Federal District Court Issues First Court Opinion Regarding EKRA’s Commission Based Payments

By James A. Hoover, Esq., Burr & Forman, LLP

A Federal District Judge in the United States District Court, District of Hawaii issued the first court opinion interpreting the prohibition of the payment of commissions by clinical laboratories to employees or independent contractors that was implemented by the Eliminating Kickback in Recovery Act of 2018 (“EKRA”).  Judge Kodayashi entered her decision on October 18, 2021 in the case S&G Labs Hawaii, LLC v Graves.  

In S&G Labs, the court ruled that the commission payments made to an employee of a clinical laboratory were legitimate compensation payments and did not violate EKRA notwithstanding the fact the payments were made to a salesman who introduced S&G Labs to physicians, counseling centers and other entities that referred patients to the lab. In so ruling, the Court emphasized the salesman had no contact with any individual whose own specimens were tested.  

As a refresher, the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act (the “SUPPORT Act) seeks to prohibit “patient brokering” practices by some recovery homes and treatment facilities. Section 1822 of the SUPPORT Act, signed into law and effective as of October 24, 2018, contains EKRA, now codified at 18 U.S.C. § 220. Although EKRA was created to address “patient brokering,” EKRA arguably prohibits a much broader scope of conduct by stating:

“whoever, with respect to services covered by a health benefit program… knowingly and willfully (1) solicits or receives any remuneration… directly or indirectly, overtly or covertly, in cash or in-kind, in return for referring a patient or patronage to… a laboratory, or (2) pays or offers any remuneration… directly or indirectly, overtly or covertly, in cash or in-kind (A) to induce a referral of an individual to a… laboratory or (B) in exchange for an individual using the services of that … laboratory, shall be fined not more than $200,000, imprisoned not more than 10 years, or both, for each occurrence”)

18 U.S.C. 220(a) (emphasis added).

EKRA also contains an exception to the prohibition set out above.  The exception states that “a payment made by an employer to an employee or independent contractor…if the employee’s payment is not determined by or does not vary by–(A) the number of individuals referred to a particular… laboratory; (B) the number of tests or procedures performed; or (C) the amount billed to or received from, in part or in whole, the health care benefit program from the individuals referred to a particular… laboratory.” 18 U.S.C. 220(b)(2).

EKRA on its face implicates any financial relationship between a clinical laboratory and an individual or legal entity that generates business for the lab. Although EKRA’s text is similar to the federal healthcare program anti-kickback statute, 42 U.S.C. 1320-7b(b) (the “AKS”), it is arguably much broader in scope for a number of reasons.  First, EKRA defines “laboratory” to include any CLIA-certified laboratory.  Second, the statute defines “health benefit program” to mean “any public or private plan or contract… under which any medical benefit, item, or service is provided to any individual.” Thus, EKRA applies to payments by any payor, such as commercial insurance and even self-pay, not just by government-funded plans.   

Relating to EKRA, the question before the Court in S&G Labs dealt directly with compensation paid by S&G Labs to an employee.  The compensation arrangement involved a compensation arrangement that included a base salary of $50,000.00 and a percentage of monthly net profits generated by the employee’s client accounts and by the client accounts handled by S&G employees whom the relevant employee managed.  The employee’s commission-based compensation resulted in him receiving more than $1.8 million in 2018 alone.

S&G Labs is a medical testing facility that performs urinalysis screening for legal substances, as well as for controlled substances for physicians, substance abuse treatment facilities and other types of entities.  The Court analyzed the definition of “laboratory” and “clinical laboratory” and concluded that S&G Labs was a laboratory for EKRA purposes.  

Next, the Court compared EKRA’s statutory language of “remuneration” and “individual” with the AKS’ statutory language for those terms.  The Court ruled, in light of the statutory construction of EKRA and the AKS, that the employee’s compensation from S&G constituted remuneration under EKRA.  

The Court also analyzed whether the remuneration paid to the employee was paid to “induce a referral of an individual to” S&G labs.  The Court opined that undoubtedly the employee’s “…commission-based compensation structure induced him to try to bring more business to S&G, either directly through the accounts he serviced himself, or through the accounts of the personnel under his management. However, the ‘client’ accounts they serviced were not individuals whose samples were tested at S&G. Their ‘clients’ were ‘the physicians, substance abuse counseling centers, or other organizations in need of having persons tested.’”  Thus, the Court concluded the compensation arrangement did not violate § 220(a) and the exception in § 220(b) was not applicable.  

Although the commission-based sales compensation arrangement in the employment agreement was upheld in this instance, this opinion is extremely narrow in its implications.  As a result, notwithstanding this opinion, EKRA remains a thorny problem for all laboratories and those who refer to them and requires much thought and consideration before using such commission-based compensation arrangements for clinical laboratories.  

Jim Hoover is a Partner at Burr & Forman LLP and practices exclusively in the firm’s Healthcare Practice Group. Jim may be reached at (205) 458-5111 or jhoover@burr.com.