The State of EKRA: Summer 2022

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Highlights

  • The Eliminating Kickbacks Recovery Act (EKRA) makes it a criminal offense to offer or receive any remuneration in an exchange in order to "induce" a referral to a recovery home, clinical treatment facility or clinical laboratory.
  • The U.S. Department of Justice is broadly construing and applying EKRA, not just to toxicology labs, but to all clinical laboratory activities, including COVID-19 testing.
  • A recent federal court decision confirms EKRA prohibits clinical laboratories from paying employed and independently contracted compensation based on volume or value-based payment structures (including percentage-based compensation), regardless of whether those activities are directed at doctors or prospective patients.

Enacted in 2018, the Eliminating Kickbacks Recovery Act (EKRA) remains a source of anxiety and confusion in the clinical laboratory industry. In the four years since EKRA's enactment, U.S. Department of Justice (DOJ) enforcement actions have broadened EKRA's scope beyond reducing fraud in the addiction treatment industry to include all clinical laboratory activities, including COVID-19 testing. Two recent and conflicting federal district court decisions add to EKRA's enigma, but indicate the statute prohibits clinical laboratories from structuring compensation paid to sales representatives (whether employees or 1099s) based on revenue generated from their marketing activities.

Summary of EKRA

EKRA's Origins and Prohibitions

EKRA was enacted as part of comprehensive legislation designed to address the opioid crisis and fraudulent practices occurring in the sober home industry. EKRA makes it a criminal offense to offer or receive any remuneration in an exchange in order to "induce" a referral to a recovery home, clinical treatment facility or a clinical laboratory. EKRA is an "all-payor" statute, which means it applies to services that are paid by commercial insurers in addition to services paid by Medicare and Medicaid. Critically, and in contrast with the Anti-Kickback Statute, EKRA prohibits clinical laboratories from paying their employed and contracted marketing force compensation based on volume or value-based payment structures (including "percentage-based compensation"), without any exception or safe-harbor. Violations of EKRA are punishable by fines of $200,000 along with a maximum sentence of 10 years in prison.

Given the legislative history of the statute, it was thought (or hoped) that the government would interpret EKRA (and limit its enforcement activities) to apply only to toxicology labs and improper referral arrangements with sober living homes and clinical treatment facilities. However, as judged by recent DOJ enforcement actions (described below), clinical laboratory owners and their partners should assume that EKRA applies to all clinical laboratories, not just those performing toxicology testing.

It is important to note that further clarification regarding EKRA's scope is unlikely to come from any regulatory activity. Although EKRA provides that DOJ and the Office of Inspector General (OIG) "may" jointly promulgate regulations implementing the statute, DOJ rarely enacts regulations under Title 18 of the U.S. Code, where EKRA falls. Therefore, stakeholders will need to rely on case law and enforcement activity to clarify the scope of EKRA and its prohibitions.

Recent Enforcement Actions

Expansion of EKRA's Scope

A recent indictment in Louisiana indicates that the DOJ is not confining EKRA enforcement to toxicology laboratories. In May 2021, Malena Lepetich of Belle Isle, Louisiana, was indicted for a $15 million healthcare fraud scheme which included, in part, paying and receiving kickbacks for COVID-19 testing in violation of EKRA. Lepetich, the owner of MedLogic LLC, a clinical laboratory based in Baton Rouge, Louisiana, allegedly offered to pay kickbacks for referrals of specimens for COVID-19 and respiratory pathogen testing. Prior to Lepetich's indictment, the DOJ had primarily confined its EKRA enforcement to the addiction treatment space, targeting referrals to toxicology laboratories and sober living facilities (the indictment in the USA v. Schena case, described below, also involved COVID-19 testing). Lepetich's indictment indicates that the DOJ can apply EKRA outside of the toxicology space to combat a range of clinical laboratory activities that it views as illegal.

Decisions Regarding Marketing Arrangements

Two recent federal court cases, though conflicting, provide some clarification on EKRA's prohibitions regarding percentage-based employee compensation arrangements. In S&G Labs Hawaii, LLC v. Graves, No. 1:19-cv-310, 2021 WL 4847430 (D. HI Oct. 18, 2021), the U.S. District Court for the District of Hawaii held that percentage-based compensation in a laboratory recruiter's contract did not violate EKRA because the recruiter was not referring individual patients but rather marketing to doctors. According to the court, EKRA only prohibits percentage-based compensation payments to marketers based on direct patient referrals. From the moment S&G Labs was published, legal practitioners were skeptical of the court's interpretation of the statute, and considered S&G Labs an outlier holding not to be relied upon.

That skepticism was confirmed in USA v. Schena, Case No. 5:20-cr-00425-EJD-1, 2022 WL 1720083 (N.D. Cal. May 28, 2022), where the U.S. District Court for the Northern District of California held that EKRA prohibits both direct and indirect referrals of patients to clinical laboratories. According to the court, EKRA prohibits percentage-based compensation to recruiters even if those recruiters interact only with doctors, and not just with prospective patients. Importantly, the court addressed the District of Hawaii's interpretation of EKRA and explicitly rejected it, stating that EKRA's prohibition on paying remuneration for referrals includes situations in which a marketer induces a referral from a physician. The Schena ruling thus confirms that EKRA prohibits laboratories from paying its employed (or contracted) marketing agents percentage-based employee compensation under most circumstances.

Key Takeaways and Next Steps

  • The Lepetich indictment and the Schena decision indicate that the DOJ is broadly construing and applying EKRA.
  • The DOJ is not confining EKRA enforcement actions to the toxicology lab space, but rather will apply it broadly to a range of clinical laboratory activities.
  • The Schena decision strongly suggests that EKRA most likely prohibits clinical laboratories from paying their marketers percentage-based compensation, regardless of whether the marketer targets doctors or prospective patients.
  • Clinical laboratories should carefully examine and update their compensation arrangements with employees and independent contractors who conduct marketing activities for the lab.

As stated above, it is doubtful that the DOJ will adopt regulations implementing EKRA. Therefore, it is imperative for stakeholders in the clinical laboratory industry to monitor enforcement activity and case opinions to determine the scope of EKRA's prohibitions. Based on early enforcement activity, clinical laboratory owners should assume that EKRA applies to their business arrangements regardless of their test menu.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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