Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
In the Case of:
The Inspector General
-v.-
The Hanlester Network, et al.;
and
Melvin L. Huntsinger, M.D. and Ned Welsh,
Respondents.
DATE: September 18, 1991
Docket Nos. C-186 through C-192, C-208, and C-213
Decision No. 1275
FINAL DECISION ON REVIEW OF
ADMINISTRATIVE LAW JUDGE
DECISION
The Inspector General (I.G.) of the Department of Health and
Human
Services appealed from a decision by an Administrative Law Judge
(ALJ)
to an Appellate Panel of the Departmental Appeals Board.
Section 1128(b)(7) of the Social Security Act (Act) authorizes
a
permissive exclusion from participation in Medicare and any State
health
care program for any individual or entity which has "committed an
act
which is described" in section 1128B(b) of the Act (Medicare
and
Medicaid anti-kickback statute). 1/ Based on these provisions, the
I.G.
had proposed to exclude 10 individual, corporate, and
partnership
entities, nine of which requested a hearing before an ALJ.
Administrative Law Judge Steven T. Kessel issued his decision on March
1,
1991 (ALJ Decision). He concluded that four of the Respondents
had
violated section 1128B(b)(2) of the Act through the conduct of
their
agent, but determined that no permissive exclusion should be
imposed
based on this violation. He also concluded that the I.G. had
failed to
prove other alleged violations of section 1128B(b)(1) or (2).
The I.G.
filed timely exceptions to the ALJ Decision, alleging error in nine
of
the ALJ's 227 Findings of Fact and Conclusions of Law (FFCLs). For
the
reasons stated below, we conclude that the ALJ misread what the
statute
requires and improperly evaluated whether to impose an
exclusion. We
remand this case to the ALJ for further action consistent
with this
decision.
SUMMARY
This is the first case proposing exclusions for acts proscribed under
the
anti-kickback statute. The purpose of the statute was to protect
the
Medicare and Medicaid programs from increased costs or abusive
practices
which result from health care decisions affected by provider
self-interest,
rather than by legitimate considerations such as cost,
quality, and necessity
of services. One section of this statute is
directed at anyone who
offers or pays "any remuneration (including any
kickback, bribe, or rebate)
directly or indirectly, overtly or covertly,
in cash or in kind . . . to
induce" referral of program-related
business. Another section is
directed at anyone who solicits or
receives such remuneration "in return for"
referrals. Both sections are
at issue here.
The I.G. had alleged that distributions offered or paid by
limited
partnership laboratories to physician investors in a position to
refer
program-related tests were knowingly and willfully offered or paid
as
"remuneration . . . to induce" referrals. The key issue on appeal
is
whether the I.G. must prove that the offer or payment was conditioned
on
the physicians agreeing to refer program-related business to
the
laboratory, so that the physicians' choice of laboratories
was
precluded. We conclude that such an agreement is not a
necessary
element of a violation.
The plain meaning of the statutory language, as well as its
context,
purpose, and history, support a conclusion that a violation
occurs
whenever an individual or entity knowingly and willfully offers or
pays
anything of value, in any manner or form, with the intent of
exercising
influence over a physician's reason or judgment in an effort to
cause
the referral of program-related business. Nothing in the
statutory
language explicitly or implicitly requires an agreement, nor can
the
legislative history or case law on the anti-kickback statute
reasonably
be read to require an agreement.
The ALJ's analysis is not consistent with any commonly accepted
approach
to statutory construction and was apparently driven by a
misplaced
concern that, unless an agreement were required, the statute would
reach
activities which are common in the health care field. First, such
a
concern can never justify introducing into the statute an element
which
simply is not there (even if that statute may be the basis for
a
criminal prosecution). Second, Congress clearly intended to
reach
common activities that it considered harmful to the programs
and
provided a means through which benign arrangements could be
protected.
While evaluating all of the circumstances surrounding a
particular
transaction or relationship in order to determine a party's intent
may
be burdensome, this is what the statute requires. In any event,
the
test created by the ALJ is itself subject to varying interpretations
and
is not easy to apply.
The I.G. had also alleged that the Respondents, in their relationship
with
a major laboratory corporation which managed the partnership
laboratories,
knowingly and willfully solicited or received
"remuneration . . . in return
for" referrals. The ALJ found no direct
payment to any Respondent nor
any guaranteed flow of business to the
manager laboratory. The key
issue is whether these findings mandate a
conclusion that there was no
violation. We conclude that these factors
are not determinative.
The statute focuses on the substance, rather
than the form, of any
transaction or relationship. Moreover, the
absence of a guarantee of
referrals does not mean that referrals, once
made, are any less "in return
for" remuneration, where there is an
intentional connection between the
referral and the remuneration.
The third major issue is whether certain Respondents should be
excluded
from the programs because the ALJ found that they had violated
the
statute through the acts of their agent (a marketing director who
made
presentations to potential limited partners conditioning
their
participation on agreements to refer). The I.G. argued that the
ALJ, in
determining that no exclusion should be imposed on these
Respondents,
erred because he did not properly weigh all relevant
factors. While we
reject some of the I.G.'s arguments on this issue, we
conclude that the
ALJ should reconsider imposing an exclusion, even if he
finds no other
violation. The ALJ gave too much weight to the fact that
the marketing
director resigned, without considering the continuing effect of
her
presentations on the structure of the partnerships, and
improperly
placed a burden on the I.G. to prove actual harm.
Because of our conclusions, we remand this case to the ALJ to make
further
findings consistent with our conclusions on the legal issues.
We provide
guidance on some of the relevant factors to be considered on
remand.
Below, we first provide the following background information to assist
the
reader in understanding the issues: relevant facts (Part I, p. 4),
a
summary of the ALJ Decision (Part II, p. 8), the I.G.'s exceptions
(Part III,
p. 9), and the language and history of the anti-kickback
statute (Part IV, p.
10). We then present our analysis of the two
statutory sections, first
discussing section 1128B(b)(2) of the Act
(Part V, p. 14) and then discussing
section 1128B(b)(1) (Part VI, p.
44). (We discuss the sections in this
order to parallel the ALJ's
discussion and to address first the primary issue
raised before us).
Next, we discuss the issues raised by the I.G. relating to
the
appropriate remedy for the violation found by the ALJ (Part VII, p.
49).
Finally, we explain why we remand this case to the ALJ and
provide
guidance for consideration on remand, consistent with our decision
(Part
VIII, p. 53).
I. Factual Background 2/
This case focuses on the complex interrelationships among the
various
individuals and corporate or partnership entities involved in
the
creation and operation of three limited partnership
clinical
laboratories formed in California during the late 1980's.
The
Respondents are: (1) the Hanlester Network; (2) the Keorle
Corporation
(originally the Hanlester Corporation); (3) Pacific Physicians
Clinical
Laboratory, Ltd. (PPCL); (4) Omni Physicians Clinical Laboratory,
Ltd.
(Omni); (5) Placer Physicians Clinical Laboratory, Ltd. (Placer);
(6)
Kevin Lewand; (7) Gene Tasha; (8) Ned Welsh; and (9) Melvin
Huntsinger,
M.D. One individual, Patricia Hitchcock, did not request a
hearing
before the ALJ, and the I.G. excluded her from participation in
Medicare
and Medicaid for a period of five years.
A. The Structure of the Hanlester Network
The Hanlester Network was a California general partnership formed
on
January 1, 1987. The Hanlester Corporation owned the majority
interest
in the Hanlester Network; Mr. Tasha and Mr. Welsh were also
general
partners. Mr. Lewand owned the Hanlester Corporation and was
President
of the Hanlester Network until January 1989. In January 1989
the
Hanlester Corporation sold its interest in the Hanlester Network to
Mr.
Tasha, an officer in the Hanlester Network, and was renamed the
Keorle
Corporation. Mr. Lewand remained Keorle's owner.
Mr. Welsh was a vice-president in the Hanlester Network until he left
in
the summer of 1987. Ms. Hitchcock was its Vice-President for
Marketing
until November 1988 when she resigned.
B. The Limited Partnership Laboratories
Between March 1987 and March 1988, the Hanlester Network issued
private
placement memoranda offering limited partnership shares in
three
clinical laboratories (PPCL, Omni, and Placer) serving
defined
communities within California (Los Angeles, Pasadena, and
Sacramento);
600 partnership shares were offered for PPCL and 800 each for
Omni and
Placer. The other principal aspects of each partnership
offering were
the same. Each share cost $500 with a three-share minimum
purchase.
The number of investors in each partnership was limited to
35
individuals or entities. The offerings for each laboratory were
limited
to licensed physicians residing in California who actively
practiced
medicine in the laboratory's geographical area and to others
whose
ownership of shares would, in the Hanlester Network's judgment,
benefit
the laboratory. The Hanlester Network was the general partner
in each
limited partnership laboratory; it retained exclusive authority to
make
management decisions for each laboratory.
An attorney employed by the Hanlester Network and Mr. Lewand
prepared
private placement memoranda for each partnership
offering.
Additionally, the attorney met with Mr. Tasha, Mr. Welsh, and
Ms.
Hitchcock and generally advised them to restrict their
sales
presentations to the information contained in the memoranda. In
the
private placement memoranda, prospective limited partners were
informed
that, initially, substantially all business would be obtained from
them
and that they would continue to be the primary source of
partnership
business. Business would also be solicited from non-partner
physicians.
Physicians who regularly ordered outpatient tests would be sought
as
limited partners. The memoranda informed prospective limited
partners
of the risks inherent in their investment. Additionally, the
memoranda
noted that, under California law, it would be illegal to offer or
pay
consideration to a physician to induce or compensate that physician
to
refer patients to a laboratory. The memoranda indicated that
a
partner's return on investment would be based on partnership
profits,
not the number of referrals. Based on assumptions regarding
business
volume and estimated costs, the memoranda told prospective
limited
partners that they could expect an annual profit of greater than 50%
of
their investment.
To varying degrees, Mr. Tasha, Mr. Welsh, and Ms. Hitchcock each
made
sales presentations to prospective limited partners in PPCL, Omni,
and
Placer. Generally, the Hanlester Network, while assuring
prospective
limited partners that patronage of partnership laboratories
was
voluntary, also asserted that it would be a "blueprint for failure"
if
partners did not refer. The scope of Ms. Hitchcock's
presentations
exceeded the parameters of the private placement memoranda.
3/ Ms.
Hitchcock told some prospective partners that they could expect
annual
returns in the range of 300-400% on the purchase price of their
shares,
that their investments were virtually guaranteed, that an "off
the
record" condition of sale was that the number of shares sold would
be
tied to the anticipated volume of business expected from the
prospective
limited partners, and that limited partners who did not refer
business
to the partnership laboratories would be pressured by the
Hanlester
Network to increase referrals or sell back their interest.
Ms. Hitchcock's compensation from the Hanlester Network included
a
percentage of the price of partnership interests she sold and
a
percentage of the dollar volume of tests referred by physicians to
the
partnership laboratories.
C. The Laboratory Management Agreements
The Hanlester Network told prospective limited partners in the
three
laboratories that it had negotiated a management subcontract
with
SmithKline Bio-Science Laboratories, Inc. (SKBL). SKBL contracted
to
provide laboratory management services to PPCL, Omni, and Placer.
Under the contract, each laboratory was responsible for
providing
facilities and equipment, repairing and maintaining laboratory
space,
and paying utility costs. SKBL was responsible for providing
and
compensating all laboratory staff, supervising operational
activities,
providing and servicing additional equipment, and handling
the
laboratories' billings and collections. The final version of
SKBL's
management contract with the laboratories provided that SKBL's
monthly
management fee would be $15,000 or 76% of all net cash
receipts,
whichever was greater.
The Hanlester Network entered into a corresponding support
services
agreement with SKBL, under which the Hanlester Network set up
and
managed the client accounts of the partnership laboratories.
The
Hanlester Network received no compensation for these services.
SKBL established accounts for each partnership laboratory into which
it
deposited the laboratory's earnings. Payments to SKBL, the
Hanlester
Network, and the partnership laboratories under the various
contracts
were made from these accounts. SKBL began paying the
partnership
laboratories based on expected, rather than actual,
collections. The
expected collections exceeded the actual
collections. SKBL treated the
resulting differences in payment as
advances which would be deducted
from future payments; however, it is not
clear if any effort at
reconciliation of the differences ever occurred.
Each partnership
laboratory paid limited partners annual returns of 50% or
better (except
for PPCL's first year when it paid 18%).
SKBL chose to perform much of the work sent to the
partnership
laboratories at its own facilities. Consequently, the
limited
partnership laboratories performed only 10 to 15% of the work sent
to
them.
While Dr. Huntsinger did not work for any of the Respondents, he
was
identified in a sales brochure as the Hanlester Network's
Medical
Director. Dr. Huntsinger also contacted prospective limited
partners to
inquire about their interest in the joint venture
laboratories. Dr.
Huntsinger owned 30 limited partnership shares in
PPCL. SKBL hired Dr.
Huntsinger as the Medical Director for Omni and
PPCL. Additionally,
after the laboratories became operational, Dr.
Huntsinger, at Mr.
Tasha's request, contacted various limited partners in
PPCL and Omni to
notify them that, based on comparisons with other limited
partners, they
were not referring sufficient business to the
laboratories. Dr.
Huntsinger also informed them that their failure to
make sufficient
referrals was damaging the interests of other limited
partners.
II. The ALJ Decision
Generally, the ALJ found that the Hanlester Network, PPCL, Omni,
and
Placer, by virtue of the acts (albeit unauthorized) of their agent
Ms.
Hitchcock, knowingly and willfully offered remuneration to physicians
to
induce them to refer program-related business in violation of
section
1128B(b)(2) of the Act. However, the ALJ found "unique
circumstances
here which preponderate against imposing an exclusion."
ALJ Decision at
95. Primarily, he found that the Respondents' liability
emanated
entirely from Ms. Hitchcock's conduct and that their
untrustworthiness
ended when Ms. Hitchcock resigned. Thus, the ALJ
concluded, no
legitimate remedial purpose would be served by excluding
these
Respondents from participating in Medicare or Medicaid.
The ALJ concluded that the I.G. did not prove that Mr. Lewand, Mr.
Tasha,
Mr. Welsh, Mr. Huntsinger, and the Keorle Corporation offered
limited
partnership shares (1) conditioned on physicians agreeing to
send laboratory
tests to the joint venture labs or (2) based on the
volume of business
physicians were willing to send. Additionally, the
ALJ concluded that
the I.G. did not prove that the Respondents disguised
payments to limited
partners for tests referred to the laboratories as
limited partnership
distributions on investments or that the Respondents
offered compensation in
return for tests. Thus, the ALJ concluded that
Mr. Lewand, Mr. Tasha,
Mr. Welsh, Mr. Huntsinger, and the Keorle
Corporation did not knowingly and
willfully offer or pay remuneration to
physicians to induce them to refer
program-related business in violation
of section 1128B(b)(2) of the Act.
The ALJ concluded that SKBL had not paid remuneration in return for
the
referral of laboratory tests either by making distributions to
the
limited partnership laboratories based on accrued rather than
actual
collections or by its management relationship with the Hanlester
Network
and the limited partnership laboratories. Thus, the ALJ
concluded that
none of the Respondents solicited or received remuneration in
return for
referring program-related business in violation of section
1128B(b)(1)
of the Act.
III. The Inspector General's Exceptions
The I.G. took exception to and asked that we vacate the following FFCLs:
202. The I.G. did not prove that SKBL's decision to make
distributions
to Respondents PPCL, Omni, and Placer based on expected
collections of
revenues rather than on actual collections constituted payment
of
remuneration to these Respondents and Respondent Hanlester in return
for
their referring laboratory tests to SKBL. 4/
204. The I.G. did not prove that the management relationship
between
Respondents Hanlester, PPCL, Omni, and Placer, and SKBL was intended
by
Respondents to disguise remuneration from SKBL to Respondents
Hanlester,
PPCL, Omni, and Placer in return for these Respondents'
referring
laboratory tests to SKBL.
217. Section 1128B(b)(1) of the Act prohibits a party from
knowingly
and willfully soliciting or receiving any payment in return
for
referring items or services which are compensated for by Medicare
or
Medicaid.
218. Section 1128B(b)(2) of the Act prohibits a party from
knowingly
and willfully offering or making any payment to obtain an agreement
to
refer, or referral of, items or services which are compensated for
by
Medicare or Medicaid.
219. In order to violate section 1128B(b)(2) of the Act, a party
must
knowingly and willfully offer to make a payment conditioned on
the
offeree agreeing to refer items or services which are compensated for
by
Medicare or Medicaid.
221. The I.G. did not prove that Respondents Lewand, Tasha,
Welsh,
Huntsinger, Hanlester, Keorle, PPCL, Omni, or Placer knowingly
and
willfully solicited or received remuneration to refer items or
services
which are compensated for by Medicare or Medicaid, in violation
of
section 1128B(b)(1) of the Act.
223. The I.G. did not prove that Respondents Lewand, Tasha,
Welsh,
Huntsinger, or Keorle knowingly and willfully offered or
paid
remuneration to physicians to induce them to refer items or
services
which are compensated for by Medicare or Medicaid, in violation
of
section 1128B(b)(2) of the Act.
226. The I.G. did not prove that Respondents Hanlester, PPCL, Omni,
or
Placer continue to be untrustworthy entities, or that they continue
to
jeopardize the integrity of federally-funded health care programs,
or
the welfare of beneficiaries and recipients of these programs.
227. In this case no exclusion is reasonably needed to satisfy
the
remedial purpose of section 1128 of the Act.
IV. Language and History of the Statute
Medicaid, Title XIX of the Act, was adopted in 1965 as a means
of
providing access to health care for the needy through federal and
state
cooperation. Medicare, Title XVIII of the Act, was initiated at
the
same time to provide insurance for the medical care of the aged,
blind,
or disabled. Although the schemes designed by Congress to
administer
the two programs differ greatly, Congress has long been concerned
about
containing costs and preserving integrity in both programs. See,
e.g.,
McDowell, The Medicare-Medicaid Anti-Fraud and Abuse Amendments:
Their
Impact on the Present Health Care System, 36 Emory L.J. 691,
699-705
(1987).
In 1972, specific penalties for fraud and kickbacks were added to
expand
provisions on false statements, by providing:
Whoever furnishes items or services to an individual for
which
payment is or may be made under this title and who
solicits,
offers, or receives any --
(1) kickback or bribe in connection with the
furnishing
of such items or services or the making or receipt
of
such payment, or
(2) rebate of any fee or charge for referring any
such
individual to another person for the furnishing of
such
items or services,
shall be guilty of a misdemeanor and upon conviction
thereof shall
be fined not more than $10,000 or
imprisoned for not more than one
year, or both.
See Social Security Amendments of 1972, Pub. L. No. 92-603
(1972),
sections 242(b) (Medicare) and 242(c) (Medicaid) (1972)
(identical
language).
Congress amended the law in 1977 to make a number of important
changes.
5/ The description of the prohibited conduct was restructured
into two
paragraphs. The terms "kickback," "bribe," and "rebate" were
subsumed
into the comprehensive term "remuneration." 6/ The breadth of
the
provision was emphasized by specifying that it applied to
actions
performed "directly or indirectly, overtly or covertly, in cash or
in
kind." The penalty was upgraded from a misdemeanor to a
felony. Thus,
the statute as amended in 1977 read as follows:
(1) Whoever knowingly and willfully 7/
solicits or receives any
remuneration (including any
kickback, bribe, or rebate) directly or
indirectly,
overtly or covertly, in cash or in kind --
(A) in return for referring an individual to a
person
for the furnishing or arranging for the furnishing
of
any item or service for which payment may be made
in
whole or in part under [Medicare or Medicaid], or
(B) in return for purchasing, leasing, ordering,
or
arranging for or recommending purchasing, leasing,
or
ordering any good, facility, service, or item for
which
payment may be made in whole or in part under
[Medicare
or Medicaid],
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 of any
item
or service for which payment may be made in whole or
in
part under [Medicare or Medicaid], 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 [Medicare or Medicaid],
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. 8/
The committee reports stated that the amendments were intended
to
strengthen penalties and to "clarify and restructure those provisions
.
. . which define the types of financial arrangements and conduct to
be
classified as illegal," because the prior provisions had "not
proved
adequate deterrents." H.R. Rep. No. 393, Part II, 95th Cong.,
1st Sess.
53 (1977); see also S. Rep. No. 453, 95th Cong., 1st Sess. 11
(1977).
Finally, in 1987 the Medicare and Medicaid provisions were
consolidated
without relevant change as the present section 1128B(b).
Medicare and
Medicaid Patient Protection Act of 1987, Pub. L. No. 100-93,
section 4
(1987). At the same time, an administrative remedy was
created in
addition to the criminal penalty, by authorizing exclusion from
Medicare
and Medicaid of any person found to have committed acts described
in
section 1128B. Id. at section 2. 9/
V. Legal Analysis of Section 1128B(b)(2)
The first major issue in this case is whether the distributions offered
by
the partnership laboratories to physician investors in a position to
refer
program-related tests were "remuneration . . . to induce"
referrals within
the scope of section 1128B(b)(2). Below, we outline
the ALJ's analysis
of the legal elements of a violation and then explain
why we disagree.
A. The ALJ's Analysis
The ALJ stated his overall conclusion as follows:
[I]n enacting section 1128B(b)(2), Congress
prohibited
agreements by health care providers which precluded them
from
making choices which were in the financial or quality of
care
interest of federally-funded health care programs and
their
beneficiaries and recipients. These prohibited
agreements
included bribes, kickbacks, and rebates and
similar
arrangements. The unifying characteristic of the conduct
which
Congress proscribed is that it consists of offers of
agreements
or agreements which foreclose the options of health
care
providers to order services which are cost-efficient and
which
are of the best quality. Offers or payments that were
intended
to influence provider choice, as opposed to agreements
which
foreclosed provider choice, are not within the scope of
the
legislative prohibition.
ALJ Decision at 62 (emphasis added, footnote omitted).
The ALJ's analysis in support of this conclusion may be summarized
as
follows:
o The evolution and legislative history
of section 1128B(b)
"demonstrates that . . . Congress was concerned with
offers and
agreements to pay kickbacks as a quid pro quo for referred
business. . .
. [N]othing . . . suggests that Congress intended to
proscribe
arrangements which encouraged parties to make referrals as opposed
to
unethical agreements which required such referrals." ALJ Decision
at
62.
o Since section 1128B(b) is a criminal
statute, the rules for
"interpreting and applying" section 1128B(b) are those
which would be
applied in a criminal enforcement proceeding.
Specifically, the section
must be construed narrowly and should not be
applied in a manner which
exceeds the reach established by federal courts in
criminal cases. Id.
at 65-66.
o The common and ordinary meaning of the
term "remuneration" is a
payment in return for a service, loss, or expense,
and, as used in
section 1128B(b), "the term means payment in return for a
quid pro quo."
Id. at 67 (footnote omitted).
o The juxtaposition of the term
"remuneration" with the words
"kickback," "bribe," and "rebate" means that
Congress intended that the
"proscribed remuneration be of a character similar
to kickbacks, bribes,
or rebates," and this is evidence that "any
remuneration" means
"traditionally unethical agreements." Id.
o Section 1128B(b)(2) must be read in
pari materia with section
1128B(b)(1). "Given the law's history and the
meaning of its language,
there would be no point in giving asymmetrical
application to the two
sections." Id. at 68 (footnote omitted).
Since section 1128B(b)(1)
prohibits remuneration "in return for" referral, it
"plainly prohibits
agreements." Id.
o Even though 1128B(b)(2)(A) is "arguably
ambiguous" and "when
read in isolation, could be construed to support the
I.G.'s 'inducement
equals encouragement' theory of unlawfulness," the "plain
meaning" of
1128B(b)(2)(B), like 1128B(b)(1), is that "payments to induce
agreements
to refer business are unlawful." Therefore, any possible
ambiguity in
1128B(b)(2)(A) is "eliminated when it is read in context, as it
should
be." Id. at 68-69.
o "The courts have not held that proof of
an agreement to refer
program-related business is a prerequisite to
establishing a violation
of section 1128B(b)(2)," but the cases in which
violations of this
section or its predecessor have been found "involve offers
of agreements
or agreements . . . . None of the cases have found
unlawful an offer or
payment which is intended to encourage referrals, but
which does not
require referrals as a quid pro quo . . . ." Id. at
69.
o The I.G.'s analysis "relies on a
literal application of the
phrase 'to induce' without due regard to the
context in which it is
used, legislative history, the maxims of statutory
construction, and
judicial decisions which have applied the Act to specific
facts." The
I.G.'s analysis "incorrectly presumes that the Act sought
to prevent any
payments which influenced or encouraged a provider to refer
business,
when in fact the Act was directed at agreements to refer
business." Id.
at 71-72.
B. Summary of our analysis regarding 1128B(b)(2)
The ALJ erred in concluding that section 1128B(b)(2) proscribes
only
offers of agreements or agreements precluding provider choice. 10/
His
analysis is fundamentally flawed and, in our view, appears
driven
primarily by a concern for the possible effects of adopting
the
alternative the I.G. proposed (that mere "encouragement" is
sufficient
to constitute a violation).
We begin our analysis with the statutory language, its context and
its
purpose. We then consider what use may be made of the principles
of
statutory construction and the legislative history, before turning
to
the case law. The main points of our analysis are summarized here
and
discussed more fully in the following section.
a) We find that the ALJ failed to give effect to the
provision
as written by Congress. While the words "to induce"
and
"remuneration" may have more than one possible meaning, the
ALJ
has not chosen among the ordinary meanings of the words
used,
but rather has introduced an element (i.e., an
agreement
precluding provider choice) which cannot reasonably be
derived
from those words. The word "induce" in this context is
properly
understood to mean something more than mere encouragement,
but
cannot reasonably be read to require an agreement
precluding
provider choice.
b) Tenets of statutory construction and legislative history
are
to be used, at most, to resolve ambiguity or uncertainty
among
possible meanings of the statutory language, i.e., to
clarify
but not to evade or rewrite. Further, we find that
the
principles of statutory construction on which the ALJ relied
are
either inapplicable or incorrectly applied. While it
is
certainly true that narrow construction of criminal statutes
is
to be preferred in selecting between two
possible
interpretations, even criminal law must be construed as
written.
The law, though broad, is not therefore vague
or
unconstitutional. Moreover, it is not necessary to read in
a
requirement of an agreement in order to avoid absurd
results.
"Remuneration" was added to the statute precisely to broaden
it
beyond traditionally recognizable corrupt payments, such
as
bribes and kickbacks, and the use of the principle of
ejusdem
generis to override structure and plain meaning is
improper.
The principle of in pari materia does not mean that the
phrase
"in return for" in 1128B(b)(1) should be imported
into
1128B(b)(2) and then be read to mean "as a condition for . .
.
agreeing to refer." ALJ Decision at 81.
c) We find that a thorough review of the legislative
background
clearly shows that Congress' concerns were wider than
agreements
precluding provider choice. In fact, the legislative
history
fully supports the plain meaning of the law as extending to
"any
remuneration" intended "to induce" referrals.
d) We find that, in reviewing the criminal cases applying
the
statute, the ALJ incorrectly focused on the facts with which
the
cases dealt, rather than on the standards which the
courts
articulated. No court has limited the reach of the statute
to
agreements precluding provider choice, as the ALJ
himself
acknowledged. Furthermore, the facts of the cases do
not
necessarily involve such agreements.
C. Discussion
1. The plain meaning of the term "to induce" does
not
imply the addition of an element of agreement to
the
statutory language.
The language of the provision being applied here, which should be
the
starting point in any analysis, does not refer to agreements at all,
nor
does it say anything about preclusion of provider choice. The
ALJ
glosses over this essential point. Section 1128B(b)(2) states,
in
relevant part:
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 . .
.
[program-related business] . . . shall be guilty of a felony .
.
. .
The I.G. asserted that the term "to induce" is synonymous with
"to
influence" or "to encourage," relying on dictionary definitions.
I.G.
Brief (Br.) at 40. The ALJ's analysis is premised on the
faulty
assumption that one must read the statute either to prohibit
agreements
which preclude providers from making choices (his approach) or
to
prohibit any encouragement of a referral (accepting the
I.G.'s
alternative definition). The ALJ apparently feared that
the
interpretation of "induce" as "encourage" might lead to absurd or
unjust
results. 11/ We do not consider this either/or approach to
be
necessary. "Induce" has meanings stronger than to encourage which
are
consistent with the purpose of the Act and do not lead to an
absurd
result.
The term "induce" is given the following meaning --
To bring on or about, to affect, cause, to influence to an
act
or course of conduct, lead by persuasion or reasoning, incite
by
motives, prevail on. . . .
Black's Law Dictionary 697 (6th ed. 1990) (Black's).
"Induce" is nowhere defined simply by reference to influence
or
encouragement. Thus, we conclude that "to induce" connotes an intent
to
exercise influence over reason or judgment in an effort to cause
a
desired action and is on its face a stronger term than merely
"to
encourage" or "to influence." While "encourage" or "influence"
may
sometimes loosely be used to substitute for "induce," Congress
may
reasonably be understood to have used the term with its own
unique
connotations which are different from those associated with
"encourage"
or "influence."
Words in a statute are presumed to be used in their ordinary and
usual
sense. See Caminetti v. United States, 242 U.S. 470 (1917);
United
States v. Ron Pair Enterprises, Inc., 489 U.S. 235 (1989). Where
those
words have a plain meaning, our role is simply to enforce the
law
according to its terms. If the language of the statute itself is
clear,
then that language is conclusive, especially absent a clearly
expressed
legislative intent to the contrary. See Russello v. United
States, 464
U.S. 16 (1983); United States v. Wong Kim Bo, 472 F.2d 720 (5th
Cir.
1972). We find that the ordinary and common meaning of "to induce"
is
as we have stated. Therefore, we are bound to enforce the
statute
without addition or subtraction from its terms.
This conclusion is bolstered by the context, since the statutory
language
itself refers to "remuneration . . . to induce." The reference
to
remuneration implies that the inducement must consist of more than
simple
encouragement or verbal persuasion. The meaning of "any
remuneration"
is discussed further below, but for these purposes it is
clear that what the
words of the statute forbid is offering or paying
something of value with the
intention of causing the recipient to make
referrals because of the influence
of that remuneration over the
recipient's reason or judgment. Thus, we
agree with the ALJ that any
ambiguity in the meaning of "induce" is
eliminated by reading it in the
statutory context, but we disagree that that
context anywhere implies an
agreement element. 12/
The ALJ's conclusion that section 1128B(b)(2) prohibits only offers
of
agreements or agreements precluding provider choice is not
consistent
even with typical kickback arrangements. In such schemes,
the provider
may choose not to make a referral or may refer to any other
provider.
The arrangement is simply that, any time the provider does refer to
the
offeror, he expects to receive a kickback. The potential harm is
that
the provider's judgment will not be based solely on
legitimate
considerations such as cost, quality, and the need for the
services, but
will at least in part be based on the provider's expectation
that he
will receive the kickback. The obvious link between the act
of
referring and the payment of the kickback is not tantamount to
an
agreement precluding provider choice.
Our analysis furthers the statute's underlying purpose, shown both by
its
own terms and by its relationship with other parts of the Social
Security
Act, of removing a conflict of interest in medical
decision-making, where the
physician's financial self-interest may
override the best interests of the
patients and the programs. The
potential for conflict of interest
exists between patients and
physicians in all fee-for-service
arrangements. However, in the case of
private patients, the personal
relationship with the physician may serve
to motivate the physician to offer
the best referral in terms of quality
and economy and the private patient is
motivated to save money so that
disclosure of the physician's interest in the
suggested referral might
prompt an inquiry as to whether better alternatives
existed. The
federal programs detach the payor from the patient,
perhaps even more so
than private insurance. Furthermore, the elderly
and the poor are less
likely to have the mobility, financial resources, and
wherewithal to
challenge their physicians or to make any effective use of
information
disclosed to them. Nor do they have any financial
motivation to take
such action. For this reason, the Act contains
provisions directly
combatting overutilization. See, e.g., section
1835(a)(1)(B)
(certification of services as medically required); section
1861(k)
(utilization reviews of hospital admissions); section 1902(a)(30)
(state
plan provisions to avoid "unnecessary utilization" and to
assure
"efficiency, economy, and quality of care"). The
anti-kickback
provisions complement such efforts to control utilization and
quality by
prohibiting financial incentives which aim at inducing providers
to make
referrals for reasons other than medical necessity, quality of care,
or
economy.
In summary, the words of the statutory provision, read in context and
in
light of the internal evidence of their purpose, lead directly to
our
conclusion that section 1128B(b)(2) does not require proof of
an
agreement precluding provider choice in order to establish a
violation.
2. No resort to principles of statutory construction
is
necessary or justifies adding an agreement element.
a. The rule of lenity
Since we find no ambiguity about whether an agreement is required as
an
element of a section 1128B(b)(2) violation, we see no reason to
seek
guidance from the various principles developed over the years as aids
in
alleviating uncertainty. We recognize that this is a criminal
statute.
Where the language is equally susceptible of two meanings, it
is
appropriate in criminal cases to prefer the narrower application, as
we
have done above in reviewing the meaning of "to induce."
Nevertheless,
it is never permissible to construe so narrowly that what
Congress
intended to embrace is excluded -- the object of interpretation even
of
a criminal statute is to adopt the "sense of the words which
best
harmonizes with the context and promotes in the fullest manner
the
policy and objects of the legislature." United States v. Hartwell,
73
U.S. 385, 396 (1867).
The ALJ relied on the "rule of lenity" articulated in United States
v.
Enmons, 410 U.S. 396 (1973), which provides that criminal
statutes
should ordinarily be construed to apply narrowly. See ALJ
Decision at
66. The Court in Enmons held that the Hobbs Act (18 U.S.C.
1951),
imposing criminal sanctions for obstructing interstate commerce
by
robbery or extortion, did not reach violent acts committed in
connection
with legitimate collective bargaining objectives. In
reaching this
conclusion, the Court reasoned that it would take more explicit
language
to lead to a conclusion that Congress intended the federal
government to
police the orderly conduct of strikes. The Court then
concluded that
ambiguity in applying a criminal statute was resolved in favor
of
lenity. However, the rule of lenity as an interpretive aid
in
construing criminal statutes is employed only where "reasonable
doubt
persists about a statute's intended scope even after resort to"
its
language, structure, and legislative history. Moskal v. United
States,
498 U.S. , 111 S.Ct. 461, 465 (1990). We do not find that
the plain
meaning and context of the words "remuneration . . . to
induce"
referrals leaves reasonable doubt or ambiguity about whether its
scope
is restricted to agreements precluding provider choice. The rule
of
lenity is not an independent source of a requirement to narrow
language
in a criminal provision simply because it is broadly written.
b. Overbreadth
The anti-kickback statute, as written, is broad in scope. The
agreement
element imported into the statute by the ALJ, as well as
his
unjustifiably restrictive reading of the term "remuneration,"
discussed
below, appear to represent an effort to narrow the intended breadth
of
the statute. Yet, the ALJ himself pointed out in his prehearing
ruling
that "breadth is not synonymous with ambiguity." ALJ Ruling
on
Respondents' Motion and Request for Ruling (May 8, 1990) at 6.
The
terms of the statute describe a wide range of conduct, but they
are
neither unclear nor vague. Attacks on the statute for vagueness
have
been repeatedly rejected by the courts. See United States v. Bay
State
Ambulance and Hospital Rental Service, Inc., 874 F.2d 20 (1st
Cir.
1989); United States v. Perlstein, 632 F.2d 661 (6th Cir. 1980);
United
States v. Tapert, 625 F.2d 111 (6th Cir. 1980); Hancock, supra.
The Bay State court held that --
When the Medicare Fraud statute is analyzed under
the applicable
standards, and in light of the fact
that inducement is the gravamen
of the offense, the
statute passes constitutional muster even
though the
criminal nature of the statute requires "a
relatively
strict test" for constitutionality. . .
. [T]he statute is an
economic regulation
which allows for greater latitude by
Congress--the
Medicare Fraud statute is directed at drains on the
public fisc.
874 F.2d at 32 (quoting Village of Hoffman Estates v. The
Flipside,
Hoffman Estates, Inc., 455 U.S. 489, 499 (1982)). The court
also
pointed out that the statute does not impact on First Amendment
rights,
which means that challenges to the law for vagueness would be
judged
only as applied in the instant facts, not in hypothetical
situations.
Id. at 32-33 (citing Maynard v. Cartwright, 486 U.S. 356,
361-363
(1988)). 13/ The court emphasized that the "key to a Medicare
Fraud
case is the reason for the payment" and that the focus on the intent
to
induce operates to avoid any risk of inadvertent violations.
c. "Absurd" results
Some cases have held that a statute should not be interpreted to intend
an
absurd result. However, it is a legislative not a judicial role
to
rewrite the law. We must take the law as Congress chose to write it
and
apply that law to the facts of each particular case. If a
particular
case, while technically violating the terms of the statute,
clearly
oversteps the bounds of legislative concerns addressed by the law
in
such a way as to lead to injustice or absurdity, we are instructed
to
presume "that the legislature intended exceptions to its language
which
would avoid results of this character." United States v. Kirby,
74 U.S.
482, 487 (1868). However, we have no mandate to amend the law
to
introduce a bright line test of our own invention in the hope
of
preventing such potential misapplication. We do not see that the
case
before us presently raises any such concerns.
To the extent that some arrangements that violate the statute
have
beneficial aspects, they may nevertheless fall within the
broad
proscription. In protecting federal funds spent to purchase
health
care, Congress was free to proscribe practices which held the
potential
for abuse even if some innovative or efficient arrangements
were
foreclosed as a result. Thus, it does not avail to argue that the
law
cannot mean what it says because on its face it may impact some
"common
and legitimate" practices in the health care industry. "Common"
does
not necessarily mean "legitimate." As discussed below,
Congress
determined after extensive hearings that fraudulent and
abusive
practices were common, in fact rampant, in the health care
industry.
Once federal law forbids a practice it is no longer "legitimate,"
even
if it had been previously. Further, Congress provided mechanisms
for
preserving particularly useful or harmless arrangements by providing
for
safe harbor regulations and by enacting specific exceptions. 14/
d. "Remuneration"/Ejusdem generis
The ALJ reasoned that the statutory language relating to the
required
remuneration supported his analysis in two respects. He
defined
"remuneration" as paying an equivalent for services and
extrapolated
from the concept of equivalence to the need for some quid pro
quo and
thence to the requirement of an agreement. Thus, the ALJ
stated:
The common and ordinary meaning of "remuneration" .
. . is a
payment in return for a service, loss, or
expense. As used within
section 1128B(b), the
term means payment in return for a quid pro
quo.
ALJ Decision at 67 (footnote omitted). Further, he considered that
the
phrase "including any kickback, bribe, or rebate" evidenced an
intention
to limit the kinds of remuneration to "traditionally
unethical"
arrangements. He concluded that "traditionally unethical"
arrangements
are those with the effect of restricting providers' freedom in
making
referrals and therefore the "remuneration" language reflects
an
intention to prohibit only agreements precluding provider choice.
Certainly the term "remuneration" does connote the idea of value paid
in
exchange for something (more than, for example, the word "payment"
might
have). Therefore, just as we discuss with regard to the phrase
"in
return for" that appears in section 1128B(b)(1), we
understand
"remuneration" to imply a requirement that the offer or payment
must
have some intentional connection with the referrals sought.
However, we
find no support in this for the idea that what must be sought to
be
induced by the offer or payment of a remuneration must be an
agreement
by which a provider will be required to make referrals or, as the
ALJ
ultimately articulated it, an agreement precluding provider
choice.
Rather, what the offeror must be seeking to induce by the
proffered
remuneration is a referral.
The ALJ reads far too much into the fairly straightforward
word
"remuneration" and ignores the surrounding language of the
statutory
provision. The statute prohibits "any remuneration (including
any
kickback, bribe, or rebate) directly or indirectly, overtly or
covertly,
in cash or in kind . . . ." All the emphasized portions
suggest
language of inclusion rather than limitation, expansively referring
to
"any remuneration" and providing for any conceivable form or manner
of
offer or payment (overtly, etc.).
The most logical construction of the parenthetical "including
any
kickback, bribe, or rebate" is that it was intended to make certain
that
no actions reached by the previous statute would be lost from
coverage
by the change in language intended to broaden the scope.
This
conclusion is particularly sound in light of the legislative
history,
discussed more fully below, showing that the term "remuneration"
was
added to broaden the pre-existing language which referred only
to
kickbacks, bribes and rebates. It makes no sense then to hold
that
Congress retained these terms to defeat its own purpose of
broadening
the scope of the provision. The courts have read the
parenthetical as
preventing a narrow reading of "remuneration" to apply only
where the
recipient provides some professional service in exchange for
the
payment.
By including such items as kickbacks and bribes, the
statute
expands "remuneration" to cover situations
where no service is
performed. That a
particular payment was a remuneration (which
implies
a service was rendered) rather than a kickback, does
not
foreclose the possibility that a violation
nevertheless could
exist.
U.S. v. Greber, 760 F.2d 68, 71 (3rd Cir. 1985), cert. denied, 474
U.S.
988 (1985) (emphasis added). 15/
The ALJ, however, said that the term "any remuneration" was "qualified .
.
. with the words 'kickback,' 'bribe,' and 'rebate'" and that
the
"juxtaposition of these terms in the Act means that Congress
intended
that . . . the proscribed remuneration be of a character similar
to
kickbacks, bribes, or rebates." ALJ Decision at 67. He cited
the
concept of ejusdem generis, which provides that a general term
connected
with a list of specific examples is usually intended to be limited
to
things similar in nature to the examples. If the statute
read
"remuneration, such as kickbacks, bribes, and rebates," or
"kickbacks,
bribes, rebates, or other remuneration," then ejusdem generis
might
usefully suggest that the offer or payment must be of something
similar
to kickbacks, etc. The parenthetical here, however, cannot
reasonably
be read as a limiting list of examples. In this context, we
find that
"including" is used to make clear that remuneration encompasses the
acts
named, but not to imply that remuneration is restricted to them. 16/
The cases on which the ALJ relies for the applicability of ejusdem
generis
are not usefully applied here. For example, in Auto-Ordinance
Corp. v.
United States, 822 F.2d 1566 (Fed. Cir. 1987), the court
interpreted the word
"accessories" to firearms to include
"compensators," even though they were
not named among a list of
examples, because they were similar in nature to
"recoil pads," which
were specifically included. The case thus would
support the inclusion
of anything similar in nature to a kickback, bribe or
rebate, but does
not support the ALJ's constricted reading of
remuneration. Schreiber v.
Burlington Northern, Inc., 472 U.S. 1
(1985), construes the prohibition
of "fraudulent, deceptive, or manipulative
acts or practices" in tender
offers to reach only manipulation involving
deception or non-disclosure.
In so doing, the Court relied on a prior holding
that "manipulative" is
"virtually a term of art . . . [in] the securities
markets . . .
[meaning acts] designed to deceive or defraud investors. . .
." Id. at
6 (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199
(1976)). We
are not dealing here with terms with technical
meanings.
The cases cited for the principle that specific terms enumerated
as
illustrative of a general term should be read to limit the general
term
to things of similar nature are also not helpful in understanding
the
language at issue. In Central Forwarding, Inc. v. ICC, 698 F.2d
1266,
1279 (5th Cir. 1983), the grant of authority to regulate, inter
alia,
"qualifications and maximum hours of service of employees" in
the
trucking industry was held not to extend to regulating employees'
wages.
The court rejected the extension of authority to promote "continuous
and
adequate" service to permit wage regulations in the face of the
explicit
and limited regulatory authority relating to employees. The
court's
conclusion not only made structural sense but was supported by
the
overall complex legislative scheme involved and by extensive
legislative
history, none of which we find here to support the ALJ's
construction of
"remuneration." Trinity Services, Inc. v. Marshall, 593
F.2d 1250 (D.C.
Cir. 1978), involved whether severance pay from a successor
contractor
to employees of its predecessor not rehired by it is covered by
the term
"fringe benefits." The statute listed specific benefits (with
severance
pay not among them) followed by "other bona fide fringe
benefits." The
court found that severance pay required from an employer
to its own
employees would be covered, but that an obligation undertaken by
a
successor toward another's employees is not a "fringe benefit,"
because
it is not similar in nature. We are not construing a similar
catchall
phrase at the end of an illustrative list. Rather, as
explained above,
we read the parenthetical as expanding the reach of
"remuneration"
beyond possible narrow constructions. Finally, the
Supreme Court case
of Harrison v. PPB Industries, Inc., 446 U.S. 578 (1980),
which the ALJ
cited, describes ejusdem generis as merely an "instrumentality"
in the
search for the meaning of words. In rejecting its use in
interpreting
the phrase "any other final action," the Court specifically
pointed to
the "expansive" word "any." Id. at 589 (emphasis in
original). The
case is thus strong support for our broad reading of the
phrase "any
remuneration."
Finally, even if we were to treat kickbacks, bribes, and rebates as
the
general type of remuneration to be prohibited, this approach would
not
lead us to conclude, as the ALJ did, that this list refers only
to
traditionally corrupt or unethical agreements involving
agreements
precluding provider choice. As we note elsewhere, even the
specific
arrangements listed in the statute are not necessarily premised
on
agreements precluding provider choice. Moreover, the term "rebate"
does
not on its face suggest a corrupt or unethical arrangement.
Rebates are
common and acceptable in the general marketplace. Rebates
become
corrupt and unethical, however, in the context of the Medicare
and
Medicaid programs because of the potential harm from affecting
provider
choice.
Thus, we conclude that the phrase "any remuneration," considered
in
context here, can best be understood as a comprehensive reference
to
anything of value employed with the proscribed intent of
inducing
referrals.
e. In pari materia
The ALJ reached into section 1128B(b)(1) for the language "in return
for,"
read into it the element of "agreement," and then injected it into
(b)(2) by
claiming to read the two sections in pari materia. The ALJ
reasoned
that there was no point to an asymmetrical application of
sections (b)(1) and
(b)(2). As discussed below, the ALJ's expansion of
"in return for" to
mean conditioned on an agreement precluding provider
choice is not supported
even in relation to (b)(1). Even if the phrase
"in return for" did have
such a meaning, there is no reason to add an
element to (b)(2) that goes
beyond the actual language of that section.
Statutes are read in pari materia where they relate to the same
subject
matter and the meaning of one statutory provision is regarded
as
resolving questions concerning the meaning or application of the
other.
For example, the words or phrases used in one statutory provision
are
given the same meaning as the words or phrases in another found to be
in
pari materia. Haig v. Agee, 453 U.S. 280 (1981); Northcross v. Bd.
of
Educ. of Memphis City Schools, 412 U.S. 427 (1973); Forman v.
United
States, 767 F.2d 875 (Fed. Cir. 1985); see generally Sutherland
Stat.
Const., sections 51.01-51.03 (4th ed.). The doctrine of in pari
materia
is not properly resorted to as an interpretative aid here. We
are not
dealing here with separate statutory provisions one of which is
unclear
in meaning or application, but rather with subsections of one
statutory
provision. Moreover, the two subsections deal with different
classes of
persons, i.e., those who receive or solicit remuneration ((b)(1))
and
those who offer or pay remuneration ((b)(2)).
In Wong Kim Bo the court held that statutes should not be interpreted
so
that the language that Congress has used is rendered meaningless.
The
court stated:
[W]here Congress includes particular language in one section
of
a statute but omits it in another section of the same Act, it
is
generally presumed that Congress acts intentionally
and
purposely in the disparate inclusion or exclusion.
472 F.2d at 722; see also Estate of Bell v. C.I.R., 928 F.2d 901 (9th
Cir.
1991); accord I.N.S. v. Cardoza-Fonseca, 480 U.S. 421, 432 (1987).
17/
This presumption of intentionality is particularly applicable here
since the
preexisting statute treated the offeror and recipient
together, and the 1977
amendments introduced a new structure by dividing
the proscribed conduct into
separate sections. The only explanation for
the new division must be
that some difference was introduced into their
treatment. That
difference appears in the very distinguishing language
which the ALJ attempts
to erase.
The ALJ suggested that his construction was more symmetrical.
Nowhere
has Congress indicated an interest in symmetry here. Nor is the
ALJ
correct that different treatment is senseless. 18/ It is
perfectly
reasonable that the "payor," who is offering remuneration in an
effort
to find a referral source responsive to his inducement, might be held
in
violation for his efforts to cause providers to divert
referrals,
without inquiring into the state of mind of those providers
he
approached. A "payee," on the other hand, who controls a
referral
stream, may reasonably be considered to violate the law at the
point
when he exchanges those referrals for a proffered remuneration
or
solicits such an exchange.
3. The legislative history of section
1128B(b)(2)
further supports our rejection of agreement as
an
element of the violation.
Nothing in the legislative history suggests that an agreement between
the
offeror and the referral source is a required element of the
statute.
The ALJ found, as the Respondents asserted, that the
legislative history does
not indicate that Congress intended to reach
beyond "offers and agreements to
pay kickbacks as a quid pro quo for
referred business." ALJ Decision at
62; Hanlester Br. at 12. But the
broader reach derives from the very
words of the statute enacted by
Congress. Neither the Respondents nor
the ALJ cited to any discussion
in the numerous reports on the 1977
amendments that demonstrates any
intention to impose such a limitation.
Rather, they rely on the
examples cited below as evidence that the
legislators were aiming at
such a narrow target, while simply ignoring the
examples of abuse in the
same legislative record that do not fit the pattern
at which they would
prefer the law to have been aimed. On careful
reading of the
legislative record, we could find no explicit or implicit
intention to
impose in the law the requirement of an agreement. In
fact, the
sponsors repeatedly refer to the intention of the 1977 amendments
as
being an expansion of the anti-kickback prohibitions.
The pre-existing 1972 law had aimed at providing penalties for
practices
"which have long been regarded by professional organizations
as
unethical, as well as unlawful in some jurisdictions, and . . .
[which]
contribute appreciably to the cost of the medicare and
medicaid
programs," including "such practices as the soliciting, offering,
or
accepting of kickbacks or bribes, including the rebating of a portion
of
a fee or charge for a patient referral." H.R. Rep. No. 231, 92nd
Cong.,
1st Sess. 107-108 (1971), reprinted in 1972 U.S. Code Cong. & Ad.
News
4989, 5093.
In subsequent years, repeated hearings, investigations, and
reports
documented that, despite the 1972 enactment, both programs continued
to
be compromised by fraudulent practices. 19/ The legislators
expressed
frustration with the ineffectiveness of the efforts of
professional
organizations, state programs, and federal agencies to deter
abuse under
the existing law. See Senate Fraud Hearing at 413
(Statement of Sen.
Domenici), 799-800 (Statement of Sen. Percy).
A wide range of practices and arrangements were implicated, among
them
"Medicaid mills" shuffling patients among numerous providers
for
low-quality care (Senate Fraud Hearing at 414-415) and
disguised
kickbacks between pharmacies and nursing homes, including
overlapping
ownership (Kickbacks Report at 7-22). In the clinical
laboratory area,
testimony described arrangements made by medical clinics for
a flow of
tests to laboratories in which the clinic owners may have an
interest
(Clinical Lab Fraud Report at 5-6), excess profits generated
through
brokering of tests to reference laboratories (Id. at 31-34),
and
unauthorized, discriminatory and excessive laboratory billing (Id.
at
23-28); Senate Fraud Hearing at 417-425 (Testimony of Val
Halamandaris,
Committee Associate Counsel). The Clinical Lab Fraud
Report concluded
that at least 20%, and possibly 50%, of the $213 million
then spent by
Medicaid and Medicare on clinical laboratory services was
"wasted," due
to fraudulent practices, kickbacks, or unnecessary
services. Clinical
Lab Fraud Report at 47-48. The Kickbacks
Report similarly found that
kickback and rebate practices were "rampant"
throughout the Medicaid
system and harmed the program both by "increasing the
cost" and by
"undermin[ing] the quality of services which are offered since
operators
become more concerned with rebates than with care." Kickbacks
Report at
2. The Kickbacks Report concluded with "a plea for aggressive
action to
root out fraud and abuse . . . ." Id.
The 1977 amendments were intended to respond to this call and
close
perceived loopholes. During the floor debate, the principal
author of
the bill explained its purpose:
In broadening these criminal provisions, your committee
sought
to made clear that kickbacks are wrong no matter how
a
transaction might be constructed to obscure the true purpose
of
a payment . . . [T]he committee stresses the need to
recognize
that the substance rather than simply the form of a
transaction
should be controlling.
123 Cong. Rec. 30280 (1977) (Statement of Rep. Rostenkowski)
(emphasis
added). 20/
In redrafting the fraud provisions, Congress had before it
considerable
testimony about growing sophistication in the structuring of
referral
arrangements. For example, Frank Holstein, a New Jersey
state
investigator, testified, from his experience, that there were
"many
efforts made to cover up rebates and kickbacks and to justify them
in
very nice euphemistic terms." Senate Fraud Hearing at 455. He
went on
to describe how such rebates resulted in poor quality:
Obviously, the physicians -- those who get a kickback from
the
laboratory or who have a proprietary interest in the
laboratory
-- have little or no motivation to go to that lab and to
take a
look to see if the quality of the testing and the conditions
are
good or bad. Their eyes are focused on the "greens" . . .
.
Id. at 458. Samuel Skinner, U.S. Attorney, Northern District
of
Illinois, similarly pointed out:
They have become very sophisticated in the health
care field. They
know what cases we are
prosecuting. They are now using their
ingenuity in an attempt to get around us.
Joint Hearing at 32.
A review of the abuses described in hearings and reports
preceding
enactment of the 1977 amendments shows that the legislators were
casting
a very wide net and many of the arrangements investigated did
not
necessarily involve agreements precluding provider choice. We thus
find
no support for the ALJ's conclusion.
The ALJ cited examples, from the Kickbacks Report, of
coercive
preconditions imposed by some nursing homes on pharmacists and of
covert
agreements between some laboratories and physicians to demonstrate
that
Congress intended to reach only "fraudulent or unethical
agreements."
ALJ Decision at 64. However, the same report describes
abusive
arrangements which do not involve agreements or preconditions.
For
example, pharmacists were concerned about "the conflict of
interest
presented where the ownership of the pharmacy and the nursing
home
overlap," without mentioning referral agreements as a condition of
such
ownership. Kickbacks Report at 13; see also Senate Fraud Hearings
at
978-79 (Statement of Sen. Chiles on physician ownership interest in
home
health agencies). Also, investigators set up a sting operation in
the
form of a storefront clinic and reported that ten out of twelve
clinical
laboratories which approached them "offered some form of inducement
or
kickback . . . [ranging] from an educational program for physicians .
.
. to maximize returns from public aid, to cash rebates of more than
50
percent. . . ." Kickbacks Report at 23. The report does not
suggest
that the offers were made conditional on the physicians' agreement
to
refer to or only to the offerors. One state investigator reported
that
"some laboratories either returned a set percentage of medicaid
test
fees to some of the doctors referring business to their laboratories
or
indulged in some other financial inducement-type payments to the
doctors
. . ." without any indication that the doctors involved made
agreements
to refer or were precluded from referring elsewhere. Senate
Fraud
Hearings at 450-51 (Statement of Mr. Holstein).
Many arrangements described as kickbacks involved remuneration
(whether
cash percentages, phony consulting fees, or in kind "gifts") that
varied
in response to the volume of referrals, but others were
constant
payments (for example, $950 for a small space or a flat $5000
payment
per year) or varied for other reasons (for example, use of a lower
price
list for a physician's private patients or free drugs or cosmetics
for
nursing home staff). See, e.g., Kickbacks Report, passim.
Obviously in
all these cases, the persons making or offering to make these
payments
to referring doctors did so in the hope or expectation of motivating
the
doctors to maintain or increase referrals to them. Presumably,
the
payments might cease or the offers be withdrawn at some point if
they
did not result in profitable referral streams. However, the
important
point is that the descriptions of these schemes nowhere suggest
that
they are abusive only when the doctors to whom the offers are made
agree
to be bound in exchange to refer to the offerors.
As support for his concept that kickbacks must involve preclusion
of
physician choice, the ALJ also quoted from findings that such
kickbacks
schemes were so widespread as to almost foreclose opportunities
for
ethical laboratories to obtain Medicaid accounts "unless they offer
a
kickback." ALJ Decision at 64-65 (quoting from Clinical Lab
Fraud
Report at 47). That some physicians were unwilling to direct
business
to laboratories that would not offer kickbacks does not mean
that
laboratories offering kickbacks were to be punished only if
the
kickbacks were conditioned on physicians agreeing to foreclose
their
options. It makes no sense to infer a requirement of an
agreement
precluding provider choice from the fact that unscrupulous
laboratories
and physicians were so prevalent as to almost bar the honest
from the
marketplace.
4. The case law does not support a conclusion that
an
agreement precluding provider choice is a
necessary
element of a violation of section 1128B(b)(2).
The ALJ cited certain federal criminal cases, applying the
anti-kickback
provisions, as support for his conclusion that an agreement
precluding
provider choice is a necessary element of a violation. 21/
The ALJ
stated --
The courts have not held that proof of an agreement
to refer
program-related business is a prerequisite
to establishing a
violation of section
1128B(b)(2). However, the cases in which
courts have found violations of section 1128B(b)(2) or
its
predecessor involve offers of agreements or
agreements to refer
program-related business.
In each of these cases the defendants
were found to
have purchased referrals through some remuneration
scheme or to have offered to purchase referrals. None of the
cases
have found unlawful an offer or payment which
is intended to
encourage referrals, but which does
not require referrals as a quid
pro quo for
acceptance of the offer or payment.
* * *
Although the payment schemes may vary, the common thread of
the
cases is that the unlawful schemes are premised on
the
provider's agreement to refer program-related business to
the
payor.
ALJ Decision at 69 and 71.
In FFCL 219, the ALJ concluded that a violation of section
1128B(b)(2)
occurred when there was an "offer . . . conditioned on the
offeree
agreeing to refer" program-related business. This formula
differs from
that articulated and applied elsewhere in the ALJ Decision that
the
requisite agreement is one that precludes provider choice. In
relating
the facts of this case to the facts of the court cases, the ALJ
appears
to have been most impressed by the fact that, under the
Hanlester
scheme, a physician-investor could participate in the partnership
and
receive payments without ever making any referrals to the
laboratories.
Thus, he considered the payments to limited partners merely
to
"encourage" referrals, but not to be "conditioned" on them,
and
therefore to fall outside the established case law. However, the
facts
found by the ALJ evidence a greater connection between the payments
and
the referrals here than mere encouragement. 22/ Moreover, the case
law
reaches remuneration not "conditioned" on an agreement to refer.
In Bay State, for example, a municipal employee received payments as
a
consultant to an ambulance company and played a role in the award of
the
city's contract for ambulance services to that company. There,
the
court rejected contentions that no showing had been made that (1)
the
employee received any more than his consultant services were worth,
(2)
the consulting contract with the ambulance company was entered into
with
any specific intent that the employee influence the bid process (he
had
received payments even before the bid process began), and (3)
the
payments to the employee were conditioned on his affecting the
city
contract. The court emphasized that the "gravamen of Medicare
Fraud is
inducement." Id. at 29. The court said it did not even
matter that the
payments might reflect the value of his services because
"[g]iving a
person an opportunity to earn money may well be an inducement to
that
person to channel potential Medicare payments towards a
particular
recipient." Id. The court further rejected the
contention that a
violation required proof that "the payee actually performed
the improper
acts for which he was paid." Id. at 34. Bay State
thus holds that a
payment intended to induce a referral (or in that case a
recommendation
to purchase) is illegal, even if it is not conditioned on or
does not
result in a referral.
Thus, in the ownership setting, an illegal inducement may consist of
an
opportunity to earn money on the investment, if a non-incidental
purpose
of providing that opportunity is to induce referrals. The
result is the
same whether or not the referrals were specifically required or
ever
took place. The applicability of section 1128B to the
ownership
situation is demonstrated by the decisions in Kats and Universal
Trade.
While the ALJ acknowledged that no court has required proof of
an
agreement to refer program-related business as a prerequisite
to
establishing a violation of (b)(2), he found such an agreement,
actual
or implied, to be the "common thread" in the facts of all these
cases.
23/ While in some instances courts referred to these
transactions as
"agreements," from our reading of these cases those
characterizations
have no legal significance with regard to the elements of a
violation.
Of course, since the gravamen of the violation here is intent,
when
there is a pre-existing arrangement or "agreement," the intent to
induce
program-related business may be more easily identified. However,
the
absence of such an "agreement" does not disprove intent. Further,
the
ALJ stretches the term "agreements" to mean merely "a formula
pursuant
to which payments will be made" (Duz-Mor and Universal) or the
payment
of a consulting fee as a "quid pro quo for each referral"
(Greber). The
ALJ seems to characterize the arrangements in the
remaining cases as
"agreements" simply because the courts found some
connection between the
value of the referred business and the remuneration
offered, paid, or
received.
The ALJ stated that, from his reading of those cases,
circumstances
existed for a trier of fact to infer existence of an agreement
to refer
program-related business. ALJ Decision at 72. Such a
reading is not
possible unless the term "agreement" is read so broadly that
it
encompasses almost any transaction. Furthermore, even if an
agreement
may be inferred, it does not follow that an offer must be
conditioned on
such an agreement in order to be illegal. 24/
What is also missing in any of these arrangements is any element
of
preclusion of provider choice, such as the ALJ demanded in
applying
1128B here. While the illegal remuneration was an inducement
in these
cases, no preclusion of provider choice appears except to the extent
the
remuneration itself resulted in a referral (i.e., once each referral
was
made, the referrer was precluded from referring that particular
test
elsewhere). Finally, even if in all these cases some form
of
"agreement" to refer existed, that alone would not determine the
legal
elements of a violation of the statute. 25/
To the extent the cases reached the elements of a violation (which
most
did not, either because of the procedural status or the narrow
issues
addressed), they support our reading of the provisions. Thus,
for
example, Duz-Mor dealt with the nature of the proscribed offer.
The
court cited analogous federal bribery cases defining "offer" as
a
representation expressing an ability and a desire to pay a
remuneration
coupled with an intent to induce desired action. In the
court's view,
Duz-Mor's proposal, suggesting a 15% rebate for referrals,
clearly met
this standard. Id. at 227.
Also, in Greber, the court recognized that the 1977 amendments
were
enacted, in part, to address the Congressional concern with
"the
practice of giving 'kickbacks' to encourage the referral of work."
Id.
at 71. The court held that if one purpose of the payment was to
induce
future referrals, the statute had been violated, even if the
payment
served other functions as well. Thus, if the payments were
intended to
induce a physician to make a referral, the statute was violated,
even if
they were also intended to compensate for professional
services. Id. at
72; accord Kats and Bay State.
In sum, the cases do not support the ALJ's conclusion.
5. Other arguments of the parties regarding
section
1128B(b)(2).
The I.G. suggested that, if we find ambiguity in the statute, we
should
defer to the interpretation of the Secretary. He further argued
that
the best evidence of the Secretary's interpretation is in two
sources,
the proposed Safe Harbor regulations and a Fraud Alert issued by
the
I.G. See I.G. Exhibit (Ex.) 101.0. As discussed at length
above we do
not find any ambiguity about whether the statutory language
requires
proof of an agreement precluding provider choice. Thus no need
arises
to seek out or defer to an administrative interpretation. In any
case,
we do not find it appropriate to defer to either proposed regulations
or
a statement of prosecutorial interests or intent. Finally, we find
that
neither document even purports to set forth an interpretation by
the
Secretary of any of the language in dispute here. We discuss
each
separately below.
a. Proposed safe harbors
The issuance of safe harbor regulations does not alter the reach of
the
anti-kickback statute, but only cloaks specific arrangements
with
protection from prosecution if they might otherwise be found
in
violation. 26/ Furthermore, a proposed regulation has no
binding
effect. Joyce Faye Hughey, DAB No. 1221 at 5-6, 8-9
(1991). It would
be unfair to require the interested public to conform
its conduct to a
proposed rule which may never take effect or which may be
changed before
becoming effective. Rowell v. Andrus, 631 F.2d 699, 702,
n.2 (10th Cir.
1980). We thus agree with the Respondents that proposed
regulations
could not constitute timely notice.
Moreover, the I.G. did not make clear where the interpretation of
the
statute to which he wished us to defer appears in the Notice of
Proposed
Rulemaking publishing the proposed Safe Harbor regulations. 27/
b. The Fraud Alert
The Fraud Alert, which was mailed to physicians in May 1989, set out
a
list of "questionable features" that "separately or taken
together"
might indicate unlawful activity and then asked recipients to
report any
joint ventures containing some of these features to the I.G.'s
offices.
Fraud Alert Brochure, I.G. Ex. 101.0. The Respondents
complained that
the Fraud Alert was tailored to the facts of this case and
was published
long after the partnerships were in operation. The I.G.
argued that the
Fraud Alert is entitled to deference as in the nature of
agency
enforcement guidelines to which the Supreme Court required
deference
under Martin v. OSHRC, 499 U.S. , 111 S.Ct. 1171
(1991). Martin is
inapposite. It involved a conflict over the
proper interpretation of an
ambiguous regulation that occurred in the context
of a different federal
agency structure. Martin in no way requires us
to defer to the I.G.'s
interpretation of a statute that is not ambiguous.
Furthermore, the Fraud Alert contains no statement on the meaning of
the
terms at issue here. Rather, it represents a statement of the
I.G.'s
interest, as prosecutor, in obtaining information about joint
ventures
with specified features, "some" of which the I.G. "believes . . .
may
violate" the statute. I.G. Ex. 101.0. The I.G. may publicly
state what
factors it will consider in deciding to initiate enforcement
action, but
the Act provides for a hearing and review procedure once
enforcement
action is undertaken. Section 1128(f) of the Act.
The I.G. relied on language from the conference report on the Stark
Bill,
section 1877 of the Act, as amended by Public Law No. 101-239,
section 6204
(1989), as evidence that the Fraud Alert authoritatively
reflected
Congressional intent. I.G. Br. at 65 (quoting H.R. Conf. Rep.
No. 386
at 856, reprinted in 1989 U.S. Code Cong. & Ad. News 3459).
The
report, however, states only how the conferees wish the Stark Bill to
be
construed and their intent not to affect the I.G.'s enforcement
efforts.
The report does not express agreement with any specific
interpretation
of the "current" law. Even if it did, the comments of a
committee
regarding interpretation of a law passed by an earlier Congress can
be
given only limited weight. Certainly the fact that when
Congress
revisited this area in 1987 and 1989, it was fully aware of the
breadth
with which the 1977 language was being interpreted in the courts and
by
the enforcement agency, and yet chose not to narrow its
scope,
reinforces our understanding that the meaning of the law is
clear,
albeit broad. However, this brief reference in a committee
report
cannot serve to make binding an informal agency statement issued
after
the ventures in question were well underway. 28/
Nevertheless, to conclude that the Fraud Alert is not a
binding
interpretation of the statute does not imply that the factors to
which
it refers are irrelevant in evaluating whether a particular
arrangement
violates the statute. To the extent these factors suggest
relevant
inferences which may reasonably be drawn from particular choices
of
investors, business structures, and financing arrangements, the
Fraud
Alert may be a useful tool in applying the statute.
c. The HCFA letters
The Respondents argued that the ALJ Decision is the
appropriate
interpretation of the Secretary, but then acknowledged that it
would be
the Secretary's decision only if not "altered by the Board."
Next, the
Respondents proposed that "the interpretations entitled to the
greatest
weight" are opinion letters issued in 1980-81, because they are
"more
contemporaneous." Hanlester Br. at 21-25. The letters
involved were
signed by an official of the Health Care Financing
Administration (the
HHS component which administers Medicare and Medicaid)
and responded to
apparent inquiries about the legality of particular
arrangements.
Generally the letters, at least as read by the Respondents,
suggest that
"legitimate" businesses are not the target of the law,
self-referral
alone does not increase costs, and other program mechanisms
would
prevent abuse. It is not clear how useful these observations are
since
(1) they do not define which businesses are legitimate; (2) they do
not
claim that self-referral never increases costs, only that it need
not
always do so; and (3) their reliance on other utilization
control
provisions fails to explain why Congress so clearly felt that abuse
was
continuing to occur despite them.
In any case, each letter disclaims authority to officially interpret
the
statute. See, e.g., Hanlester Ex. 15. The Respondents did not
claim
they relied on these letters in structuring their arrangement. In
any
event, such an argument would amount to an attempt to use estoppel
to
make the interpretations in these letters binding on the
Secretary,
despite their own disclaimers. Estoppel will not lie against
the
federal government in these circumstances. See Heckler v.
Community
Health Services of Crawford County, Inc., 467 U.S. 51 (1984);
Office of
Personnel Management v. Richmond, 496 U.S. , 110 S.Ct.
2465 (1990).
VI. Section 1128B(b)(1) of the Act
The second major issue in this case is whether, in their relationship
with
SKBL, the Respondents committed acts described in section
1128B(b)(1) of the
Act. The I.G. alleged generally that (1) the ALJ
erred by applying an
improper legal standard in determining that the
Respondents had not committed
such acts; and (2) we should remand to the
ALJ to reexamine the record based
on the proper legal standard. Below,
we first summarize the ALJ's
analysis of this issue. We then state why
we consider that analysis to
be erroneous.
A. The ALJ's Analysis
As discussed above, in determining the meaning of section 1128B(b)(2),
the
ALJ discussed his view of the evolution, history, purpose, and
language of
section 1128B(b) as a whole, as support for his overall
conclusion that
section 1128B(b)(2) proscribed offers of agreements or
agreements to refer
precluding provider choice. A key part of his
analysis was his
conclusion that sections 1128B(b)(1) and (b)(2) were
intended to have the
same scope, and, therefore, (b)(2) required an
agreement because (b)(1)
did. The language of (b)(1) which the ALJ said
required an agreement
was the phrase "in return for," as well as the
term "remuneration" (which
appears in both sections).
The ALJ stated what the I.G. must prove to establish a violation
of
section (b)(1), as follows:
Thus, a party will manifest the requisite intent to
violate section
1128B(b)(1) if that party agreed to
accept payments in return for
referring
program-related business, even if that party also
accepted the payments for other, lawful, reasons.
ALJ Decision at 80 (footnote omitted). 29/ He also stated that
"the
meaning of this section is plain" and that --
Whatever payment is solicited or received by the referring
party
must be intentionally solicited or received by that party as
a
condition for that party agreeing to refer
program-related
business.
Id. at 81.
Finally, in applying the section to the facts of this case, the ALJ
found
that the I.G. did not prove that any Respondent solicited or
received
remuneration from SKBL because "SKBL made no payments to
Respondents."
Id. at 81-82. He found that, instead, Respondents PPCL,
Omni, and
Placer made substantial payments to SKBL to remunerate SKBL
for its
management services. He explained that this did not mean
the
Respondents did not benefit from their relationship with SKBL,
but
stated that the Act "does not attach liability to parties simply
because
they benefit from contracts." Id. at 82. He further found
that the
I.G. did not prove that the Respondents agreed to refer
program-related
business to SKBL, noting that the "management agreements do
not
guarantee SKBL a flow of business from Respondents PPCL, Omni,
and
Placer." Id.
B. Our Analysis of Section 1128B(b)(1)
The ALJ erred in concluding that section 1128B(b)(1) is violated only
when
there is solicitation or receipt of a payment in return for an
agreement
precluding provider choice. Section 1128B(b)(1) of the
Act
provides:
(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)
in
return for referring [program-related business], . . . shall
be
guilty of a felony . . . .
(Emphasis added.)
Nothing in the wording of this section requires an agreement
precluding
provider choice. Neither the phrase "in return for" nor the
term
"remuneration" implies that such an agreement is required.
Moreover, to
prove a violation, the I.G. does not need to prove a guaranteed
"flow of
business."
1. The phrase "in return for" does not imply agreement.
The phrase "in return for" in section 1128B(b)(1) certainly does imply
a
connection between the solicitation or receipt of remuneration and
the
actual referral of program-related business. Moreover, the section
has
an intent element, and evidence of an agreement to refer would
satisfy
the statutory standard of an intentional connection between
the
remuneration and the referral. But we fail to see how an agreement
is
necessary in order to establish that connection. For example, if
a
physician made a referral to a supplier and then asked the supplier
for
a kickback of part of the supplier's profit from that referral,
the
physician would certainly be soliciting payment in return for
the
referral, even if he did not promise to make further referrals or have
a
preexisting understanding with the supplier at the time the referral
was
made.
The ALJ apparently adopted the Respondents' position that "in return
for"
implies a quid pro quo (which means "something for something").
By
itself, this is not an unreasonable reading if it means that
the
remuneration is being solicited or received as a quid pro quo for
the
referral. "In return for" does imply a connection between
the
remuneration and the referral. We do not, however, think it
is
reasonable to infer that this connection must take the form of
an
agreement precluding provider choice. 30/
Even in a typical kickback situation, a provider may merely have
an
expectation (based on past practice) that he will receive payment for
a
referral. He has not agreed to refer, nor is the supplier bound to
make
the kickback, but if the provider refers with the intent to receive
a
kickback and then receives a kickback, the kickback is no less
"in
return for" the referral simply because there was no
preexisting
agreement precluding provider choice.
2. "Remuneration" does not imply an agreement
or
guarantee.
Like section 1128B(b)(2), section 1128B(b)(1) contains the
term
"remuneration," which the ALJ found required an agreement. As
we
discussed above, this reading (1) is not derived from the
ordinary
meanings of that term; (2) ignores the clear intent manifested in
the
language and structure of the section as a whole; (3) is based on
a
misapplication of principles of statutory construction, and, in
any
event, misinterprets the terms "kickback," "bribe," and "rebate;"
and
(4) is inconsistent with the legislative history and purpose of
the
amendment adding the term "remuneration." (See our discussion
in
sections V.C.2. and 3. above.)
Also implicit in the ALJ's application of the concept of
"remuneration"
here is the idea that the I.G. had to prove that payments
flowed from
SKBL to the Respondents. This requirement clearly
frustrates
Congressional intent to focus on the substance rather than on the
form
of the transaction. We agree with the ALJ that a showing of
benefit
does not conclusively establish that prohibited acts were
committed.
But, if the sum of the benefits received by a party are
excessive
compared to the sum of the legitimate benefits conferred and
if
referrals are occurring, it is reasonable to infer that the
excess
benefits were received in return for the referrals.
Finally, the ALJ found that the I.G. did not prove that the
Respondents
agreed to refer to SKBL since the management agreement did
not
"guarantee SKBL a flow of business" from the Respondent
laboratories.
First, we do not think even an agreement to refer necessitates
a
guaranteed flow of business. Even in an easily recognizable
kickback
scheme, the physician does not guarantee a stream of referrals.
Second, it appears to us that the substance of the transaction resulted
in
a virtual guarantee to SKBL of referral of any tests the
Respondent
laboratories were not equipped to perform. If the management
agreements
gave SKBL control over any tests referred to a reference
laboratory
(which could result in higher reimbursement), then, under the
agreement,
the Respondent laboratories had given up their choice of using
a
reference laboratory other than SKBL. 31/
VII. Legal Analysis of the Remedy Issue
The third major issue here is whether Respondents Hanlester, PPCL,
Omni,
and Placer should have been excluded based on the conduct of their
agent
Ms. Hitchcock. The I.G. argued that the ALJ erred in deciding
that no
exclusion should be imposed even though he found a violation of
section
1128B(b)(2) based on the conduct of Ms. Hitchcock.
Below, we first summarize the ALJ's analysis of the remedy issue.
We
then address the I.G.'s arguments that (1) the ALJ failed to
give
sufficient effect to deterrence as a purpose of an exclusion; (2)
the
ALJ failed to give sufficient weight to the fact that
section
1128B(b)(2) is a criminal statute and that Congress has in
section
1128(a) of the Act mandated a minimum five-year period of exclusion
for
convictions under section 1128B(b)(2); (3) the ALJ erred in
requiring
proof of actual harm to the programs; and (4) an exclusion should
be
imposed regardless of whether Ms. Hitchcock had severed her
relationship
with Respondents.
Our analysis of these arguments assumes a finding of a violation
based
solely on the conduct of Ms. Hitchcock. We conclude that the ALJ
should
reevaluate whether an exclusion should be imposed on
Respondents
Hanlester Network, PPCL, Omni, and Placer, regardless of whether
he
finds that these Respondents violated the statute through acts
other
than those the ALJ found were solely attributable to Ms. Hitchcock.
A. The ALJ's Analysis
In analyzing the remedy to be imposed, based on the violation he
found,
the ALJ pointed out the remedial purpose of the exclusion
remedy,
describing that purpose as allowing the Secretary to suspend
his
contractual relationship with those providers who are dishonest
or
untrustworthy. The ALJ recognized deterrence as an ancillary benefit
of
exclusion, but stated that the primary purpose was remedial, rather
than
to punish or deter.
The ALJ agreed as a general proposition that inferences as to a
party's
trustworthiness can be drawn from the nature of the conduct they
have
committed. In most circumstances, he said, misconduct in the
nature of
a program-related crime infers untrustworthiness. He further
said that
the fact that Congress has mandated a five-year exclusion for
those
convicted of a program-related crime should be used as guidance on
what
would be a reasonable exclusion for those found to have engaged
in
conduct in the nature of a program-related crime. ALJ Decision
at
93-94.
The ALJ also applied as guidelines the factors listed in 42
C.F.R.
1003.106(b). He described these regulations as enumerating
"factors
which should be considered in deciding whether to impose an
exclusion,
and in deciding how long an exclusion should be." Id. at
95.
The ALJ concluded from applying these "criteria and guidelines" to
the
facts (as he had found them) that "no remedial purpose would be
served
by imposing exclusions against Hanlester, PPCL, Omni, and
Placer." Id.
Essentially, his points in support of this conclusion were
that --
o The basis for a finding of violation was solely attributable to
the
acts of Ms. Hitchcock, and the problems with her agency ended
when
Hanlester and Ms. Hitchcock parted company. Id.
o The evidence shows that the Respondents did not manifest
a
"propensity for hiring untrustworthy agents and employees," nor
were
they "indifferent to the consequences of their agents' acts." Id.
at
95-96.
o Ms. Hitchcock's conduct was contrary to
Respondents' intent and
their policy. The Respondents manifest little
culpability, and none has
a history of prior offenses. Id. at 96.
o While the potential for harm to the
Medicare and Medicaid
programs is one of the principal reasons Congress
enacted section 1128B,
there is no evidence to prove such harm actually
resulted from the
limited partners' participation in Respondents PPCL, Omni,
and Placer.
Id. at 96-97
B. Our Analysis
We note at the outset that ordinarily we accord deference to an
ALJ's
judgment on the length of an exclusion to be imposed since this
judgment
requires weighing the evidence presented and, often, includes
evaluating
credibility of witnesses. The I.G.'s exceptions here,
however, raise
questions concerning whether the ALJ applied proper legal
standards in
determining the remedy and whether the ALJ appropriately
included or
omitted certain factors in determining that no exclusion was
warranted.
First, we reject the I.G.'s position that the ALJ erred by not imposing
an
exclusion for purposes of deterrence where the ALJ found that no
remedial
purpose would be served by an exclusion. The ALJ's reasoning
was based
on the Supreme Court's statement, in United States v. Halper,
490 U.S. 435,
448 (1989), that a "civil sanction that cannot fairly be
said solely to serve
a remedial purpose, but rather can be explained
only as also serving either
retributive or deterrent purposes, is
punishment . . . ." While Halper
involved the question of double
jeopardy and that question does not arise
here since there is no
criminal conviction, the ALJ's determination that no
exclusion should be
imposed solely for the purpose of deterrence is
reasonable. It is not,
as the I.G. alleged, "directly at odds" with the
ALJ's previous
recognition that deterrence is one purpose of the
statute. See I.G. Br.
at 97. We note that passage of the broader
statutory provision was
regarded as a deterrent, separate from the actual
imposition of any
exclusion. See S. Rep. No. 453, 95th Cong., 1st Sess.
11 (1977).
Moreover, to the extent the I.G.'s position is that the ALJ was
required
to impose an exclusion solely for deterrent purposes, this position
is
inconsistent with the statute, which makes imposition of an
exclusion
permissive, rather than mandatory.
We also think the I.G. placed too much weight on the fact that
section
1128B(b) is a criminal statute and that five-year exclusions
are
mandated for program-related crimes. The standard of proof is
different
for a criminal conviction than for civil liability. Moreover,
if
Congress had intended a five-year exclusion to apply in all
section
1128(b)(7) cases, it would not have made such exclusions
permissive.
On the other hand, it is not clear to us that the ALJ gave
sufficient
weight to the fact that Congress obviously thought that the
misconduct
proscribed by section 1128B(b) was a serious offense. While
the ALJ
stated that he was considering this fact and that, in
most
circumstances, misconduct in the nature of a program-related
crime
infers untrustworthiness, his analysis appears at odds with
these
statements.
The ALJ stated that Ms. Hitchcock's conduct was contrary to
Respondents'
intent. Yet, the Respondents here (Hanlester, PPCL, Omni,
and Placer)
are the very Respondents whom the ALJ found had the requisite
intent,
"[b]y virtue of the acts of their agent," necessary for finding
a
violation. FFCLs 220 and 222. Moreover, the ALJ gave great
weight to
his finding that the I.G. did not prove any actual harm. Yet,
the
statute proscribes offers of illegal remuneration, so Congress must
have
thought the conduct proscribed in section 1128B(b)(2) was
serious
regardless of whether actual harm resulted. The degree
of
untrustworthiness is evidenced by the degree to which a respondent
is
willing to place the programs in jeopardy, even if a scheme
is
ultimately unsuccessful.
The lack of actual harm, if proved, would be a relevant mitigating
factor
to be considered, but it should be weighed against the scope of
the potential
for harm. Here, Ms. Hitchcock's conduct was not an
isolated incident
but apparently affected her presentation to many of
those physicians who
invested as limited partners. Moreover, since lack
of actual harm acts
as a mitigating factor, the burden of proof is
properly placed on the
Respondents, rather than on the I.G.
Finally, we agree with the I.G. that the ALJ gave too much weight to
the
fact that Ms. Hitchcock resigned her position with Hanlester
Network.
While relevant, the effect of her resignation must be viewed in
light of
other considerations. Unlike the conduct of an employee of a
large
corporation who engages in illegal conduct solely for his/her own
ends,
Ms. Hitchcock's conduct affected the whole structure of the
partnership
laboratories to the extent that participating physicians invested
based
on her representations. The programs are still in jeopardy so
long as
any of these physicians remain in the partnership with the
understanding
they derived from Ms. Hitchcock's presentation. Absent
evidence that
the Respondents acted to undo the effects of the
representations she
made, the potential for harm to the programs still
exists.
Also, we consider it a relevant factor that the Hanlester Network
provided
a compensation package for Ms. Hitchcock which included
payments based on the
number of referrals. Ms. Hitchcock thus had a
financial incentive to
make the representations she made as agent for
the Hanlester Network and the
partnership laboratories, and some
potential for harm to the programs would
remain even if another
marketing director were hired, so long as the
compensation structure is
the same.
Thus, even if we had agreed with the ALJ on what constitutes a
violation
of section 1128B(b), we would remand for a reevaluation of the
remedy.
VIII. Applying Our Conclusions -- Guidance to the ALJ on Remand
While we agree with the I.G. that the ALJ erred in interpreting
section
1128B, we consider it appropriate in this case to remand to the ALJ
for
further action, consistent with our decision. In this section, we
first
explain what is required in applying our conclusions and why we
decline
to evaluate here whether the I.G. proved violations and
whether
exclusions are appropriate. We then discuss some of the factors
which
the ALJ should consider on remand in applying sections 1128B(b)(2)
and
(b)(1) here.
A. Remand Is Appropriate
Distinguishing acts described in the statute from other acts
requires
examining all the circumstances surrounding a transaction
or
relationship in order to ascertain the parties' intentions. No
one
aspect of the circumstances, such as the absence of an agreement,
is
singled out in the statute as decisive of whether the offeror
intended
to induce referrals or whether remuneration was sought in return
for
referrals. Therefore, it is not possible to avoid the task
of
thoroughly evaluating all relevant circumstances of the transactions
at
issue here. However, the legislative history, the case law, and
the
remainder of the Medicaid and Medicare law provide direction as to
the
targets at which the provisions were aimed. From these, we can
derive
guidance as to what factors suggest the acts Congress sought
to
proscribe.
Our role is not to issue policy guidelines specifying the factors
which
would be suspect in all conceivable future transactions. Rather,
we
merely provide guidance below on some factors the ALJ should consider
on
remand in the context of applying the statute to the
specific
arrangements at issue. That guidance does not constitute
a
comprehensive listing of all evidence relevant to determining the
intent
of the parties or of all the inferences which could reasonably be
drawn
from such evidence. The ALJ already made findings pertaining to
some of
these considerations, but did not draw inferences from them
regarding
the parties' intent because of his view of the legal
standard. In other
areas, he made no findings (possibly because his
view of the legal
standard made all factors except for the condition of an
agreement
precluding provider choice irrelevant or possibly because the
record did
not support findings).
The duty of making all relevant findings and drawing
appropriate
inferences from them is properly committed to the ALJ in the
first
instance. As the Respondents noted, the ALJ has the advantage
of
familiarity with "a thoroughly developed and extensive factual
record"
which will enable him to avoid deciding "in a vacuum or in
the
abstract." Hanlester Br. at 3. The ALJ is in the best
position to make
any further findings required by our decision, determining
the relative
weight of the various, possibly conflicting, evidence of
the
Respondents' intent and assessing the credibility of the witnesses.
32/
Therefore, we decline to substitute FFCLs evaluating whether the
I.G.
proved violations or whether exclusions are appropriate. Instead,
we
remand to the ALJ to make such amended or additional findings as may
be
necessary in light of this Decision.
B. Factors for Section 1128B(b)(2)
The ALJ should reevaluate the record and his findings on whether
the
Respondents violated section 1128B(b)(2) in light of the following:
o It is not a necessary element of a violation of section
1128B(b)(2)
that the offer or payment be conditioned on an agreement to
refer.
Rather, the question is whether the Respondents knowingly and
willfully
offered or paid remuneration with the intent of exercising
influence
over the reason or judgment of the physicians in an effort to cause
them
to refer.
o Remuneration offered or paid which exceeds the reasonable value
of
any services openly provided or of any investment made is
likely
intended as inducement for referrals. Some of the courts
applying the
statute have inferred intent from the excessiveness of the
remuneration.
See Lipkis at 1449 (payments for "handling" fees that far
exceed the
value of the services can be inferred to be remuneration for
referrals).
33/ The ALJ expressed concern that this standard would
discourage too
many potential ventures because of the difficulty of judging,
on an
on-going basis and without set guidelines, whether the compensation
was
excessive. "Few would risk the prospect of exclusion . . . I
suspect
that most simply would opt not to engage in any business
transaction
which might be construed to be illegal." ALJ Decision at
79. However,
the legislative history cited above demonstrates that
Congress'
experience suggested otherwise. Health care ventures that
violated
existing laws or were designed precisely to seek loopholes in those
laws
were described repeatedly in testimony and reports as widespread
and
common. Therefore, the mere fact that a particular arrangement
is
common cannot be properly considered because it would reduce
the
effectiveness of Congress' decision to alter substantially many
common
practices in the health care industry precisely because Congress
found
so many providers so willing to skirt the edge of the law.
o The ALJ found that the limited partners received a rate of
return
which did not exceed what is typically paid by health care
limited
partnerships. FFCL 200. If the I.G. proved that the
payments to
limited partners were excessive in terms of the risks involved
and the
return of alternative investments in general, however, this
would
indicate that the excess value could act as an inducement.
Limiting the
comparison to other health care limited partnerships may
legitimize a
prohibited arrangement simply because that type of arrangement
is
common.
o Inferences regarding intent may be drawn from the structure of
the
venture: whether the venture is limited to potential referral
sources;
whether the partners are precluded or discouraged from using
alternative
laboratories; whether the investments were sought to meet the
capital
needs of the venture; whether the venture met a need for services;
and
whether the structure was designed to permit the physicians to
evade
restrictions on their profiting from tests they order by
taking
advantage of the reference laboratory exception.
o Inferences may be drawn from the degree of nexus between
the
remuneration and the referrals. Clearly, a scheme in which payments
(or
the shares which generate payments) are proportional to referrals
offers
the most direct incentive to physicians to refer or overutilize.
Even
where payments (or ownership shares) are not divided with regard
to
actual referral patterns, the smaller the number of partners,
the
greater the impact each physician's referrals will have on his
return
and the greater the incentive to refer. (As noted above,
however, the
legislative record included both flat and proportional
arrangements, so
lack of proportionality should not be given too much
weight.)
o It is relevant whether the arrangement was likely to lead
physicians
to select one laboratory over another or to overutilize
laboratory
services because of the incentives provided. See H.R. Rep.
No. 393
(Part II) at 48 (1977), reprinted in 1977 U.S. Code Cong. & Ad.
News at
3050. In other words, it is relevant whether the value offered
was
sufficient to interfere with the physician's judgment based
on
legitimate considerations, such as cost, quality, and necessity of
the
services. 34/
o While actual harm to the program is not required as a basis for
an
exclusion, evidence showing resulting overutilization or reduced
quality
of services to recipients/beneficiaries is relevant on whether
the
incentive offered was sufficient to induce referrals.
C. Factors for Section 1128B(b)(1)
In applying section 1128B(b)(1) to the Respondents, the ALJ
should
reevaluate the record and his findings, in light of the following:
o The compensation received and duties performed by each of
the
individual Respondents is relevant to whether any of the
compensation
was received in return for arranging for referrals of
program-related
business.
o It is not a necessary element of section 1128B(b)(1) that
the
Respondents agreed to make referrals to SKBL or guaranteed a flow
of
business to SKBL.
o It is a relevant factor here whether, as manager of the
Respondent
laboratories, SKBL could control whether the Respondent
laboratories
would refer tests to or order tests from SKBL laboratories as
reference
laboratories (for which higher rates presumably were
available).
o The fact that a transaction may have a legitimate business
purpose
does not mean that the transaction as a whole does not run afoul of
the
law. See, e.g., Greber, and Kats. While this may be some
evidence of
intent, it is not determinative.
o The relationship as a whole between SKBL and the Respondents must
be
evaluated to determine whether the sum of the benefits the
Respondents
received from SKBL were excessive compared to the sum of the
legitimate
benefits they conferred on SKBL. As the I.G. noted, SKBL
advanced money
to the Respondents based on expected rather than actual
revenues. The
value of the use of the money to the Respondents during
the period
before it was due is one benefit to be considered.
CONCLUSION
The I.G. filed exceptions to FFCLs 202, 204, 217, 218, 219, 221, 223,
226,
and 227. Consequently, we affirm and adopt the ALJ's findings of
fact
and conclusions of law which were not subject to the I.G.'s
exceptions.
We vacate all the FFCLs which were subject to the I.G.'s
exceptions, but
decline to adopt the language of the I.G.'s proposed
FFCLs 1-10.
We modify the decision to add the following conclusions consistent
with
our determinations concerning the legal standard:
AP 1. An individual or entity commits acts described in
section
1128B(b)(1) of the Act by knowingly or willfully soliciting or
receiving
any remuneration in return for the referral of program-related
business.
AP 2. An individual or entity commits acts described in
section
1128B(b)(2) of the Act by knowingly and willfully offering or paying
any
remuneration to induce the referral of program-related business.
An
offer or payment may violate section 1128B(b)(2) even if it is
not
conditioned on an agreement to refer.
AP 3. The phrase "to induce" in section 1128B(b)(2) connotes an
intent
to exercise influence over the reason or judgment of another in
an
effort to cause the referral of program-related business.
AP 4. The phrase "any remuneration" in sections 1128B(b)(1) and
(2)
covers offering or paying anything of value in any form or
manner
whatsoever. The direction in which money payments flow in a
transaction
is not determinative of whether remuneration has been paid.
AP 5. While the phrase "in return for" in section 1128B(b)(1)
connotes
a connection between the solicitation or receipt of remuneration and
the
referral of program-related business, this phrase does not
necessarily
imply that the solicitation or receipt of remuneration must
be
conditioned on an agreement to refer or on any guaranteed flow
of
business.
AP 6. The mere fact that an exclusion under section 1128(b)(7)
is
based on a determination that a respondent has committed acts
described
in section 1128B(b) (which may also be the basis for a
criminal
prosecution) does not mean that a five-year exclusion should be
imposed.
AP 7. The I.G. failed to prove actual harm, which could act as
an
aggravating factor in determining the length of an exclusion. Lack
of
actual harm would be a mitigating factor, and, therefore, the burden
of
proving the lack of actual harm is on the Respondents.
Five of these modified FFCLs substitute for vacated FFCLs 217, 218,
and
219. As the I.G. requested, we added two FFCLs on the legal
standard to
be applied in determining whether a permissive exclusion is
necessary
once a party is found to have violated the statute.
We remand the case to the ALJ for reconsideration of the
conclusions
stated in FFCLs 202, 204, 221, 223, 226, and 227, consistent with
the
analysis in this decision.
We note that FFCLs 202 and 204 contain conclusions related to the
overall
conclusion stated in FFCL 221 that the Respondents did not
violate section
1128B(b)(1) of the Act. We conclude that FFCLs 202 and
204 are
mixed conclusions of fact and law which are vulnerable because
of the ALJ's
error with regard to the meaning of the term "any
remuneration" in section
1128B(b). Thus, we vacate those conclusions.
We decline to modify the decision to add FFCLs concluding that
the
Respondents committed acts described in section 1128B or
imposing
permissive exclusions. Whether to reach such conclusions is
the
province of the ALJ on remand.
We decline to adopt an FFCL proposed by the I.G. stating the "one
purpose"
rule adopted in the Greber and Kats decisions (I.G.'s proposed
FFCL 3).
We do not consider such an FFCL to be necessary since the rule
is not in
dispute here. We also decline to adopt an FFCL proposed by
the I.G.
concerning the inference to be drawn when the amount of
remuneration received
substantially exceeds the fair market value of any
services provided (I.G.
proposed FFCL 7). As discussed above, excessive
remuneration is only
one of the factors to be examined by the ALJ, who
will determine its
significance. Thus, we do not consider it necessary
to single out this
one factor in a modified FFCL.
We expect the ALJ's further determinations to involve new findings of
fact
as well as a reexamination of the significance of the findings of
fact
previously made. Furthermore, we recognize that in his decision
on
remand the ALJ may wish to reorder and/or renumber the FFCLs,
including
the FFCLs stated above.
_______________________________
Judith
A. Ballard
________________________________
Theodore
J. Roumel U.S. Public
Health Service
________________________________
Cecilia
Sparks Ford Presiding
Panel Member
1. "State health care program" is defined by section 1128(h) of the
Act
to cover several types of federally-financed programs,
including
Medicaid. We use the generic term "Medicaid" to refer to all
State
health care programs.
2. This background is derived from the ALJ Decision. It is not
a
substitute for the detailed FFCLs, but is provided solely to explain
the
factual context for our decision. See ALJ Decision at 5-31.
3. The ALJ found that the I.G. failed to prove that either Mr. Tasha
or
Mr. Welsh made the kind of representations which Ms. Hitchcock made
and
which the ALJ found violated the Act.
4. Throughout this decision, we omit the ALJ's citations to the
Act,
regulations, other FFCLs, or the record before him from our
restatement
of his FFCLs.
5. Pub. L. No. 95-142, section 4 (1977).
6. See H.R. Rep. No. 393, Part II, 95th Cong., 1st Sess. 53
(1977),
reprinted in 1977 U.S. Code Cong. & Ad. News 3056; S. Rep. No.
453, 95th
Cong. 1st Sess. 12 (1977). This change resulted from a
perceived need
to clarify the terms "kickback," "bribe," and "rebate."
Joint Hearing
at 31-32. Such clarification, it was hoped, would prevent
different
forms of "transferral payments" from giving kickbacks "an air
of
legitimacy even though the parties involved intend to circumvent
the
law." Id. at 37. The meaning of these terms had also been
placed in
doubt by conflicting interpretations in the courts. Compare
United
States v. Porter, 591 F.2d 1048, 1054 (5th Cir. 1979) ("kickback"
means
"secret return to an earlier possessor of part of a sum received")
with
United States v. Zacher, 586 F.2d 912, 914-16 (2d Cir. 1978) (all
three
terms "involve a corrupt payment" in violation of providers'
obligations
to use federal funds as intended) and United States v. Hancock,
604 F.2d
999, 1001-02 (7th Cir. 1979) (per curiam), cert. denied, 444 U.S.
991
(1979) ("kickback" means a percentage payment to someone who controls
a
source of income).
7. The phrase "knowingly and willfully" was added in 1980 by
the
Omnibus Reconciliation Act of 1980, Pub. L. No. 96-499, section
917
(1980). The purpose was to avoid prosecution of persons "whose
conduct,
while improper, was inadvertent" and to "assure that only persons
who
knowingly and willfully engage in the proscribed conduct" would
be
punished. H.R. Rep. No. 1167, 96th Cong., 2d Sess. 59 (1980),
reprinted
in 1980 U.S. Code Cong. & Ad. News 5526, 5572.
8. The identical prohibition appeared at section 1877(b) of the
Act
with respect to Medicare and at section 1909(b) of the Act with
respect
to Medicaid. Throughout this decision, we use
"program-related
business" as shorthand for the language in the statute
concerning those
items, services, etc., for which payment is made under
Medicare or
Medicaid. Also we use "referral" as shorthand for
purchases, leases,
etc. of covered items or services.
9. The committee report explains that the Secretary is
thereby
authorized to impose an exclusion without "obtaining a criminal
penalty
or obtaining a criminal conviction. It is the Committee's
intent that
the burden of proof requirements . . . would be those
customarily
applicable to administrative proceedings." S. Rep. No. 109,
100th
Cong., 1st Sess. 10 (1987), reprinted in 1987 U.S. Code Cong. & Ad.
News
682, 690.
10. Throughout this decision, we use the expression
"agreement
precluding provider choice" to summarize the requirement imposed
by the
ALJ as reflected in his analysis discussed above. In FFCL 219
the ALJ
used the phrase "payment conditioned on the offeree agreeing to
refer."
His discussion treats an agreement precluding provider choice
as
equivalent to a guarantee of a flow of referrals, to a requirement
of
referrals as a condition for payment, to an offer to purchase
referrals,
to an agreement to refer business, or to the provision of a quid
pro
quo, and further assumes the agreement concept to be determinative
of
the existence of unethical or corrupt conduct. See, e.g., ALJ
Decision
at 62, 69-72, 74, 82, and 83. These concepts are not
interchangeable,
and the use of the word "agreement," which has its own
ambiguities and
which appears nowhere in the statute, only magnifies the
confusion.
11. For example, the ALJ referred to promotional drug samples
and
hospital recruitment lunches as potentially suspect. ALJ Decision
at 77
and n.18.
12. Following the language "to induce such person" in
section
1128B(b)(2), there are two paragraphs. Paragraph (A) states "to
refer
an individual to a person for the furnishing or arranging for
the
furnishing of any [program-related business]." Paragraph (B) states
"to
purchase, lease, order, or arrange for or recommend purchasing,
leasing
or ordering any [program-related business]. The ALJ
conclusorily stated
that the plain meaning of paragraph (B) is that "payments
to induce
agreements to refer business are unlawful." ALJ Decision at
69. The
activities covered by paragraph (B) (which are used to obtain
items,
services, etc., paid for by Medicare and Medicaid) often involve but
do
not necessarily require agreements. It is clearly unreasonable to
infer
from the mere fact that some of the types of commercial
arrangements
listed may involve agreements that Congress intended to make
illegal
only payments to induce agreements to refer.
13. The Supreme Court has also pointed out that, while
criminal
statutes must provide adequate notice of the conduct which is
subject to
its penalties, the language of statutes is rarely capable
of
mathematical precision. "Consequently, no more than a reasonable
degree
of certainty can be demanded. Nor is it unfair to require that
one who
deliberately goes perilously close to an area of proscribed
conduct
shall take the risk that he may cross the line." Boyce Motor
Lines,
Inc. v. United States, 342 U.S. 337, 340 (1952). In structuring
these
joint ventures and crafting the private placement memoranda,
the
Respondents may well have tailored their arrangements to maximize
their
financial returns, despite knowing that they were at least close to
an
area proscribed by federal law.
14. The five exceptions may be paraphrased as (1) discounts passed
on
to the program, (2) bona fide employment relationships, (3)
certain
shared purchasing arrangements, (4) certain waivers of copayment
under
Part B of Medicare, and (5) regulatory safe harbors.
Section
1128B(b)(3) of the Act, as amended by Pub. L. No. 101-508,
section
4161(a)(4) (1990). The Secretary was directed to issue
regulations
specifying practices that would not be subject to prosecution
(i.e.,
"Safe Harbors"). Pub. L. No. 100-93, section 14 (1987).
Proposed
regulations were issued for comment in January 1989. 54 Fed.
Reg. 3088
(1989). Final regulations were published during the pendency
of this
appeal. 56 Fed. Reg. 35952 (July 29, 1991).
15. The court in Bay State quoted this language with approval and
then
rejected the reverse argument that no remuneration occurred if
the
payment was reasonable in relation to the professional services
rendered
because the payment must have been to compensate those services
rather
than to induce referrals. Id. at 29-30.
16. This construction is particularly appropriate for the
term
"including" in a portion of the Social Security Act, since
section
1101(b) of the Act states that this term "when used in a definition .
.
. shall not be deemed to exclude other things otherwise within
the
meaning of the term defined." Section 1101(b) thus provides
further
support for our conclusions.
17. The ALJ pointed to dicta in Bay State where the court stated
that
Congress meant crimes under sections 1128B(b)(1) and (2) to have
the
same elements for payor and payee. See ALJ Decision at 68, n.13
(citing
Bay State at 34). As the I.G. noted, the court's quotation of
parallel
statutory language stopped short of the differentiating language
which
immediately followed. I.G. Br. at 51, n.26. The ALJ's
reliance on
dicta is further undercut when the dicta is read in
context. The issue
of whether the elements of a violation of (b)(2)
included the payment of
remuneration in return for referrals did not arise in
Bay State.
Consequently, the dicta cited is pertinent only to the extent
(b)(1) and
(b)(2) contain the same elements but does not support disregarding
any
differences in language.
18. To illustrate that there are legitimate reasons for an
asymmetrical
reading, the I.G. looked to analogous provisions of the
principal
federal bribery statute, 18 U.S.C. 201(b)(1) and (2). The
bribery
statute is split into two parallel provisions with language similar
to
the anti-kickback statute. As the I.G. noted, Congress rejected
a
proposed revision to the bribery statute which would have merged
the
separate sections into one provision requiring proof of an
"intention,
agreement or arrangement to purchase or sell an official's
conduct"
whereas "under the existing law there need be only an intention
to
influence or induce conduct." I.G. Reply Br. at 9-10 (citing
National
Commission on Reform of Federal Criminal Laws, Working Papers,
Comment
on Official Bribery [references and emphasis omitted]).
19. See, e.g., Senate Special Comm. on Aging, Kickbacks Among
Medicaid
Providers, S. Rep. No. 320, 95th Cong., 1st Sess. (1977)
(Kickbacks
Report); Medicare-Medicaid Antifraud and Abuse Amendments:
Joint
Hearing on H.R. 3 Before the Subcomm. on Health, Comm. on Ways
and
Means, and the Subcomm. on Health and the Environment, Comm.
on
Interstate and Foreign Commerce, 95th Cong., 1st Sess. (1977)
(Joint
Hearing); Medicaid and Medicare Frauds: Hearing Before the
Subcomm. on
Long-Term Care of the Special Comm. on Aging, 94th Cong., 2d
Sess.
(1976-1977) (Senate Fraud Hearing); Subcomm. on Long-Term Care of
the
Special Comm. on Aging, Fraud and Abuse Among Clinical Laboratories,
S.
Rep. No. 944, 94th Cong., 2d Sess. (1976) (Clinical Lab Fraud Report).
20. Perhaps the ALJ read this statement as referring only to
disguised
kickbacks. The history as a whole, however, indicates that
"kickback"
here was simply a shorthand reference to proscribed
inducements.
21. The ALJ analyzed these cases -- United States v. Duz-Mor
Diagnostic
Laboratory, Inc., 650 F.2d 223 (9th Cir. 1981); United States
v.
Universal Trade and Industries, Inc., 695 F.2d 1151 (9th Cir.
1983);
Greber, supra; United States v. Stewart Clinical Laboratory, Inc.,
652
F.2d 804 (9th Cir. 1981); United States v. Lipkis, 770 F.2d 1447
(9th
Cir. 1985); United States v. Kats, 871 F.2d 105 (9th Cir. 1989).
22. First, every referral made by a limited partner would
incrementally
increase his payment, so at least some part of the payments of
referring
partners was "conditioned on" his referrals. Bay State holds
that
inducement is illegal even if it is only one of several purposes
of
payment so long as it is not merely incidental. Id. at 30; see
also
Greber. Second, most of the referrals to the laboratories in fact
came
from limited partners, and these referrals generated most of
the
revenues resulting in the payments to the partners. FFCLs 191 and
193.
Thus, the payments depended on the referrals, even though each
partner's
receipts were not necessarily mathematically proportional to
his
referrals. Third, limited partners were told that referrals
from
limited partners were essential to the venture's ability to
make
payments and their absence would be a "blueprint for failure."
FFCLs 42
and 44. Thus, it may be inferred that the limited partners
were aware
of the potential impact of their referral decisions on their
future
income. That not all limited partners made referrals does not
prove
that no violation occurred. See FFCL 139. It is not
necessary that a
payment succeed in inducing a referral for it to have been
intended to
serve that end.
23. The illegal arrangements considered were: (1) a scheme
whereby 15%
of the value of referred business would be returned to the
referring
party (Duz-Mor); (2) schemes where the amount returned to the
referring
party was ostensibly based on a related service provided by that
party
(e.g., Greber -- "consulting fee" paid to the referring physician
for
interpretation of test results; Lipkis -- 20% kickback from a
medical
laboratory to physicians for certain services such as "collection
of
specimens, spinning down blood"); (3) a scheme whereby free
laboratory
work would be provided for a physician's private patients in
exchange
for the referral of his program-related business (Stewart); and (4)
more
complex transactions involving illegal gain received through
an
ownership or management interest (e.g., Kats -- payments received due
to
a 25% interest in a clinic which received 50% kickbacks on the value
of
referred laboratory work; Universal Trade -- a medical laboratory
and
its administrative director, through a separate corporation, opened
a
medical lab in a clinic and returned to the clinic's
administrator/owner
a percentage of the net receipts and of the gross
receipts as an
administrative "salary" associated with no duties).
24. In support of the proposition that section 1128B(b)(2) requires
a
quid pro quo, the Respondents cited McCormick v. United States,
500
U.S. , 111 S.Ct. 1807 (1991). There, an elected official
was
originally convicted of extorting payments in violation of the
Hobbs
Act. Reversing the lower court, the Supreme Court held that
receipt of
political contributions may be vulnerable under the Hobbs Act as
having
been taken "under color of official right, but only if the payments
are
made in return for an explicit promise or undertaking by the official
to
perform or not to perform an official act." Id. at 1816.
McCormick has no relevance here. McCormick plainly focused on a
statute
whose language ("obtaining property . . . under color of
official
right"), elements, and purpose are altogether different from
section
1128B(b) of the Act. The gist of the decision is that it is
not
reasonable to infer that extortion was intended simply because
a
legislator voted for legislation that benefitted his constituents
after
receiving a political contribution knowing that the
contributors
expected him to support the legislation. The Court
stated:
[T]o hold that legislators commit the federal crime of
extortion
when they act for the benefit of constituents, . . .
shortly
before or after campaign contributions are solicited
and
received from those beneficiaries, is an unrealistic
assessment
of what Congress could have meant by making it a crime to
obtain
property from another, with his consent, "under color
of
official right." To hold otherwise would open to
prosecution
not only conduct that has long been thought to be well
within
the law but also conduct that in a very real sense
is
unavoidable so long as election campaigns are financed
by
private contributions.
111 S.Ct. at 1816.
The Court specifically did not consider application of the Hobbs Act
to
payments made to nonelected officials or to payments made to
elected
officials that are properly determined not to be campaign
contributions.
Id. at 1814.
25. The ALJ apparently felt he was restricted to the facts of
these
cases in order not to "apply the Act in a manner which exceeds the
reach
established by federal courts in criminal cases," so as not to create
a
divergent administrative interpretation. ALJ Decision at 66. It
is
proper that "the same rules of construction [apply] as would be
applied
by a federal court in a criminal enforcement proceeding." Id.
at 65.
However, applying the same rules of construction does not imply
awaiting
a federal court application to identical facts before considering
an
administrative remedy. Nothing in the statute, the cases, or
the
legislative history remotely suggests that, in adding an
administrative
remedy, Congress intended to tie the hands of the enforcement
agency
until each factual scenario was presented to a federal court. In
fact,
the legislative history indicated that the intention was that
an
administrative remedy be available "without the necessity of . .
.
obtaining a criminal penalty or obtaining a criminal conviction."
S.
Rep. 109, 100th Cong., 1st Sess. 10 (1987), reprinted in 1987 U.S.
Code
Cong. & Ad. News 682, 690.
26. The preamble to the final regulations is explicit on this point:
This regulation does not expand the scope of activities that
the
statute prohibits. The statute itself describes the scope
of
illegal activities. The legality of a particular
business
arrangement must be determined by comparing the particular
facts
to the proscriptions of the statute.
56 Fed. Reg. at 35954.
27. We note that the preamble to the final Safe Harbors
regulations
does contain some statements in general accord with what we
have
concluded is the proper meaning of the statute. We do not rely on
this
preamble in any way since it also could not constitute timely
notice.
28. We also reject the use to which the ALJ put the Stark
Bill,
concluding that "Congress would have had no need to enact
such
legislation if section 1128B(b) already prohibited such
arrangements."
ALJ Decision at 65. The Stark Bill will prohibit as of
1992 all
program-related referrals to clinical laboratories in which
the
referring physicians have an ownership interest or from which
they
receive compensation. The ALJ read this enactment to be directed
at
arrangements which merely encourage referrals, unlike his restriction
of
1128B(b) to agreements precluding provider choice. However, in
fact,
Congress' later enactment serves to eliminate the element of intent
and
the burden of proving that intent. The legislative history
indicates
that this enactment making these forms of physician self-referral
per se
illegal is the culmination of the very frustration expressed earlier
by
Congressional committees with the efforts to find or create loopholes
to
defeat enforcement of section 1128B(b) in this field. See 135
Cong.
Rec. H240 (February 9, 1989) (Statement of Rep. Stark).
29. Regarding the requisite intent, the ALJ said:
The test for intent was established in the Kats and
Greber
decisions as being the intent to do something prohibited by
the
Act. It is not necessary under this test to establish that
a
party had a specific intent to violate the Act, nor is
it
necessary to establish that the sole or even the primary
purpose
of the party charged with the violation was to engage
in
prohibited conduct. It will suffice to show that one purpose
of
a party was to engage in conduct prohibited by the Act.
ALJ Decision at 80. This statement regarding intent is not at issue.
30. In defining quid pro quo, Black's states:
Used in law for the giving [of] one valuable thing
for another. It
is nothing more than the
mutual consideration which passes between
the
parties to a contract and which renders it valid and binding.
At 1123. Perhaps the ALJ inferred from this that a binding
agreement
was required. If so, it is a tenuous inference at best.
We see nothing
in the choice of the words "in return for" or in the
legislative history
of the provision which indicates that Congress intended
"in return for"
to have the same gloss which Black's puts on the phrase quid
pro quo.
Moreover, even if Congress did intend to suggest the passing of
mutual
consideration between parties, this does not necessarily imply
a
preexisting agreement precluding provider choice. A contract may be
an
executed one "where the transaction is completed at the moment that
the
arrangement is made, as where an article is sold and delivered,
and
payment therefor is made on the spot . . ." (Id. at 323) or a
unilateral
one "in which one party makes an express engagement or undertakes
a
performance, without receiving in return any express engagement
or
promise of performance from the other" (Id. at 325). Neither of
these
types of contracts involves an "agreement" in the sense the ALJ
appears
to be using that term.
31. We note that, prior to 1984, physicians billed Medicare
directly
for tests they performed or ordered from independent
clinical
laboratories. Apparently, in an effort to establish and
maintain a
stream of business, some laboratories would offer discounts to
doctors.
However, the physicians could bill the beneficiaries and Medicare
for
the undiscounted cost of the test.
The Deficit Reduction Act of 1984, Pub. L. No. 98-369 (1984)
(DEFRA),
established a direct billing requirement, i.e., Medicare would not
pay
doctors who did not perform or supervise laboratory work for
which
reimbursement was sought. Medicare would pay only the
laboratory
actually performing the work. DEFRA also changed the
payment
methodology for clinical laboratory tests to the lesser of the
actual
charge or a fee schedule payment rate. However, DEFRA also
contained a
reference lab exception. This exception allowed an
independent clinical
laboratory to bill Medicare for tests which it did not
perform, but sent
out to a reference laboratory.
The practical effect of the exception was that large volume
laboratories
could offer discounts to small laboratories (instead of
doctors). In
turn, the small laboratories could bill the higher fee
schedule amount
to Medicare.
32. The ALJ stated that, if the I.G. were correct about the
legal
standard, "then Respondents violated the Act by offering payments
to
physicians in the form of returns on . . . partnership investments
and
by urging those physicians to refer business . . . ." ALJ Decision
at
61. However, this assertion represented a hypothetical
assessment,
since the ALJ actually rejected the I.G.'s argument.
Therefore,
contrary to what the I.G. asked, we do not direct a finding that
the
Respondents violated the Act.
33. We note that it is relevant but not required that payments
be
excessive in comparison to the services or other value received.
As
noted in Bay State, the opportunity to earn money, even if
not
disproportionate to the service provided, can serve as a remuneration
if
a non-incidental purpose of the payment is to induce referrals. Id.
at
29.
34. In analyzing the Greber decision, one commenter articulated
the
objectives of the statute as: (1) "eradicating the practice
of
physicians choosing a laboratory based on the size of the
kickbacks
received" and (2) combatting "financial incentives [paid to]
physicians
for ordering" unnecessary services. Prenetta, United States
v. Greber:
A New Era in Medicare Fraud Enforcement?, 3 Journal of
Contemporary
Health Law and Policy 309, 319 (1987). For this reason, de
minimis or
very remote forms of remuneration, such as drug samples or
recruitment
lunches, may not be subject to prosecution, as the ALJ
worried. If the
remuneration offered is unlikely to affect physician
referral decisions,
it is probably not intended to induce referrals, absent
clear evidence
to the