Health care lawyers have long debated whether the AKS safe harbor provides full protection for employees who are paid to market a supplier’s services.  In Carrel v. AIDS Healthcare Foundation, 898 F.3d 1267 (Aug. 7, 2018), the Eleventh Circuit might have come a step closer to answering this question.  The Carrel court affirmed the dismissal of a False Claims Act suit against the AIDS Healthcare Foundation, Inc. (the “Foundation”), holding that the Anti-Kickback Statute (“AKS”) safe harbor for employment relationships protected bonuses the Foundation paid to employees who referred HIV/AIDS patients to the Foundation for treatment. The outcome of this case was unsurprising given the facts and relevant precedents in the Eleventh Circuit, but highlights an important potential limitation to the AKS’s employment safe harbor.

Carrel Put the Strict Terms of the Employment Safe Harbor to the Test

The AKS criminalizes knowingly and willfully offering, paying, soliciting, or receiving any remuneration to induce or reward referrals of items or services reimbursable by a federal health care program (e.g., Medicare or Medicaid). 42 U.S.C. § 1320a-7b(b). One of the most common AKS safe harbors protects “any amount paid by an employer to an employee (who has a bona fide employment relationship with such employer) for employment in the provision of covered items or services.” 42 U.S.C. § 1320a-7b(b)(3)(B). Regulations provide a parallel exemption for “any amount paid by an employer to an employee … for employment in the furnishing of any item or service for which payment may be made in whole or in part under Medicare, Medicaid, or other Federal health care programs.” 42 C.F.R. § 1001.952(i).

The plaintiffs in Carrel alleged that the Foundation violated the AKS by paying its employees bonuses for each HIV-positive individual they referred to the Foundation for treatment. Specifically, the Foundation had a contract with the State of Florida under which it conducted HIV testing. The contract (funded by the federal Ryan White Act) required the Foundation to refer clients with positive test results to health care providers for treatment, and compensated the Foundation for such referral services. In an apparent effort to incentivize these referrals, the Foundation offered cash bonuses to employees for each HIV-positive patients they successfully directed to the Foundation for follow-up medical care. The bonuses were allegedly not available if the patients received follow-up care from a provider that was not affiliated with the Foundation.

The plaintiffs’ case hinged on the scope of the AKS employment safe harbor. The plaintiffs urged the court to rule that, for the employment safe harbor to apply, “the remuneration paid must be tied to the furnishing of a legitimate covered service and not merely a referral promised to a particular provider.” The plaintiffs conceded that the Ryan White Act funding covers “referral services,” but claimed that “directing referrals to a particular provider in exchange for cash is not” a covered service, so “purchase of patient referrals through ‘per head’ bonus payments violated the AKS.”

The Eleventh Circuit roundly rejected the plaintiffs’ arguments, relying almost exclusively on the text of the applicable safe harbor. It noted that the employment safe harbor, by its terms, protects payments to employees for their “employment in the provision of covered items or services.” Because the Ryan White Act covers “referrals of individuals with HIV/AIDS to appropriate [health care] providers,” such referrals are a “covered service” and the Foundation was entitled to pay its employers for such service in any way it so chose.

The structure of the Foundation’s  referral bonus invited regulatory scrutiny. Not only was there a direct payment in exchange for referrals of federal health care program business, the bonuses were only available if employees referred patients to the Foundation.  That being said, the outcome of this case is unsurprising. The compensation relationship between the Foundation and its employees fits squarely within the four corners of the employment safe harbor (it was a bona fide employment relationship covering services reimbursable by the federal health care programs). The plaintiffs were effectively asking the court to add new criteria to the safe harbor—namely to prohibit compensation based on the volume of referrals and to require nondiscriminatory referral incentives. The Eleventh Circuit was understandably unwilling to do so, explaining that they “lack the authority to ignore the texts of [the AKS and its safe harbor] in the service of general purposes and selective legislative history.”

Lessons for Employers

Although a victory for the defendants, the decision in Carrel highlights an important limitation of the employment safe harbor. The safe harbor, by its terms, covers only “in the furnishing of any item or service for which payment may be made in whole or in part under Medicare, Medicaid, or other Federal health care programs.” 42 C.F.R. § 1001.952(i).  The court in Carrel relied heavily on this language, repeatedly noting that the Foundation received funding for referral services through the Ryan White Act, which it specifically deemed a type of service covered by the federal health care programs. This focus on federal funding suggests that the case would have come out differently had Ryan White Act funds not specifically reimbursed the Foundation for the referral services in question.

Indeed, the requirement that the employment be “in the provision of covered items or services” has long caused health lawyers to question whether the employment safe harbor can ever cover employment for an employee’s activity in marketing services because these services are not covered items or services funded by federal health care programs. CMS has not issued clear guidance on this issue. On the one hand, CMS has explicitly stated that the employment safe harbor would cover marketing, which is generally not a covered service. 54 Fed. Reg. 3088, 3093 (Jan. 23, 1989) (the employment safe harbor “permits an employer to pay an employee in whatever manner he or she chooses for having that employee assist in the solicitation of Medicare or State health care program business”). On the other hand, CMS has also indicated, and several courts have held, that the employment safe harbor is unavailable for referral services because they are not a “covered item or service.” See United States v. Starks, 157 F.3d 833 (11th Cir. 1998).

Ultimately, the Carrel case is a reminder that AKS safe harbors can protect financial relationships that seemingly belie the intent of the AKS, while leaving seemingly benign relationships unprotected. Employers should take special care with employment relationships that implicate AKS but do not involve the provision of services covered by a federal health care program, as such arrangements may not clearly fit within the strict terms of the employment safe harbor.