Author: Daniel I. Levin, CFA
In an effort to combat the opioid crisis, Congress enacted the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act (“SUPPORT Act”). The SUPPORT Act is comprised of more than 70 bills intended to promote recovery and treatment programs and help communities suffering from addiction. One section of the SUPPORT Act, The Eliminating Kickbacks in Recovery Act of 2018 (“EKRA”), has important implications for clinical labs and has caused some labs to reassess and restructure compensation arrangements with employed sales representatives and third-party marketing organizations.
In particular, EKRA was intended to eliminate kickback arrangements whereby individuals receive remuneration for referring patients to recovery homes, treatment centers, or clinical labs (broadly known as patient brokering). Under the federal Anti-Kickback Statute (“AKS”), labs were previously unable to enter into compensation arrangements with third-party sales and marketing representatives (i.e., independent contractor arrangements) whereby the representatives were compensated based on the volume or value of referrals. However, there was an exemption within AKS allowing W-2 sales and marketing representatives (i.e., lab employees) to earn commissions. Under EKRA, this exemption was eliminated and commission-based compensation arrangements for employed sales and marketing representatives potentially implicate the law.
Given the broad language used in EKRA, as well as some conflicting and confusing language and provisions, many in the healthcare legal community expect governmental regulators to provide additional details and clarifications surrounding the interpretation and intent of the law.1 However, as written now, the law applies to all clinical labs (not just toxicology labs in the substance abuse space), and clinical labs and their sales representatives may want to reassess any compensation arrangements that they have in place, including those that were in place prior to the passage of the SUPPORT Act (which went into effect October 24, 2018).
With steep penalties including fines up to $200,000 and up to 10 years in prison, clinical lab operators may want to seek legal counsel and consider whether any of their sales and marketing relationships may implicate the recently enacted EKRA. HealthCare Appraisers has worked with clinical labs, durable medical equipment suppliers2, marketing organizations and healthcare attorneys in recent months to provide fair market value (“FMV”) opinions regarding their compensation arrangements with employed sales representatives and third-party marketing services organizations. As clinical labs move forward and wait for additional clarity, there are several key items to be aware of when structuring compensation arrangements with sales and marketing individuals or organizations:
- EKRA as written applies to all clinical laboratories, not just those involved in providing testing within the substance abuse/addiction space;3
- EKRA applies to business from all self-pay, commercial and government payors;
- Marketing arrangements whereby labs market to physicians who then refer patients may be treated differently than arrangements involving direct marketing to patients;4 and
- Compensation should be set in advance and be consistent with fair market value in a manner that does not take into account the volume or value of referrals.
When valuing marketing arrangements, HealthCare Appraisers typically utilizes a combination of the Cost Approach and the Market Approach to determine if the compensation paid and received is consistent with FMV. Common expenses incurred by marketing organizations include call center expenses, qualified and unqualified leads, advertisements, and brick and mortar operations. Marketing organizations are also entitled to earn a return on the services they provide. HealthCare Appraisers analyzes benchmark data pertaining to each of the cost components to assess whether the costs incurred providing the services are consistent with FMV. We then compare the implied return that is priced into the management fee to returns earned by investors in similar industries. Our FMV conclusion is based on a cost build up presenting each of the cost components and the FMV return.
EKRA’s broad language has implications for clinical labs and marketing organizations throughout the United States. HealthCare Appraisers has the knowledge and experience to help ensure your marketing arrangement fee is consistent with FMV. Contact one our valuation experts today to discuss your valuation needs.
2 While DME suppliers are not implicated by EKRA, recent regulatory activity has caused many operators in the DME space to reassess their compensation arrangements with marketing firms.
3 Ibid 1