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Avoiding Fraud and Abuse in Health Care Lending Arrangements

A recent settlement demonstrates the importance of compliant structuring of lending arrangements in the health care industry. The failure to consider health care fraud and abuse risks in connection with lending arrangements can lead to extremely costly consequences.

On April 27, 2017, the Department of Justice (“DOJ”) announced that it reached an $18 Million settlement with a hospital operated by Indiana University Health and a federally qualified health center (“FQHC”) operated by HealthNet. United States et al. ex rel. Robinson v. Indiana University Health, Inc. et al., Case No. 1:13-cv-2009-TWP-MJD (S.D. Ind.).  As alleged by Judith Robinson, the qui tam relator (“Relator”), from May 1, 2013 through Aug. 30, 2016, Indiana University Health provided HealthNet with an interest free line of credit, which consistently exceeded $10 million.  It was further alleged that HealthNet was not expected to repay a substantial portion of the loan and that the transaction was intended to induce HealthNet to refer its OB/GYN patients to Indiana University.

While neither Indiana University Health nor HealthNet have made any admissions of wrongdoing, each will pay approximately $5.1 million to the United States and $3.9 million to the State of Indiana. According to the DOJ and the Relator, the alleged conduct violated the Federal Anti-Kickback Statute and the Federal False Claims Act.

The Application of The Federal Anti-Kickback Statute in Lending

The Anti-Kickback Statute prohibits, among other things, the knowing and willful payment of any remuneration to induce the referral of services or items that are paid for by a federal health care program, such as Medicaid. Claims submitted to federal health care programs in violation of the Anti-Kickback Statute can also be false claims under the False Claims Act. Safe-harbor regulations are exceptions to the Anti-Kickback Statue, which define practices that the Department of Health and Human Services has determined are unlikely to result in fraud or abuse (see42 C.F.R. § 1001.952). Conduct is protected from the Anti-Kickback Statute only if all of the elements of the applicable safe-harbor are satisfied.  However, failure to meet any element of a regulatory safe-harbor does not necessarily mean a violation of the Anti-Kickback Statute.

Under the Anti-Kickback Statute, loans or lending arrangements can be deemed “remuneration,” especially if they are made on terms differing from those that would be offered by a commercial lender[1]. The Office of Inspector General (“OIG”) has long cautioned against the provision of “low-interest or interest free” loans or forgivable loans made to referring providers[2]. Suspect lending arrangement have also arisen in connection with certain investments made by referring providers with certain types of health care entities (e.g., ambulatory surgery centers).

Questionable Lending Arrangement

The Defendants in United States et al. ex rel. Robinson disputed that the loan from Indiana University Health to Healthnet was intended as remuneration for referrals and argued in a motion to dismiss that the loan was protected under a statutory exception to the Anti-Kickback Statute.  Since the loan was made to Healthnet’s FQHC, the Defendants relied on a statutory exception applicable to such FQHCs:

“any remuneration between a[n] [FQHC] and any . . . entity providing goods, items, services, donations, loans, or a combination thereof, to [the FQHC] pursuant to a contract, lease, grant, loan, or other agreement, if such agreement contributes to the ability of the [FQHC] to maintain or increase the availability, or enhance the quality, of services provided to a medically underserved population served by the [FQHC].[3]

The Defendants argued that the loan was protected as it unquestionably contributed to the ability of HealthNet to maintain or increase the availability, or enhance the quality, of services provided to a medically underserved population.

The Relator argued that the Defendants’ reliance on the statutory exception was unfounded and ignored the more detailed nine-part regulatory safe-harbor for FQHCs as set forth in 42 C.F.R. §1001.952(w). In particular, the loan agreement was deficient because it did not have a fixed amount, fixed percent or a fixed formula, as required by the safe-harbor[4].  Rather, the loan was to be repaid “as HealthNet’s overall financial condition permits . . . .”  According to the Relator, this informal arrangement allowed the loan balance to balloon to a $13.7 million debt without substantial efforts by HealthNet to pay the balance.

What About The Federal Stark Law?

While not discussed in United States et al. ex rel. Robinson, lending arrangements can also implicate the Federal Stark Law (42 U.S.C. §1395nn) and state self-referral prohibitions. The Stark Law prohibits physicians from referring designated health services (“DHS”) to an entity with which a physician (or a physician’s immediate family member) has a financial relationship.  The Stark Law also prohibits the entity in receipt of such prohibited referrals from submitting claims for reimbursement to a federal health care program.  Since lending arrangements can be categorized as a “financial relationship,” referrals between borrower-physicians and lender-facilities can implicate the Federal Stark Law, unless an exception is met. Possible exceptions include: (i) the “physician recruitment” exception (see 42 C.F.R. § 411.357[e][5]); and (2) the Fair Market Value (“FMV”) Compensation Exception (see 42 C.F.R. § 411.357[i]);.


While the parties settled this matter before a decision was issued on the Defendants’ motion to dismiss, it is apparent that the loan agreement in question raised potential regulatory concerns.

United States et al. ex rel. Robinson serves as a valuable reminder to structure lending arrangements in the health care industry with a focus on fraud and abuse risk areas:

  • Loans can be “remuneration,” triggering liability under the Anti-Kickback Statute, especially if such loans are made to a provider as an inducement to refer;

  • Loans involving physicians or physician organizations can also raise scrutiny under the Federal Stark Law. If a loan arrangement implicates the Stark Law, an exception must be met to avoid liability;

  • If relying on the FQHC Safe Harbor to the Anti-Kickback Statute, make sure that all of the elements under 42 C.F.R. §1001.952(w) are met. Reliance solely on the statutory exception for FQHCs may be insufficient;

  • Loans made to certain individual practitioners should qualify for a different safe-habor to the Anti-Kickback Statute, such as the Practitioner Recruitment Safe Harbor (42 C.F.R. § 1001.952[n]). In order to avoid liability under the Practitioner Recruitment Safe Harbor, all of its elements must be satisfied;

  • To the extent that the Federal Stark Law, or any state self-referral prohibition applies, the arrangement must qualify for an exception in order to be protected from liability – e.g., the “Physician Recruitment” exception (see 42 C.F.R. § 411.357[e][5]) or the FMV Compensation exception (see 42 C.F.R. § 411.357[i]);

  • For all loans, make sure that the terms are bona fide, commercially reasonable and on fair market value terms; and

  • Continually monitor loan arrangements to ensure that the terms are being fully implemented, including the accrual of interest, the making of timely payments and reasonably pursuing defaults.

[1] See E.g., Polk County, Texas v. Peters, 800 F. Supp. 1451, 1456 (E.D. Tex. 1992) (holding that interest free-loans made by a hospital to a physician was “remuneration” for the purposes of inducing referrals from the physician).

[2] OIG Special Fraud Alert: Hospital Incentives to Physicians (May 1992), reprinted at 59 Fed. Reg. 65372, 65375 (Jan. 19, 1994).

[3] 42 U.S.C. § 1320a- 7b(b)(3)(I)

[4] See 42 C.F.R. §1001.952(w)(1).

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About this Author

Gary Herschman, Epstein Becker Law Firm, Healthcare Attorney

GARY W. HERSCHMAN is a Member of the Firm in the Health Care and Life Sciences practice, in the Newark and New York offices of Epstein Becker Green. He also serves on Epstein Becker Green’s National Health Care and Life Sciences Steering Committee, and prior to joining the firm, Mr. Herschman was Co-Chair of the Health Care Practice Group of a large regional law firm. He is also a member of the firm's Board of Directors.

Mr. Herschman represents a diverse group of health care clients, including health systems, hospitals, nursing...