American Journal of Law & Medicine

The fraud and abuse statute in an evolving health care marketplace: life in the health care speakeasy.(Health Care Capitated Payment Systems)


The health care market, the organizations that deliver health care, and health care payment mechanisms have all changed significantly in recent years and continue to changed In contrast, the so-called antikickback provision of the fraud and abuse statute remains much as it was in 1977, when it was amended into its current general form.(2) By prohibiting financial incentives to induce referrals, the antikickback law counters abuses to the Medicare and Medicaid programs that are likely to proliferate in a cost-based, fee-forservice (FFS) health care market.(3) In a FFS system, financial incentives stimulate increased use of services and often result in overutilization.(4) The antikickback section has significantly less relevance to a capitated health care system in which the payment system itself inhibits overutilization and other costly practices.(5) However, the antikickback section is broad and the regulatory safe harbors promulgated under it are narrow. As a result, practices such as capitation, which encourage cost-effective care and the formation of organizations to provide care on a capitated basis, are poorly insulated from the strictures of the statute.

Capitation may be a check to several types of fraud in the health care industry. Experts estimate that fraud, waste, and abuse account for ten percent of health care expenditures in the United States; if one uses 1993 figures for the size of the industry, this means that about $90 billion is fraudulently spent annually.(6) The category fraud, waste, and abuse is far larger than the fraud-through-payment-for-referrals discussed in this Article. However, from a general antifraud perspective, a capitation payment system discourages volume-enhancing types of fraud because payment is based on a flat rate, rather than on the number of services provided.(7)

This Article will discuss the antikickback provisions of the fraud and abuse statute, its safe-harbor regulations, the implications for capitated payment arrangements, and the formation of organizations to provide capitated care.



The present antikickback provision of the fraud and abuse statute makes the knowing and willful offer, payment, solicitation, or receipt of any remuneration (directly or indirectly, overtly or covertly, in cash or in kind) in return for or to induce a referral of services or goods payable by Medicare or Medicaid a felony punishable by up to five years in prison and a fine of up to $25,000,(8) The antikickback section was originally passed in 1972 as a part of two separate statutes, one for Medicare and one for Medicaid.(9) In 1977, the present remuneration language replaced previous kickback, bribe, and rebate language, and the penalty changed from a misdemeanor to a felony.(10) In 1980, the knowing and willful scienter requirement was added.(11) In 1987 the two separate statutes were combined into the present one,(12) the Office of the Inspector General (OIG) was authorized to exclude from the Medicare and Medicaid programs individuals and entities that violated the statute, and Congress directed the Secretary of Health and Human Services (HHS) to promulgate regulations setting forth payment arrangements that would not be the basis for prosecution.(13) Since then, the antikickback provision has not been significantly amended.(14) Although the definition of the illicit payment has been broadened from kickback to remuneration, a willful and knowing scienter requirement has been added, and the penalty increased, the basic design of the antikickback law-to prohibit payment for referrals in order to reduce incentives for overutilization-has not changed significantly since its inception.


Essential to understanding the antikickback provision of the fraud and abuse statute is the legitimate governmental concern with the prevention of overutilization of services and the containment of Medicare and Medicaid costs.(15) If providers are paid for referrals, they have an incentive to overrefer, thereby increasing utilization and costs.(16) Adding insult to injury, including the referral in the charge to Medicare or Medicaid would further increase costs.(17)

Traditionally, medical care has been paid for on a FFS basis. The FFS system financially rewards a health care provider for each service provided to a patient.l(8) The financial incentives of the FFS system promote the use of medical facilities and services.(l9) Utilization is constrained by the professional ethics of the provider, the willingness of the patient to spend the time necessary for the procedures, and the willingness of the patient or the patient's insurer to pay for the procedures. If the patient is well insured, the limitation imposed by costs is significantly attenuated, if not eliminated, unless the insurer takes an active part in monitoring costs and the provision of services.(20) Furthermore, if reimbursement is based on cost, the health care provider lacks financial incentives to limit either medical procedures or overhead costs.(21)

Until the development of the prospective payment system (PPS), Medicare was essentially a cost-based, FFS system.(22) As originally enacted, the Medicare program reimbursed providers on the basis of their costs or charges, placing no limitations on the amount to be reimbursed.(23) Patients paid only for a small percentage of their total bills, and physicians and hospitals were guaranteed recovery for most of their costs. This retrospective payment system resembled those used by third-party payers such as Blue Cross. In 1983, Congress established PPS with respect to inpatient hospital services.(24) Under this system, fixed rates are determined in advance, according to specific diagnosis related groups (DRGs).(25) Under PPS, a hospital has an incentive to discharge patients as soon as possible because a longer stay does not produce more revenue.(26) Outpatient services and services provided in a physician's office remained on a cost-reimbursement basis.(27) The fact that technological advances make it possible for some procedures to be done on an outpatient basis,(28) that outpatient services were not within the PPS,(29) and that it is cost effective to provide services on an outpatient rather than inpatient basis all combined to stimulate the provision of care outside of the hospital.(30) Hospitals have frequently formed joint ventures with physicians on their medical staffs to offer outpatient services in order to preserve a share of the outpatient revenue for the hospital, to tie the physicians to the hospital for the sake of the inpatient business, and to forestall the physicians from establishing outpatient services on their own.(31)

Beginning in 1989, a significant number of studies showed that when physicians had an ownership interest in or a compensation arrangement with an ancillary facility, the patients of such physicians used these ancillary facilities more than did the patients of other physicians. Thus, such ownership/compensation arrangements increased costs to the Medicare and Medicaid programs.(32) The initial OIG study in 1989 showed that twenty percent of the physicians who billed Medicare had an ownership interest in or other financial arrangement with entities to which they referred Medicare patients.(33) The Medicare patients of referring physicians who owned clinical laboratories received forty-five percent more clinical laboratory services than all Medicare patients in general.(34) Studies of the use of diagnostic imaging equipment done in 1990 and 1994 showed that patients of physicians who had an ownership interest in such equipment utilized some equipment 400% more than the patients of nonowning physicians.(35) Physicians having ownership interests in physical therapy clinics or radiation therapy centers similarly recommended patient visits to such facilities fifty percent more than did other physicians.(36) This last study also examined whether there were patient characteristics which could explain different utilization rates but found none.(37) A FFS payment system that rewards providing more services will stimulate the provision of services when such services are only marginally appropriate or even inappropriate.

Vastly increased utilization by the patients of physicians with an ownership interest in ancillary services leads to the conclusion that physicians are influenced by financial incentives. If not properly structured, those incentives can and likely will lead to increased costs to the Medicare and Medicaid programs. If providing more services is financially rewarding, physicians will provide more services. However, despite being directed at a real problem, the antikickback section of the fraud and abuse statute is such a blunt tool that prohibition of arrangements which might lead to greater efficiency and reduced or constant costs may occur.

Perhaps reflecting the structure of the industry at the time, Congress assumed that use of remuneration to induce future referrals would always increase program costs. Apparently Congress failed to contemplate that such arrangements could reduce costs with economic incentives in other than a strict FFS and cost-based reimbursement mode. Thus, for a successful prosecution, there is no statutory requirement to prove that program costs are being increased when remuneration is used to induce future referrals. That is not part of the government's case in a fraud and abuse prosecution.(38) Furthermore, it is not a defense to prove that program costs are being reduced.(39) No statutory (or administrative) safe harbor based on the reduction of Medicare and Medicaid program costs exists.(40)


In contrast to a FFS system, capitation is a payment method whereby a health plan or a health care provider, an organization or an individual, is paid a fixed amount on behalf of an individual or group to provide a defined set of health care services.(41) Although the amount paid per member per month is renegotiated on a periodic basis as set forth in the contract, the amount of payment does not vary during the stated contract period based on the amount of health care provided to the individual or group.(42) The provider is paid as much for individuals who require no care as for individuals who require extensive care.(43) Thus, a capitated system provides a health care provider financial incentives for efficient care, that is, care provided at the lowest cost consistent with the desired health care outcome. The financial incentives of capitation prompt a provider to utilize the fewest ancillary services, fewest tests, and the least expensive versions of such services and tests consistent with appropriate care. Capitation also creates incentives to emphasize preventive treatment and health promotion practices.(44)

Capitation payments may be made at various levels. An employer may pay a capitation amount to a health maintenance organization (HMO) which is a fixed amount for every employee or employee family group who selected the HMO for their health coverage.(45) The HMO then may pay the actual health care providers (the primary care physicians, the specialists, the hospitals) in various ways, not all of them capitated.(46) The HMO may capitate the primary care physicians and have withholds relating to hospital and specialist care, or the HMO may pay salaries to the primary care physicians with a bonus based on such criteria as productivity (the number of patients seen), patient satisfaction, office overhead targets, or clinical and hospital resource management.(47) The HMO may capitate specialists and the hospitals or may pay them on a discounted FFS basis.(48) Whether or not all health care providers within a health plan are capitated, a capitated payment to the health care entity produces incentives to the health care organization to provide cost-efficient, effective care. Although many commentators and health care providers predict that more providers will be capitated in the future, at present the great majority of managed care physicians receive FFS payments.(49) One commentator has speculated that physicians may prefer capitation to a discounted FFS payment system because endlessly defending clinical decisions to payers may be more onerous and intrusive on the norms of professional autonomy than being paid a capitated amount.(50)

The key point to remember is that the capitation method of payment reverses the traditional financial incentive under FFS or cost-based reimbursement systems.(51) Instead of a financial incentive for overutilization, capitation creates a powerful incentive for less intensive and even underutilization of services.(52) Quality assurance and monitoring and the development of effective and understandable measures of quality replace monitoring of costs as the major concerns of payers. The fraud and abuse statute, enacted before capitation had a large market presence, clearly contemplates a world of FFS payment driving excessive utilization and escalating program costs. While this concern remains realistic in much of the market, the fraud and abuse law suffers from a case of hardening of the intellectual arteries because it does not adequately accommodate the evolving market-driven reforms in the health care arena. Indeed, fraud and abuse law can serve as an obstacle to the rationalization of the health care marketplace.


The courts have interpreted the antikickback provision of the fraud and abuse statute broadly,(53) and the enforcement agencies have embraced this all-encompassing approach.(54) United States v. Greber is the leading case in the field.(55) There, the Third Circuit held that if one purpose of a payment was to induce future reciprocal referrals, the payment violated the antikickback law, even if the payment was also intended to compensate for professional services rendered.(56) The court of appeals assumed that the services were needed, medically appropriate, and reasonably priced.(57)

Dr. Greber was the president of a company that provided physicians with cardiac diagnostic services for their patients.(58) His company received a referral from a second doctor and provided services to the referring physician's patient.(59) The services provided by Dr. Greber's company(60) were paid for by Medicare and required interpretation by a qualified physician.(61) The Medicare payment to Dr. Greber's company contemplated and included a portion for physician interpretation.(62) Dr. Greber referred the interpretation to the original referring physician and paid that physician a fee for his interpretation.(63) The issue arose because Dr. Greber admitted that his hope to receive future referrals was at least one consideration in his decision to refer the interpretation to the original referring physician.(64) The question before the court concerned whether a violation of the fraud and abuse law occurred when one purpose for the referral was an intent to induce future referrals.(65) Finding that a violation had occurred, the court held that the law is aimed at the inducement factor, and prosecutors need not prove that the only purpose (or even a dominant, predominant, or significant purpose) was the inducement of future referrals.(66) Thus, Greber held that a violation of the fraud and abuse law occurs when an intent to induce is a consideration.(67)


Under Greber, the breadth of the prohibition of the fraud and abuse law is truly startling. It calls into question numerous routine practices in the health care industry as the industry consolidates, and otherwise seeks to rationalize and make more efficient the delivery of services. For example, purchasers of medical care are increasingly seeking to do business with networks of providers that furnish broad geographic coverage and an array of needed medical care services to insured patients.(68) Providers have responded by developing relationships with other providers.(69) In that process, economic efficiency and cost consciousness have become watchwords of the managed care movement(70) and of managed care organizations (MCOs) that contract with purchasers and providers of services and seek to match the interests of both sets of participants in the market. Part of the rationale of managed care is reducing program costs and part of the strategy for implementing that goal is obtaining lower prices from providers in return for the assurance of an increased volume of patient flow (the Walmart effect). Under Greber, the use of financial incentives (remuneration) for the purpose (even in small part) of inducing patient flow is problematic.

MCOs, which often include capitation at some level, are increasingly seen by employers and governments as an effective way to control the costs of medical care(.71) The ninth annual survey of U.S. companies by a benefits consultant showed the first-ever decline in average health care costs per employee in 1994.(72) In contrast, costs in recent years had soared as high as eighteen percent per year.(73) HMOs and other managed care entities received credit for this decline.(74)

Even small businesses have been able to reduce costs through managed care. For one New York company, insurance rates doubled between 1990 and 1994, despite reduction in coverage. …

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