economic Lose

“Laboratories that use third-party marketing must consider the consequences from both a liability and a strategic standpoint,” observed Gee. “Failure to do so can cause both economic loss and loss of reputation— each a critical aspect of today’s competitive laboratory landscape.”

During his presentation, Gee outlined six reasons that a lab company using a third-party marketing agreement could encounter problems. Some problems affect the lab’s business. Other problems could increase the lab company’s risk of violating federal and state laws.

“One, in these arrangements, your laboratory not only has no line-of-sight to 1099 marketers and their sales practices, but your lab also has no line-of-sight to its customers,” noted Gee. “This makes it difficult, if not impossible, for your lab’s compliance officer to have confidence that the third-party marketers are compliant in their sales practices.

“Two, 1099 marketers and other middlemen generally are not part of whatever compliance culture your lab company has invested to build and sustain,” he explained. “Again, this increases compliance risk for the lab company.

‘Patients Won’t Get A Bill’

“Three, third-party marketers can disregard or subvert your lab’s policies, without a great deal of oversight from you,” noted Gee. “Take the common example of 1099 marketers telling your lab’s client-physicians that their patients won’t ever see a lab test bill and won’t be charged for copayments and deductibles. In the case of BlueWave, the jury found the principals of that marketing company guilty in part for paying processing and handling fees to referring physicians.

“Four, 1099 marketers find it easy to consider your client physicians as ‘their customers,’” stated Gee. “Their focus often is not on promoting customer loyalty to your lab company.

“Five, your lab company is exposed to higher compliance risk if 1099 marketers and their middlemen wear multiple hats,” he continued. “If, in addition to your lab’s testing, the 1099 marketers also sell pain creams and other clinical products or services, for example, any kickbacks (including free services or lavish entertainment) they might offer to physicians may be imputed to your lab company.

“Six, at the end of the day, a third-party marketing arrangement can erode how your laboratory business is valued in the event of a strategic transaction,” added Gee. “How secure and sustainable is the goodwill your clinical laboratory has with referring physicians? Does the third-party marketing arrangement undermine the value of your laboratory company’s intangible assets, such as your customer list?”

More on 1099 marketers will be in upcoming issues of THE DARK REPORT.

Contact David Gee at (206) 622-3150 or

In Texas, Feds Indict Third-Party Marketers for Kickbacks Paid to Induce Lab Testing

IN RECENT YEARS, a substantial number of lab testing companies have decided to engage third-party marketers to visit physicians’ offices and sell lab testing services. While speaking during a Dark Daily webinar about lab compliance, attorney David Gee of Davis Wright Tremaine, LLP, discussed reasons why labs should be careful when considering third-party marketing agreements.

To illustrate how “1099 marketers” can violate state and federal laws, Gee referenced a federal case in Texas. The federal Department of Justice issued a press release on July 13, 2017, that announced indictments of four individuals who had generated “unnecessary” toxicology tests billed to federal health programs.

DOJ Announces Indictments

The DOJ stated, “As part of that enforcement, Erik Bugen, 42, Jody Sheffield, 43, Matthew Hawrylak, 41, and Britt Hawrylak, 38, were charged by information for their role in a $36 million fraud scheme involving unnecessary and improperly prescribed toxicology and DNA cancer screening tests which were billed to TRICARE, announced the United States Attorney’s Office of the Northern District of Texas. Each defendant faces a maximum statutory penalty of five years in federal prison and a $250,000 fine.”

Gee’s slides summarized how the DOJ described the actions of the four indicted 1099 lab sales marketers as follows:

• May 2014 to July 2017, [four defendants] operated ADAR Group in Killeen, Texas.

• [Adar Group was] paid by Xpress Laboratories and Progen Lab for referring testing orders for TRICARE beneficiaries.

• Bugen and Sheffield gave Walmart gift cards in exchange for urine and saliva specimens that were mailed to Xpress Laboratories and Progen Lab for unnecessary toxicology and DNA cancer screening tests and billed to TRICARE by Cockerell Dermatopathology in Dallas.

• Bugen and Sheffield disguised the gift cards as a food assistance program for low-income beneficiaries.

• ADAR Group employees collected urine and saliva samples from up to 200 patients per day.

• Bugen and Sheffield paid doctors a flat fee per month to sign orders for toxicology and DNA cancer screening tests. The doctors never saw the patients and had no doctor-patient relationship with the patients. Beneficiaries did not receive the test results.

• ADAR employees obtained signature stamps from the doctors and stamped the doctors’ signatures on testing orders before sending the forms to Xpress Laboratories and Progen Lab.

• ADAR Group employees also placed false diagnosis codes on TRICARE claim submissions to make it appear that the beneficiary needed the testing… to ensure that TRICARE would accept, and pay, the claim.


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