By: David Hirshfeld & Jeff Cohen
Lately we’ve noticed an uptick in criticism of toxicology labs that are owned by the substance abuse treatment programs and recovery residences that refer to them. Sadly, this criticism seems to be coming from within the addiction and recovery industry itself. In addition to being absolutely necessary for substance abuse treatment, toxicology screens have become a meaningful source of revenue that helps to fund treatment programs and scholarships for those who cannot afford to pay the full cost of treatment. We cannot understand why the substance abuse treatment industry would want to help pull the rug out from under itself, but that seems to be what is occurring. Under the current state of Florida law, toxicology labs can be owned by their referral sources without much risk if that arrangement is properly structured.
For purposes of example, let’s examine a common model in which a toxicology lab is owned by a group of investors that includes recovery residence and treatment program providers whose residents’ and patients’ specimen are tested by that lab.
Two fundamental types of laws are implicated by this model: laws prohibiting the referral of a patient to an entity owned by the referral source, and laws prohibiting payments for referrals. Both Federal and Florida versions of these laws exist. Generally, the Federal laws only apply to patients whose treatment is paid for by Medicare, Medicaid, CHAMPUS or TriCare. Since the majority of recovery residences and treatment programs we represent do not house or treat Federal program beneficiaries, I will focus on Florida law.
Pursuant to the Florida self-referral law, a health care provider may not refer a patient for the provision of clinical lab services to an entity in which the health care provider is an owner. Under this law “health care provider” is defined as various kinds of physicians and does not include recovery residences or licensed treatment programs.
There are two different anti-kickback statutes within Florida law that should be considered with respect to toxicology labs. One such statute, and the associated regulation, specifically prohibits payments for patients referred to clinical labs. The other statute is a more general prohibition that applies to any patient or patronage of any health care provider or facility.
The lab-specific anti-kickback statute is the more troublesome of the two because it can be construed as characterizing all investment interests held by referral sources in clinical labs as prohibited kickbacks, without exception. Regulators have not, to date, adopted this onerous interpretation with respect to the model in our example. One reason is probably because the plain language of the statute prohibits only those payments that are “for patients referred” and, if properly structured, payments to lab investors are for returns on their investments regardless of whether and to what extent they refer patients to the lab. Another reason for not enforcing this statute against the example-model might be because the Agency for Health Care Administration may not have had the authority to use its regulation to redefine “kickback” pursuant to the enabling statute.
The more general prohibition against payments for referrals applies to all patients or patronage that are referred to or from all health care providers or facilities, and not just clinical labs. Unlike the lab-specific prohibition, this “Patient Brokering Act” has some important exceptions. Most notably, if an arrangement passes muster under the Federal anti-kickback statute, then it passes muster under Florida’s Patient Brokering Act. Fortunately, the Federal anti-kickback statute includes an exception (called a “safe harbor”) for investment interests in small entities.
Payments in return for an investment interest in a health care provider or facility will not be considered a prohibited kickback if the following eight requirements are met: (i) no more than 40% of the investment interests of each class of investment interests may be held by investors who are in a position to make referrals to the entity; (ii) the terms on which an investment interest is offered to an investor in a position to make referrals to the entity must be no different from the terms offered to other investors; (iii) the terms on which an investment interest is offered to an investor in a position to make referrals must not be related to the volume or value of referrals from that investor; (iv) investors are not required to make referrals or to remain in a position to make referrals to the entity as a condition of maintaining their investment interests; (v) the entity or its investors must not market its or their goods or services differently to investors than it or they do to non-investors; (vi) no more than 40% of the entity’s annual gross revenue from health care goods or services may come from referrals from investors; (vii) the entity must not loan funds, or guarantee a loan, to an investor in a position to make referrals if any portion of that loan is used to purchase the investment interest; and (viii) the amount of payment to an investor in return for the investment must be directly proportional to the amount of his/her capital investment.
Remember, in order for there to be a kickback violation the parties had to intend for the arrangement to induce referrals. Lawmakers recognize that some arrangements may appear to embody an intent to induce referrals, but actually benefit patients while also saving money. In order to protect these sorts of arrangements, the Federal and Florida anti-kickback statutes include safe harbors such as the one detailed above. If an arrangement fits squarely within a safe harbor, then it is beyond reproach. If an arrangement does not fit squarely within a safe harbor, then it may still be acceptable; but, if challenged, the parties may have to defend the arrangement by, in esse, proving they lacked the requisite intent to induce referrals. In addition, the safe harbor for investments described above has several requirements expressed as percentages of ownership and revenue. Therefore, whether a particular arrangement fits squarely within a safe harbor varies depending upon what point in time the analysis is conducted.
In addition to carefully structuring their ownership in toxicology labs to which they refer, recovery residence and treatment program providers can establish operating procedures supported by compliance plans that help avoid the accusation that the enterprise is paying or receiving anything of value in order to induce referrals.
 The Florida Patient Self-Referral Act of 1992 found at F.S. §456.053.
 F.S. §456.053(3)(i).
 F.S.§483.245; F.A.C. §59A-7.037(1) and F.A.C. §59A-7.020(14).
 The Florida Patient Brokering Act found at F.S. §817.505.
 See, F.S. §483.051.
 F.S. §817.505.
 F.S. §817.505(3)(a).