Blog January 28, 2020
Healthcare Compliance 101: Making Sense of Fraud and Abuse Laws and Regulations

The laws that govern physician relationships with industry come from a variety of sources on both the federal and state levels.  However, the five most important Federal fraud and abuse laws that apply to physicians are the False Claims Act (FCA), the Anti-Kickback Statute (AKS), the Physician Self-Referral Law (Stark law), the Exclusion Authorities, and the Civil Monetary Penalties Law (CMPL).  Government agencies, including the Department of Justice, the Department of Health & Human Services Office of Inspector General (OIG), and the Centers for Medicare & Medicaid Services (CMS), are charged with enforcing these laws.


Primarily, these federal and state fraud and abuse laws are enacted to prohibit the potential for financially inducing a physician to generate business for a party that is concurrently offering or paying remuneration to the physician. This document is intended to summarize key fraud and abuse laws that govern the practice of medicine and offer practical guidance on engaging and managing relationships with industry in a compliant manner.



The federal anti-kickback statute prohibits any individual or entity from knowingly and willfully soliciting or receiving, or offering or paying any form of remuneration (“in cash or in-kind”) in order to induce the following: (a) referral of an individual for the furnishing, or arranging for the furnishing of, any item or service payable under a federal healthcare program or (b) purchasing, leasing, ordering, or arranging of any good, facility, service or item payable under a federal healthcare program.  “Federal healthcare program” covered by the anti-kickback statute is defined as a health benefit program funded in whole or in part by the federal government, such as Medicare, Medicaid, the Department of Veterans Affairs health network, TriCare, the Indian Health Service, the Maternal and Child Health Services Block Grant Program and the Social Services Block Grant Program.  It does not include the Federal Employee Health Benefits Program.

The anti-kickback law is drafted broadly.  It not only outlaws a quid pro quo actual payment in return for a referral but also bans both proposed and implemented financial arrangements in which the remuneration is intended to induce the physician to order or prescribe a certain product.  As used by the anti-kickback statute, the term “referral” includes not only a referral of a patient for services but also the furnishing, ordering, purchasing, or leasing of any item or service that is reimbursable under any federal healthcare program.

For example, a physician who is remunerated by a drug company specifically for switching a patient’s medication to the product of the paying drug company, which is covered under Medicare Part D, would be deemed to be a “referring” party under the federal anti-kickback statute because the physician is ordering an item that is reimbursable under Medicare Part D, a federal healthcare program.


  1. The One Purpose Test

The federal courts have ruled consistently that the anti-kickback statute is violated if the ordering or referral of items or services was only one of the purposes, and not even necessarily the primary or sole purpose, for the remuneration.  Drug and device companies that offer gifts, cover expenses or even seek to contract for the services of a physician are potential targets for prosecution under the anti-kickback statute.  Likewise, physicians who solicit or receive any form of remuneration from drug and device companies, or their intermediaries or agents, are in the gray zone and may be crossing into the realm of illegality.

In order to win a conviction, the federal anti-kickback law requires the federal government to prove to a jury that an accused party intended to violate the law.  The party charged must be shown to have acted with the requisite intent or state of mind to offer or give or solicit or receive remuneration as an inducement to generate Medicare or Medicaid referrals.  While this has proven to be a high bar for prosecutors, the federal government enforcement position, as articulated by the OIG in its 2003 Compliance Program Guidance for Pharmaceutical Manufacturers, continues to be that “a lawful purpose will not legitimize a payment that also has an unlawful purpose.”

A significant portion of enforcement activity and litigation focusing on financial payments to physicians from drug and device companies has involved claims that items of value, such as paid trips and lavish dinners, or “compensation” for little or no actual services rendered, are really disguised inducements for the physicians to prescribe or order the paying company’s products.  The anti-kickback statute has been used by prosecutors in illegal marketing cases against pharmaceutical companies that sell drugs administered by physicians, alleging that the company has “marketed the spread” between the discounted price it charged physicians and the significantly higher rate of Medicare reimbursement paid to the physicians, thereby inducing physicians to obtain their business.

While the anti-kickback law does not prohibit a physician from making a profit by dispensing prescription medication, the statute may be violated when that margin is offered to the doctor as part of a marketing effort to promote the prescription of that drug use by a manufacturer.  Other industry marketing practices that have been challenged under the anti-kickback statute include offers of free trips, frequent flyer miles, sporting event and concert tickets, “no show” consultancies, grants to conduct drug studies with minimum work involved, cash payments to switch to the company’s product and payments to attend seminars.  As a practicing physician, you may have opportunities to work as a consultant or promotional speaker for the drug or device industry. For every financial relationship offered to you, evaluate the link between the services you can provide and the compensation you will receive.  Test the propriety of any proposed relationship by asking yourself the following questions:

  • Does the company really need my particular expertise or input?
  • Does the amount of money the company is offering seem fair, appropriate, and commercially reasonable for what it is asking me to do?
  • Is it possible the company is paying me for my loyalty so that I will prescribe its drugs or use its devices?

If your contribution is your time and effort or your ability to generate useful ideas and the payment you receive is fair market value compensation for your services without regard to referrals, then, depending on the circumstances, you may legitimately serve as a bona fide consultant.  If your contribution is your ability to prescribe a drug or use a medical device or refer your patients for particular services or supplies, the proposed consulting arrangement likely is one you should avoid as it could violate fraud and abuse laws.

For example, if a drug company offers to pay you and a hundred other “thought leaders” to attend a conference in the Bahamas without requiring preparatory work on your part or information about your expertise in the field (other than the fact that you are a licensed physician), you should be suspicious that the company is attempting to influence you to prescribe its drug.


  1. AKS Safe Harbors

The safe harbor regulations provide regulatory exceptions to the broad prohibitions under the anti-kickback statute.  The permissibility and risks associated with a physician’s financial relationships always depend on the facts and circumstances, as well as whether the physician and his or her health- care organization have acted in good faith to attempt to act in a compliant fashion with the law.

Examples of such good faith efforts include avoidance of any arrangement in which remuneration is related to the volume or value of products ordered by the physician, adoption of a compliance plan and documented written agreements with terms that satisfy as many elements of an applicable anti-kickback safe harbor as possible.

The safe harbor regulations relevant to physicians’ financial relationships with drug and device companies are as follows:


  1. Personal Services Arrangements

The most common form of a financial relationship between a drug or device company and a physician is one that involves the retention of the physician by the company to render some sort of consultative service.  Physicians are retained by companies to perform a variety of services, including consulting on a specific product during the pre-marketing phase, serving on scientific advisory boards and serving on speaker’s bureaus.  These types of arrangements involving a physician as a provider of services on an independent contractor basis by the company can potentially be safe harbored from anti-kickback prosecution under the personal services safe harbor.

This safe harbor applies to any payment made by a principal to an agent as compensation for services of the agent (an individual other than a bona fide employee) if the following conditions are satisfied:

  • The agreement is set out in writing and signed by the parties;
  • The agreement specifies the services to be provided by the agent;
  • If the agreement is intended to provide for the services of the agent on a periodic, sporadic or part-time basis, rather than on a full-time basis for the term of the agreement, the agreement specifies exactly the schedule of such intervals, the precise length and the exact charge for such intervals;
  • The term of the agreement is for not less than 1 year;
  • The aggregate compensation paid to the agent over the term of the agreement is set in advance, is consistent with the fair market value in arms-length transactions and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare or Medicaid;
  • The services performed under the agreement do not involve the counseling or promotion of a business arrangement or other activity that violates any state or federal law; and
  • The aggregate services contracted for do not exceed those which are reasonably necessary to accomplish the commercially reasonable purpose of the services.


While the OIG will not opine in its anti-kickback advisory rulings on how fair market value is defined, the agency has consistently endorsed those arrangements that tie commercially reasonable payments to the rendition of actual services and that are not prone to resulting in overpayment or payment for little or no real effort to the referral source.

For example, consider a consulting agreement between a pharmaceutical company and a physician who is in a position to order or influence the ordering of that company’s products under which the doctor is retained to serve on the company’s advisory board and is paid a flat fee for his service that is not in excess of the fair market value for the doctor’s services. If the terms and conditions of the arrangement are set forth in a commercially reasonable contract with a term of at least one year, this agreement would come within the personal services anti-kickback safe harbor.  However, if the same arrangement was not committed to a written agreement, if it included remuneration in excess of fair market value or if the physician was not required to perform any actual tasks for the payments, the relationship would not be safe harbored and could be subject to prosecution.


  1. Investment Interests

Some physicians working with drug and device companies may be offered ownership interests in the company.  For instance, a physician may be retained by a start-up company with little or no resources to pay a fee but plenty of stock to issue. Device companies retain physicians not just as consultants but also as co-developers of device products or patentable innovations. Physicians in a position to influence a hospital’s surgical device purchase decision or a pharmacy plan’s formulary may be offered stock or stock options in a drug or device company interested in selling devices or drugs to the hospital.


This safe harbor is defined separately for three categories of companies: (1) certain publicly traded companies; (2) small privately held joint ventures; and (3) closely held ventures located in underserved areas. The safe harbor defines “investment interest” to mean a security issued by an entity, including stock, LLC or partnership interests, or any form of debt instrument.  “Active investor” is defined as one who is responsible for day-to-day management or who agrees in writing to undertake liability for the actions of the company’s agents.  A “passive investor” is defined as one who is not an active investor.

  • Publicly Traded Companies

A return on an investment interest, such as a dividend or interest income made to an investing physician, is not illegal remuneration under the anti-kickback statute if the company possesses more than $50 million in underappreciated net tangible assets (based on the net acquisition cost of purchasing such assets from an unrelated entity) related to the furnishing of healthcare items and services within the previous fiscal year or 12-month period, and five standards are met. These standards are as follows:

  • If the interest is an equity security registered with the U.S. Securities and Exchange Commission (SEC);
  • The interest is obtained on terms (including any direct or indirect transferability restrictions) and at a price equally available to the public when trading on a registered securities exchange;
  • The company or investor must not market or furnish the company’s items or services (or those of another entity as part of a cross-referral agreement) to passive investors differently than to non-investors;
  • The company or any of its investors (or any agent of such parties) must not loan funds to or guarantee a loan for an investor who is in possession to make or influence referrals to, furnish items or services to, or otherwise generate business for the company if the investor uses any part of the loan to obtain the investment interest; and
  • The amount of payment to an investor in return for the investment interest must be directly proportional to the amount of the capital investment of that investor.

An example of a safe harbored investment interest relationship between a doctor and a publicly-traded company would be a primary care physician who not only prescribes Lipitor but also receives dividend payments from stock in Pfizer that the physician owns as an investment.


  1. Small Companies

Investment interests in smaller companies that are not either publicly traded or at the size required in the first investment interest safe harbor can try to qualify for the second investment interest safe harbor designed for investment interests in smaller companies.

A return on an investment interest, such as a dividend or interest income made to an investing physician, is not illegal remuneration under the anti-kickback statute if the company has active or passive investors and the following eight standards are met:

  • No more than 40% of the value of the investment interests of each class of investment interests may be held by investors who are in a position to make or influence referrals to furnish items or services to, or otherwise generate business for the entity;
  • The terms on which an interest is offered to a passive investor, if any, who is in a position to make or influence referrals to, furnish items and services to, or otherwise generate business for the entity must be no different from the terms offered to other passive investors; the terms on which an interest is offered to an investor who is in a position to make or influence referrals to, furnish items and services to or otherwise generate business for the entity must not be related to the previous or expected volume of referrals, items or services furnished, or the amount of business otherwise generated from that investor to the entity;
  • There is no requirement that a passive investor, if any, make referrals to, be in a position to make or influence referrals to furnish items or services to, or otherwise generate business for the entity as a condition for remaining as an investor;
  • The entity or any investor must not market or furnish the entity’s items or services (or those of another entity as part of a cross-referral agreement) to passive investors differently than to non-investors;
  • No more than 40% of the entity’s gross revenues related to the furnishing of healthcare items or services may come from referrals or business otherwise generated from investors;
  • The entity or any investor (or other individual or entity acting on behalf of the entity or any investor in the entity) must not loan funds to or guarantee a loan for an investor who is in a position to make or influence referrals to, furnish items or services to or otherwise generate business for the entity if the investor uses any part of such loan to obtain the investment interest; and
  • The amount of payment to an investor in return for the investment interest must be directly proportional to the amount of the capital investment (including fair market value of any preoperational services rendered) of that investor.

Many surgeons and other specialists assist in product development and as consideration of their advice are offered stock options or equity in small start-up biotech or device companies. If these physicians are in a position to order or to cause the ordering of the company’s products, their investment interest would only be safe harbored if all of the elements of the small company safe harbor are satisfied.  For example, if the physician owns no more than 40% of the company, generated no more than 40% of the company’s gross revenues, was offered the equity on the same terms as offered to other passive investors, was not required to refer or generate business and only received distributions directly proportional to his or her equity, the relationship could come within the anti-kickback safe harbor for small company investment interests.

The safe harbor for interests in ventures in underserved areas is similar to the safe harbor for small companies but requires that at least 75% of the dollar value of the entity’s business in the previous year be derived from services of persons who reside in an underserved area or are members of medically underserved populations.  It also sets forth much more liberal equity and revenue participation requirements for investing physicians than the other two investment interest safe harbors. “Underserved areas” and “medically underserved areas” are those designated by the DHHS.



The Physician Self-Referral Law, commonly referred to as the Stark law, prohibits physicians from referring patients to receive “designated health services” payable by Medicare or Medicaid from entities with which the physician or an immediate family member has a financial relationship unless an exception applies. Financial relationships include both ownership/investment interests and compensation arrangements.  For example, if you invest in an imaging center, the Stark law requires the resulting financial relationship to fit within an exception or you may not refer patients to the facility and the entity may not bill for the referred imaging services.

The Stark law is a strict liability statute, which means proof of specific intent to violate the law is not required.  The Stark Law prohibits the submission or causing the submission, of claims in violation of the law’s restrictions on referrals.  The law is generally violated by the making of a referral or the filing of a claim where a non-excepted “financial relationship” exists between a referring physician and the healthcare entity (i.e., the very existence of the financial relationship and the making of the referral is enough to constitute a violation of the law without regard to the intent of the parties).  The Stark regulations are issued by the Centers for Medicare and Medicaid Services (CMS), while the OIG has the authority to impose CMP and program exclusions for violation of the Stark law.  Penalties for physicians who violate the Stark law include fines as well as exclusion from participation in the Federal health care programs.


While compliance with Stark does not automatically cause a physician’s relationship to be compliant with the anti-kickback laws, it is likely to bring the relationship closer to being within a safer zone under the anti-kickback statute even if it does not fall within any of the anti-kickback safe harbors.


The Stark Law prohibits the making of referrals or the billing for payment for certain designated health services and items covered by Medicare or Medicaid if there is a financial relationship between the referring physician (or immediate family member of the physician) and an entity which renders and is paid for the referred or ordered services. The prohibition is absolute unless the relationship can be proven to come within at least one of the exceptions enumerated in the Stark regulations.

The items and services covered under the Stark law include clinical lab services, inpatient and outpatient hospital services, outpatient prescription drugs, radiology services, home health, durable medical equipment (DME) and supplies, physical and occupational therapy services, radiation therapy services, parenteral and enteral nutrients, equipment and supplies, as well as prosthetics, orthotics and prosthetic devices and supplies.



The federal government has other statutes that can be used against providers that are seeking program reimbursement under false pretenses.  The most potent and frequently used of this kind is the federal False Claims Act (FCA).  It permits the government to bring a civil suit against any party that knowingly submits a false or fraudulent claim for payment from any federal agency. A party is deemed to have knowingly submitted a false claim if that party not only intentionally submits a false claim but also acts in deliberate ignorance or in reckless disregard of the truth or falsity of the claim submitted.

The FCA authorizes the government to recover treble damages plus a CMP up to $11,000 per false claim submitted.  In a matter alleging that a provider submitted months or years of claims for Medicare or Medicaid payment containing false statements, these penalty amounts can add up to hundreds of thousands or millions of dollars.  Thus, actions under the FCA have resulted in many multi-million-dollar settlements against healthcare organizations, especially drug and device companies.


  1. Whistleblower Qui Tam Actions

The qui tam process under the FCA involves the filing of a complaint by a private citizen often a former or current employee or contractor of a defendant company on behalf of the federal government against a party alleged to have submitted false claims to the federal government. The FCA provides protection against retaliation against whistleblower employees.


  1. The FCA And Anti-Kickback and Stark Violations

The federal FCA is not only used by whistleblowers and the U.S. government to pursue cases involving fraudulent billing, such as physician upcoding or billing for services not rendered, but also has been used in cases alleging anti-kickback and Stark violations in challenged financial relationships between physicians and industry.

The anti-kickback and Stark laws are increasingly being used as underlying allegations in federal FCA cases.  The theory underlying the use of an anti-kickback or Stark violation as a precursor to a federal FCA action is one of implied or express false certification, with some FCA decisions involving underlying anti-kickback or Stark violations have even held that the government or whistleblower does not have to prove that a government program suffered actual damages in order to state an actionable FCA claim.  However, relief in such cases is limited to civil penalties and not any multiple damages.  The FCA puts the burden on the government to prove the amount of harm the government suffered with sufficient specificity to support a reasonable estimate of its damages.

Frequently, these matters are settled before a trial.  For example, in 2003, a $6.5 million settlement was paid in a Stark-related qui tam FCA case involving a group of Rapid City, South Dakota, oncologists that allegedly paid below-fair-market-value rent to a hospital for office space.

Overall, Stark and anti-kickback compliance is essential to avoid the risk of FCA suit and liability especially due to the possibility of a qui tam action filed by a whistleblower who believes a financial arrangement with a physician is not legitimate or involves a level of improper inducement to influence the generation of business.



The imposition of CMPs on providers is authorized under federal statute.  The OIG has the authority to impose CMPs of up to $10,000 per item or service and treble damages for a variety of infractions, including violations of anti-kickback and Stark.  In order to ultimately succeed in a CMP civil case, the government needs to prove that the provider knew or “should have known” of the violation. The “should have known” standard of intent can be demonstrated by the OIG if it introduces evidence that the person or entity charged acted in deliberate ignorance, or reckless disregard, of the truth or falsity of the information.

If a CMP action defendant has already been convicted of making false or fraudulent statements under federal law, whether by verdict or by plea of guilty or no contest, the defendant cannot deny the essential elements of that offense in a CMP proceeding.  CMPs may be imposed after a hearing before an administrative law judge and may be appealed to an internal agency appeals board and then to federal court.  Conduct which gives rise to the imposition of a CMP may also subject a person to exclusion from participation in the Medicare and Medicaid programs. Some examples of CMPL violations include:

  • Presenting a claim that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent;
  • Presenting a claim that the person knows or should know is for an item or service for which payment may not be made;
  • Violating the AKS;
  • Violating Medicare assignment provisions;
  • Violating the Medicare physician agreement;
  • Providing false or misleading information expected to influence a decision to discharge;
  • Failing to provide an adequate medical screening examination for patients who present to a hospital emergency department with an emergency medical condition or in labor; and
  • Making false statements or misrepresentations on applications or contracts to participate in the Federal health care programs.

Recent CMP enforcement actions related to anti-kickback and Stark prohibited self-referrals have included physicians receiving compensation greater than the fair market value of their services, physicians billing for free drug samples and the provision to physicians of free medical devices.



The OIG has very broad authority and discretion to exclude providers from participation in the Medicare and Medicaid programs for a variety of infractions. The exclusion of a provider can follow a felony conviction under federal, state, or local law relating to healthcare fraud, regardless of whether government programs were involved.  The OIG can initiate an action to exclude a provider if it believes there is evidence of a violation of the anti-kickback statute, even if there has not been a court determination in a criminal proceeding.  The length of exclusion varies and generally ranges from one to ten years, although multiple convictions can lead to permanent exclusion.

The OIG is legally required to exclude from participation in all Federal health care programs individuals and entities convicted of the following types of criminal offenses: (1) Medicare or Medicaid fraud, as well as any other offenses related to the delivery of items or services under Medicare or Medicaid; (2) patient abuse or neglect; (3) felony convictions for other health-care-related fraud, theft, or other financial misconduct; and (4) felony convictions for unlawful manufacture, distribution, prescription, or dispensing of controlled substances. OIG has the discretion to exclude individuals and entities on several other grounds, including misdemeanor convictions related to health care fraud other than Medicare or Medicaid fraud or misdemeanor convictions in connection with the unlawful manufacture, distribution, prescription, or dispensing of controlled substances; suspension, revocation, or surrender of a license to provide health care for reasons bearing on professional competence, professional performance, or financial integrity; provision of unnecessary or substandard services; submission of false or fraudulent claims to a Federal health care program; engaging in unlawful kickback arrangements; and, defaulting on health education loan or scholarship obligations.

In addition to the OIG permissive exclusion authority, the federal statute on program exclusion mandates exclusion of any provider for conviction of violating a program-related crime, including the anti-kickback statute.  “Conviction” is defined broadly to include pleas of guilty and no contest.  This “big stick” of program exclusion carried by the federal government is often referred to as the “civil death penalty.”