Conflicting Federal Decisions Create Uncertainty for Clinical Laboratories About the Application of EKRA

On May 28, 2022, in United States v. Schena, the Northern District of California found that EKRA prohibits a laboratory from paying commissions to its sales employees to secure referrals of patients indirectly from physicians.[1] The decision is only the second federal court case to interpret EKRA and it directly contradicts an earlier decision by the District of Hawaii in S&G Labs Hawaii, LLC v. Graves, which held that payments to a sales employee in compensation for marketing efforts directed at physicians and other lab clients did not violate EKRA.[2]

What is EKRA?

The Eliminating Kickbacks in Recovery Act (“EKRA”), 18 U.S.C. § 220, is a criminal statute passed in 2018 that prohibits knowingly and willfully soliciting, receiving, paying or offering any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind “in return for referring a patient or patronage,” “to induce a referral of an individual” to a recovery home, treatment facility or laboratory, or “in exchange for an individual using the services” of a recovery home, treatment facility or laboratory. EKRA contains an exception for compensation arrangements for bona fide employees and independent contractor arrangements. But, unlike the bona fide employee safe harbor to the federal Anti-Kickback Statute, the exception under EKRA prohibits compensation determined by or varying with (1) referrals to the laboratory, (2) the number of tests or procedures performed, or (3) the amount billed or received from payors. EKRA applies to federal health care programs, commercial insurance and self-cash pay patients. A violation of EKRA may result in a fine of up to $200,000, imprisonment for 10 years, or both, for each violation.

Graves and Schena Decisions

Graves involved a dispute between a laboratory and a former sales employee who oversaw client accounts, which included physicians, counseling centers and other referral sources. The employee was paid a base salary plus a percentage of net profits. After EKRA was enacted, the laboratory attempted to renegotiate the contact and, after the parties were unable to agree on the terms, the laboratory canceled the contract. Responding to the employee’s breach of contract claim, the laboratory claimed the contract violated EKRA and was unenforceable. The court determined that EKRA did not apply because the sales agent’s efforts were directed toward the physicians and other lab clients, rather than the individual patients requiring testing. Therefore, the court determined the compensation the laboratory paid the agent was not “to induce the referral of an individual to” the laboratory.

In contrast, the Schena court rejected an interpretation of EKRA that would require interaction between the marketer and individual patient for EKRA to apply. In Schena, the government alleged that the president of a clinical laboratory had violated EKRA, among other laws, by paying kickbacks to individuals and marketing companies to induce physicians’ referral of blood samples to the laboratory for COVID-19 and allergy testing. Relying on the decision in Graves, the defendant filed a motion to dismiss the three counts of the indictment that were based on EKRA. The court observed that EKRA does not include any requirement for a direct relationship between the marketer and held that “the plain meaning of ‘to induce a referral of an individual’…includes situations where a marketer causes an individual to obtain a referral from a physician.” The court denied the motion to dismiss, finding that the alleged conduct violated EKRA because “the marketers received a kickback to ‘influence’ the physician’s referrals.”

Conclusion

Future cases interpreting EKRA are likely to offer more clarity about its application to marketing compensation arrangements. In the meantime, clinical laboratories should carefully evaluate their compensation arrangements with sales employees and continue to monitor future legal developments.

[1] United States v. Schena, Case No. 5:20-cr-00425-EJD-1, (N.D. Cal. May 28, 2022).
[2] S&G Labs Hawaii v. Graves, Civ. No. 19-00310, (D. Haw. Oct. 18, 2021).

Authored by Brett A. Elliott.  For questions or more information regarding these developments, please contact Brett or the KTC attorney with whom you normally work.