Eliminating Kickbacks In Recovery Act – Update

Since the enactment of the Eliminating Kickbacks In Recovery Act (EKRA) in October of 2018, many have waited in anticipation for clarification on the reach of the statute. On October 18, 2021, a decision was issued by a United States District Court in Hawaii in the case S&G Labs Hawaii, LLC v. Graves, interpreting the reach of EKRA.

While many have anticipated such interpretation to be made in the context of a criminal prosecution, interestingly, S&G Labs Hawaii, LLC v. Graves is a civil lawsuit that analyzed the question of whether an employment agreement that contained a commission-based compensation formula was unenforceable as being in violation of EKRA. In this case, an account manager’s compensation was based in part on the profits derived from the business that the manager and his team developed. The laboratory’s counsel advised the client that the compensation formula in the employment agreement likely violated EKRA and the agreement should be re-negotiated. The parties failed to agree on a new financial arrangement, and as a result Graves was terminated. This lawsuit was then commenced by Graves, claiming that S&G Labs breached the employment agreement and owed him his earned commissions. The Court’s interpretation included an analysis that provided that although Graves’ commission-based compensation formula incentivized him to bring in referrals, the accounts were not individuals who were submitting samples to the laboratory to be tested, but rather were physicians, substance abuse counseling centers, and other organizations for their patients. Ultimately, the Court held that the commission that Graves was paid was not to induce him to refer individuals to the laboratory and therefore the commission-based compensation set forth in the employment contract did not violate EKRA.

EKRA, codified at 18 U.S.C.§ 220, is violated if one knowingly and willfully:

• (1) solicits or receives any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind, in return for referring a patient or patronage to a recovery home, clinical treatment facility, or laboratory; or
• (2) pays or offers any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind –
  • (A) to induce a referral of an individual to a recovery home, clinical treatment facility, or laboratory; or
  • (B) in exchange for an individual using the services of that recovery home, clinical treatment facility, or laboratory.

Penalties for a violation of EKRA can be a fine not to exceed $200,000, imprisonment for not more than ten years, or both a monetary fine and imprisonment.

EKRA has striking similarities to the Anti-Kickback Statute (AKS), as well as significant differences. Unlike the AKS that only applies to governmental payors, EKRA applies regardless of the payor. Additionally, while the AKS has a safe harbor for compensation set forth in written employment agreements, such safe harbor does not exist at this time in EKRA. There is also a difference between the AKS and EKRA in terms of the language about who makes referrals to whom.

Due to the lack of interpretation of EKRA, and the severity of the punishments for violation of the statute, many health care attorneys have conservatively advised their clients affected by EKRA, not to compensate their sales personnel, even bona fide employees, on a commission basis. It remains unclear whether other jurisdictions throughout the country will adopt the same analysis that the U.S. District Court in Hawaii did. The decision in S&G Labs Hawaii, LLC v. Graves was rendered in the context of a private employment/breach of contract dispute, not in a criminal prosecution brought by the government, therefore limiting its precedential value. We continue to caution those affected by EKRA to adopt compensation formulas that are compliant on their face with both EKRA and the AKS.