Neil Caesar, J.D.

Neil Caesar, J.D.

All readers of this column know that federal fraud-and-abuse laws intertwine with virtually every physician financial relationship and managed care affiliation. But don't let your concern with federal laws obscure the equal importance of your state's fraud-and-abuse legislation. Many times, state rules can be every bit as complicated and subtle as federal law. Often the danger is increased because the state law appears relatively simple, almost identical to language in federal fraud-and-abuse legislation.

To illustrate this point, let's explore South Carolina's 1993 Provider Self-Referral Act. Much of the law focuses on physician self-referrals to health care service-providing entities in which the physician has an investment interest. In this respect, the core of the act tracks the basic self-referral prohibitions of the federal Stark law (although with a number of differences). But the law also contains a broad prohibition against kickbacks generally. It bars a health care provider from offering, paying, soliciting or receiving a kickback in cash or in kind, in exchange for referring or soliciting patients.

The statutory language for this state law is quite similar to the anti-kickback provisions in Medicare/Medicaid anti-fraud-and-abuse rules. But there are important differences. Note, for instance, that South Carolina actually uses the term kickback in the statutory language. Ironically, even though the federal law prohibition is generally referred to as the anti-kickback law, the federal statutes never use the word kickback. Rather, they prohibit giving or getting (or soliciting) remuneration in exchange for referring or purchasing referrals or purchases of items covered by federal health care payment programs.

Going in circles

This may seem like a unimportant distinction, but it's not. South Carolina looks to the federal tax code in helping to clarify what constitutes a kickback, and concludes in part that, to be a kickback, the payment must not be tax-deductible as an ordinary and necessary business expense. Under Section 162(a) of the Internal Revenue Code, businesses may deduct ordinary and necessary expenses paid in carrying on any business. IRC Section 162(c)(2) denies this deduction for bribes, kickbacks and other payments that are illegal under federal or state law. Thus, putting the federal and state law together, we are left with a conundrum: Remuneration as an inducement to refer is a kickback under South Carolina law if it is a non-deductible kickback under the Internal Revenue Code. The same payment is a kickback under the IRC if it is a kickback under South Carolina law. Yikes!

This definitional circle yields no insight. But remember that the IRC law also prohibits deductions for payments that are illegal under federal law. The Medicare/Medicaid anti-kickback prohibitions fall into this category. Therefore, as a rule of thumb, payments that are illegal under federal anti-fraud-and-abuse laws are probably a kickback under South Carolina law (and under federal tax law).

But many physician relationships are not clearly legal or illegal. Rather, they fall into the gray area where the government may pursue a challenge to the arrangement, but where good arguments exist on both sides of the issue. In these situations, the special kickback focus of the state law may affect the risk of pursuing certain courses of action.

Suppose, for example, that Provider A extends to Medical Group B a loan at the prime rate that is not collateralized. This loan would require analysis under the federal anti-kickback law, because the interest rate charged is within the low end of fair market value for commercially available loans, and because the loan is not secured. But, even though the loan is risky, it is not certain that it would be deemed an inducement for a referral, and thus illegal under federal law. Under South Carolina's anti-kickback law, however, we must additionally note that loans are not deductible as ordinary and necessary business expenses by the creditor. Thus, the South Carolina physician must know that the loan is vulnerable to state scrutiny because it does not have protection as a tax deduction. If my client were unsure whether to accept this loan, I would recommend even greater caution because of the additional state law issues.

Let's take another example. Suppose Infusion Supplier X pays a lump sum grant, over time, to Medical Group Z to perform research in accordance with the medical group's written proposal. Let's say the research involves the supplier providing infusion therapy to patients and comparing the effectiveness of a plan of treatment involving IV therapy with another plan of treatment.

In this case, the medical group's receipt of funds ties integrally (though perhaps not exclusively) to services rendered to patients referred to Supplier X. Because Supplier X provides the grant funds, this arrangement must be evaluated under federal law (anti-kickback law and Stark law) as well as state law. Federal anti-kickback law analysis will focus on whether the research benefits the infusion supplier, whether actual work is done by the physician, whether the grant amount is appropriate for the work performed, whether the results benefit the supplier (or, if the supplier is a charitable organization, if it benefits the community), whether the amount of the grant relates to the amount of referrals, whether the supplier has a formal grant program, etc. But note that South Carolina law additionally requires Supplier X to justify the research grant as an ordinary and necessary deductible business expense.

There's good news, too

Of course, differences between state law and federal law sometimes help the provider. Suppose, for example, a pediatrician pays an orthopedist a negotiated fee to see certain pediatric patients, and the pediatrician then seeks full reimbursement from third-party payers for those services. Because no Medicare patients are involved, the federal anti-kickback laws probably would not apply here, unless some of the referred children were covered under Medicaid. There is still a state law issue, however, because this relationship could be viewed as a disguised way for the pediatrician to receive a kickback (the profit) for work actually referred to the orthopedist.

In this case, however, the provider is safe because of a state law loophole. The subcontract fee paid to the orthopedist clearly is an ordinary and necessary business expense if it is within fair market range. Thus, in this case we need not address whether the subcontract fee actually was paid in order to induce referrals. South Carolina law says this is not a kickback, regardless of motive.

The author is president of The Health Law Center (Neil B. Caesar Law Associates, PA), a national health law/consulting practice in Greenville, S.C.

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