What Orthodontists Need to Know About Illegal Referrals, Kickbacks, and Fee-Splitting Schemes

Orthodontists need to maintain a basic awareness of how healthcare fraud, waste, and abuse laws may impact their practice. We summarize the federal Stark Law and Anti-Kickback Statute, as well as related Illinois laws.

Brace yourself for this number: Of the more than $2.8 billion in settlements and judgments that the U.S. Department of Justice (DOJ) obtained from civil cases involving fraud and false claims against the government this past fiscal year, $2.5 billion – almost 90% – involved the healthcare industry. In fact, last year was the ninth consecutive year that the DOJ’s civil healthcare fraud settlements and judgments exceeded $2 billion. As these numbers confirm, for government regulators, the healthcare sector is “where the money’s at.”

So what do these trends mean for the orthodontic practitioner?

While much of the government’s most prominent enforcement activity has focused on large institutional providers like pharmaceutical manufacturers and hospital systems, federal and state governments (not to mention private whistleblowers) have a wide array of tools at their disposal to curb fraud, waste, and abuse in the healthcare industry – all the way down to the solo practitioner level. Key among these tools are the federal Stark Law and Anti-Kickback Statute (AKS), both of which broadly restrict financial incentives tied to referrals for services payable by government programs. Similar laws at the state level may further constrain the types of business arrangements that healthcare practitioners may enter into.

To ensure legal compliance, orthodontists, like other healthcare professionals, should maintain a basic awareness of how these healthcare fraud, waste, and abuse laws may impact their practice. To this end, we summarize below the Stark Law, AKS, and related state laws, with an emphasis where applicable on Illinois law. Against this backdrop, we offer some general thoughts on the following questions that may be of interest to orthodontists, in particular:

• Are referral arrangements between orthodontists and other dental practitioners permissible?
• May orthodontists award patients with gift cards and other benefits for generating new patient referrals?
• May orthodontists split their fees from professional services with an outside management company?

The Stark Law

The federal Ethics in Patient Referrals Act, or “Stark Law” as it is known among seasoned healthcare attorneys (named after former Congressman Pete Stark), prohibits physicians from referring Medicare patients for certain “designated health services” (DHS) to be provided by an entity with which the physician has a broadly defined “financial relationship.” The Stark law permits some types of compensation- and investment-based financial relationships between referring parties (e.g., employment relationships, lease arrangements) but only if they meet detailed regulatory requirements. Failure to structure a financial relationship with the technicalities of one of the Stark law’s authorized “exceptions” can lead to substantial fines and exclusion from participating in federal healthcare programs, among other civil penalties.

The Stark Law is often characterized as a “strict liability” statute because a party’s knowledge or intent is irrelevant in analyzing whether a violation occurred. Simply put, if a financial relationship between a physician and DHS entity does not strictly comply with an exception, the physician cannot refer any Medicare patients to receive DHS from that entity. Likewise, where a referral has been “tainted” by non-compliance with an exception, the entity cannot receive reimbursement for the DHS.

By its express terms, the Stark Law applies to dentists, including them within the definition of “physician.” As a practical matter, however, the Stark Law is limited in its reach to orthodontists and other dental practitioners because Medicare does not cover most dental services. Thus, most dental practitioners do not ordinarily make referrals of Medicare patients subject to the Stark Law.

However, orthodontists should be aware that “mini Stark Laws” exist at the state level and may be broader than the federal counterpart. In Illinois, for example, the Health Care Worker Self-Referral Act prohibits dentists and other healthcare workers from referring any type of patient – whether insured by Medicare or another governmental or private payer – to an entity outside the dentist’s office or group practice in which the dentist is an investor. Thus, it is possible to encounter a scenario where a referral is outside the scope of the Stark Law but still impermissible as a matter of state law.

The Anti-Kickback Statute

Like the Stark Law, the AKS regulates referral relationships between healthcare providers, and the DOJ recently indicated that it has “continued to place great importance” on enforcing it. At its core, the AKS forbids the giving or receiving of anything of value to induce referrals of items or services reimbursable by federally funded healthcare programs. Similar to the Stark Law’s exceptions for certain arrangements, the AKS specifies “safe harbors” for permissible financial relationships between referring parties.

Yet the AKS differs from the Stark Law in several key respects. For one, the AKS applies to referrals of patients covered not only by Medicare but also Medicaid and other federal healthcare programs. This is a key distinction for dental practitioners because while Medicare does not cover most dental services, most state Medicaid programs do cover dental services, including orthodontics in some instances. Thus, a referral of a Medicaid patient to or from a dental practitioner potentially could implicate the AKS.

The AKS is further dissimilar from the Stark Law in that it is a felony criminal statute and, as such, requires a criminal intent to induce unlawful referrals. Accordingly, even if a party has not complied with the requirements of a safe harbor, the party can avoid a conviction if the requisite intent is lacking. While the intent requirement raises the threshold to find a violation in comparison to the Stark Law, it also raises the stakes: Commission of an AKS violation is punishable by prison time, in addition to a litany of fines and penalties. Showing just how serious the federal government considers illegal kickbacks, in 2018 Congress increased the prison sentence for an AKS violation to a maximum of 10 years (from a prior maximum of 5 years).

Just as the Stark Law has corresponding state laws, the AKS is supplemented by state laws that also prohibit kickbacks in the healthcare sector. In Illinois, the Dental Practice Act subjects a dentist to disciplinary action against his or her license for dividing any fees received for dental services with any person for bringing or referring a patient or assisting in the care or treatment of a patient. A violation will only occur, however, where the dentist engaged in the fee-splitting without the knowledge of the patient or his or her legal representative. The law further clarifies that the fee-splitting prohibition does not prevent a dentist from engaging a third-party referral service or from entering into bona fide employment or independent contractor arrangements with healthcare professionals and other parties.

Are Referral Arrangements Between Orthodontists and Other Dental Practitioners Permissible?

For many orthodontists, maintaining referral relationships with pediatric and general dentists in the community is critical to the success of their practice, ensuring a steady stream of new patients. While these relationships, by themselves, are not problematic, the exchange of a benefit between an orthodontist and another dental practitioner could create a regulatory risk if the benefit is intended to steer referrals.

At a very minimum, a financial relationship between an orthodontist and other dental practitioner who refer patients to each other could create a kickback issue under the AKS. That’s why the parties would want to structure any such financial relationship to fit within one of the safe harbors under the AKS, to the extent possible. For example, an orthodontist might consider employing a referring dentist and to that end would want to arrange the employment arrangement to comply with the AKS safe harbor for employment relationships. Or, as an another example, the orthodontist might enter into an office lease with the referring dentist, which could be structured to fit within the AKS safe harbor for space leases.

In this instance, the Stark Law likely would not be implicated. Orthodontic and other dental services do not constitute DHS, and, as noted, dental practitioners do not typically make referrals of Medicare patients. However, the referring parties would still want to ensure any financial relationship between them complies with Stark Law-like requirements under state law, if applicable.

May Orthodontists Award Patients with Gift Cards and Other Benefits for Generating New Patient Referrals?

As another means to shore up business, orthodontists may want to implement “loyalty programs” that reward existing patients with gift cards or other benefits if they refer a new patient to the practice. This scenario is notably different than a financial relationship between an orthodontist and referring dentist because here, the source of the referral is not another healthcare provider. In that respect, the “referral” is not really a referral at all but rather a word-of-mouth promotional scheme. Given the absence of a provider-patient relationship, which would be necessary to make a recommendation for an orthodontist a “referral,” this scheme likely would fall outside the scope of the Stark Law and AKS.

Nevertheless, loyalty programs of this nature could run afoul of other federal and state laws. One federal statute that may be implicated is what is commonly referred to as the federal beneficiary inducement statute. This law prohibits knowingly offering or transferring to a Medicare or Medicaid beneficiary any remuneration that is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of Medicare or Medicaid payable items or services. Violation of this prohibition is punishable by imposition of civil monetary penalties.

In interpreting the beneficiary inducement statute, the Office of Inspector General (OIG) within the U.S. Department of Health and Human Services has stated that “even if a provider does not directly advertise or promote the availability of a benefit to beneficiaries, there may be indirect marketing or promotional efforts or informal channels of information dissemination, such as ‘word of mouth’ promotion by practitioners or patient support groups.” According to the OIG, these arrangements are improper inducements under the law. Likewise, the OIG considers improper inducements to include the “provision of free goods or services to existing customers who have an ongoing relationship with a provider” because they are “likely to influence those customers’ future purchases.”

While this guidance suggests that orthodontic loyalty programs could be construed to induce new and existing patients to obtain services from the orthodontist running the program, there are potentially applicable exceptions to the prohibition on beneficiary inducements. One exception allows providers to make non-cash gifts of “nominal value,” meaning they are no more than $15 per item or $75 in aggregate per patient on an annual basis. Thus, an orthodontist could potentially evade liability under a loyalty program that rewards existing patients who bring in new patients to the practice with non-cash gifts (not including gift cards) that do not exceed $15 per item or $75 in total annually.

Even if designed in this way, a loyalty program could still conflict with state law. In Illinois, the Dental Practice Act explicitly prohibits a dentist from “advertis[ing] or offer[ing] gifts as an inducement to secure dental patronage.” While potentially an argument could be made that the prohibition does not include “nominal value” gifts, orthodontists should be aware that the law contains no express exceptions other than for gifts in the form of free examinations or dental services.

May Orthodontists Split Their Fees from Professional Services with an Outside Management Company?

Increasingly, orthodontists, like other dental practitioners and healthcare professionals, are turning to outside management companies to offload the administrative aspects of running a practice. A popular methodology for compensating management companies is to pay some percentage of billed or collected revenues from the dental practice. While such “fee-splitting” might align the economic interests of both the orthodontist and management company, it might run afoul of legal restrictions on this practice.

In Illinois, the Dental Practice Act, as noted, prohibits fee-splitting, but only with a person or entity for “bringing or referring” a patient or “assisting in the care or treatment” of a patient. Arguably, because a management company’s role is limited to administrative functions – the management company does not “bring,” “refer,” or “assist in the care or treatment” of patients – the fee-splitting prohibition would not prevent an orthodontist from splitting his or her professional revenue with the management company.

This reading is further supported by cross-reference to the more specific, and restrictive, fee-splitting prohibition in the Illinois Medical Practice Act. That law expressly prohibits a medical doctor from “divid[ing], shar[ing] or split[ting] a professional service fee with, or otherwise directly or indirectly pay[ing] a percentage of the licensee’s professional service fees, revenues or profits to anyone for the marketing or management of the licensee’s practice.”

Get Legal Support

Ultimately, the legality of the practices described in this article will depend on the particular facts and circumstances involved. At Jackson LLP, we have experience guiding healthcare professionals through the complex web of healthcare fraud, waste, and abuse as they seek to grow their practices.

Schedule a complimentary phone consultation with one of Jackson LLP’s Illinois-licensed healthcare attorneys to learn how we can help.