Attempts by Recruiters to Avoid Kickback Prosecutions Using the “Bona Fide Employee” Safe-Harbor Fail

On August 6, 2020, the United States Court of Appeals for the Sixth Circuit upheld the conviction of a patient recruiter in a Medicare kickback case, finding insufficient evidence to demonstrate that the recruiter was a “bona fide employee” entitled to safe-harbor protection for alleged Anti-Kickback Statute (AKS) violations. U.S. v. Eggleston, Case No. 19-1748 (6th Cir. Aug. 6, 2020). On August 20, 2020, a federal grand jury charged a pharmacy marketer, Vinson Woodlee, with conspiracy to pay and receive healthcare kickbacks in what the Justice Department alleged involved more than $60 million in kickbacks.  In both alleged schemes, the recruiters attempted to avail themselves of the bona fide employee safe harbor to the AKS despite being paid on a per-patient/prescription basis.

Ms. Eggleston appealed her conviction from the United States District Court for the Eastern District of Michigan, arguing, among other issues, that the trial court erred by refusing to instruct the jury on the bona fide employee safe harbor.  The Sixth Circuit ruled that not only did the patient recruiter fail to carry her burden to present sufficient evidence supporting the bona fide safe-harbor defense, but that the evidence presented by the Government relating to the employee relationship failed to support the defense’s contention that a bona fide employment arrangement existed.

Defendant Sophia Eggleston worked as a community liaison for free prior to being contacted by the owners of two home health agencies who later entered guilty pleas in exchange for testifying against Eggleston.  The two agencies, Prestige Home Health Services and Empirical Home Health Care, retained Eggleston as a recruiter and testified that Eggleston was initially paid $700 and later $1,100 for every patient the home health agency successfully recruited for home health services.

In the recently announced indictment, the grand jury charged Mr. Woodlee for illegally paying physicians to prescribe the industry’s most profitable prescriptions, to include pain cream and patches, through NextHealth pharmacies.  In exchange, according to the Justice Department, Mr. Woodlee initially demanded approximately 50% of the profits for each prescription and refill written by the physicians whom he recruited and later demanded 58%.  Similar to the Eggleston prosecution, NextHealth’s executives entered guilty pleas admitting to the use of marketers to funnel illegal kickbacks to physicians and attempting to conceal the payments.

Because both fee structures involved payment based, in part, on the conversion of the home health and pharmacy referrals to services reimbursed by Medicare, the alleged arrangements implicate the AKS, which prohibits anyone from knowingly and willfully receiving “any remuneration . . . directly or indirectly . . . in return for referring an individual to a person for the furnishing . . . of any . . . service for which payment may be made in whole or in part under a Federal health care program[.]” 42 U.S.C. § 1320a-7b(b)(1)(A).

Eggleston defended her actions by asserting she was a bona fide 1099 employee of the home health agencies, being paid at the hourly rate of $65 per hour. Woodlee similarly relied upon an alleged employment relationship, although the DOJ contends that he and NextHealth, attempted to disguise the kickback payments as salary and bonuses.

Both recruiters relied upon the bona fide employee safe harbor, because it provides that remuneration for referrals under the kickback statute does not apply to “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. § 1320a7b(b)(3)(B).

In upholding the District Court’s decision affirming the conviction against Eggleston, the Sixth Circuit reviewed the District Court’s stated reason for not issuing a safe-harbor jury instruction, by applying three factors set out in Nationwide Mut. Ins. Co. v Darden, 503 U.S. 318, 323-24 (1992), to determine whether Eggleston was a bona fide employee of the home health agency.  The three factors consisted of (1) Prestige’s control over Eggleston’s work hours, (2) whether Eggleston’s work was part of Prestige’s regular business and (3) the manner of Eggleston’s payment.

Relying on Eggleston’s own testimony, the appellate court concluded that Prestige exercised little to no control over Eggleston’s work habits.  According to Eggleston, she went into the office no more than 4 times per month.  As to the second factor, the Sixth Circuit, again relying upon Eggleston’s own testimony, noted that Eggleston’s work was “merely an extension of what she previously did on her own, for free.”  Finally, and perhaps most tellingly was the fact that the payments received by Eggleston were consistently issued in increments of the $1,100 per patient fee testified to by the home health agency owners for which she was issued a 1099 and not a W-2.  Eggleston’s only response was to insist she was paid on an hourly basis.

The Sixth Circuit’s decision demonstrates that per-patient referral payments arrangements can easily run afoul of the AKS and unless a recruiter can demonstrate that the payments were made pursuant to a bona fide employment relationship, in which all three of the factors set forth in Darden are met, the safe harbor protection will most likely not apply.  Similarly, Mr. Woodlee’s defense utilizing the safe harbor will likely depend, at least in part, on his ability to demonstrate that his activities, and particularly his “percentage” arrangement, constituted a bona fide employment arrangement under the three factors set out in Darden.