Federal criminal prosecutions of kickback arrangements in the healthcare sector involving private pay patients.

• Author: Walker, Becky S.
• Position: Twenty-Fifth Edition of the Annual Survey of White Collar Crime

The integrity of our healthcare system depends largely on the ability of patients to receive care without fear that providers (2) are acting other than in the best interests of patients. For this reason, federal and state legislators have criminalized certain conduct by providers which enables them to put their own interests ahead of the interests of their patients. Kickback arrangements between providers are a prime example of such conduct. (3) But, at least at the federal level, the conventional wisdom has been that kickback arrangements are subject to federal prosecution only when federal and/or state monies are involved. This approach leaves untouched, at least from federal criminal prosecution, kickback arrangements aimed only at private pay patients. (4)

The conventional wisdom overlooks federal law that could, in fact, criminalize kickback arrangements even where federal and/or state monies are not implicated. The purpose of this article is to connect the dots between the statutes and the case law that may allow for federal prosecution of kickback arrangements aimed only at private pay patients, and to evaluate the policy considerations that may support such prosecutions in appropriate cases.

The two principal federal statutory bases for prosecuting private pay kickback arrangements in the healthcare sector are the federal mail and wire fraud statutes, and the Racketeer Influenced Corrupt Organization statute (commonly known as the RICO statute). Part I addresses each of those statutes and their interpretative case law. We conclude in Part II that, since kickback arrangements are susceptible to prosecution under the federal mail and wire fraud and RICO statutes, and since improving the integrity of the healthcare system and constraining costs are important federal goals, federal officials should consider using these statutes to prosecute healthcare kickback arrangements.

1. KICKBACK ARRANGEMENTS ARE ILLEGAL UNDER THE MAIL AND WIRE FRAUD AND RICO STATUTES

   1. The Mail and Wire Fraud Statutes

      The key statutory provisions are as follows: 18 U.S.C. [section][section] 1341 and 1343 make it a crime to use, respectively, the mails or the wires for the purpose of executing a "scheme or artifice to defraud." (5) 18 U.S.C. [section] 1347(1) imposes criminal liability on any person who "knowingly and willfully executes or attempts to execute, a scheme or artifice ... to defraud any health care benefit program." Under [section] 24(b), a "health care benefit program" is defined to include "any public or private plan ... affecting commerce, under which any medical benefit ... or service is provided to any individual...." (6) Finally, [section] 1346 defines a "scheme or artifice to defraud" as including a "scheme or artifice to deprive another of the intangible right of honest services." (7) Though the meaning of the phrase, "to deprive another of the intangible right of honest services," is not entirely free from doubt, and is currently an issue hotly debated at the Supreme Court, (8) under even the narrowest definition of the phrase, an arrangement designed to pay providers in exchange for making referrals would constitute an attempt to deprive patients, their employers and payors of the honest services of their providers.

      Although commonly applied to cases involving public officials, federal appeals courts have held that "the 'intangible rights' theory [under 18 U.S.C. [section] 1346] applies to private-sector fraud, at least where ... the defendant has a fiduciary duty to the victim." (9) For example, in United States v. Hausmann, (10) the Seventh Circuit upheld conspiracy convictions based on an honest services theory against a personal injury lawyer (Hausmann) and a chiropractor (Rise), where Hausmann referred clients to Rise and Rise in turn paid kickbacks benefitting Hausmann. The court explained that the scheme violated Hausmann's fiduciary duty to his clients. (11) Significantly, the court also rejected the defendants' argument that the clients were not harmed in a tangible way by the scheme, explaining:

      This reasoning ignores the reality that Hausmann deprived his clients of their right to know the truth about his compensation.... It is of no consequence, despite Appellants' arguments to the contrary, that Rise's fees (absent his discount) were competitive, or that clients received the same net benefit as they would have absent the kickback scheme. (12) Similarly, the Second Circuit upheld honest services fraud and conspiracy convictions of personal injury lawyers based on their payment of kickbacks to insurance claims adjusters to induce faster and more lucrative settlement of their clients' claims. (13) The court held that 18 U.S.C. [section] 1346 applies to private actors under circumstances where a duty of loyalty is owed, and the court concluded that in that case the insurance adjusters had violated their duty of loyalty to their employer insurance companies. (14)

      Other cases have held [section] 1346 to apply in a variety of contexts involving individuals in fiduciary capacities, including financial advisors, (15) stockbrokers, (16) union officials, (17) corporate officers and managers, (18) and university faculty. (19)

      Schemes to accept bribes or kickbacks generally have been held to fall in the heartland of a "scheme to deprive another of the intangible right of honest services." (20) Kickback schemes by healthcare providers are precisely the sort of scheme that deprives...