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Paul Zimmerman
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Federal Authorities Have Their Eyes on Treatment Facilities, Sober Living Home Operators and Marketers, Especially in Orange County

Federal prosecutors are aggressively targeting the substance use disorder treatment space—an industry that some believe has been permeated with fraud and abuse. This is particularly the case in Orange County, California, referred to by some as part of the “Rehab Riviera” on account of the dense concentration of treatment facilities and sober living homes in Costa Mesa, Laguna Beach and San Juan Capistrano.

Just last week, on November 15, a marketer pleaded guilty in Orange County federal court to accepting nearly $2 million in kickback payments in return for referring patients to treatment facilities. And, by all indications, further indictments and charges are coming.  

Federal authorities have been targeting marketing and personal services arrangements that exchange patient referrals for bribes, kickbacks, and other consideration.  Some providers are well-intentioned and have tried to comply with Federal and California laws without observing the nuances of those laws.  Others use these arrangements to conceal illegal patient brokering behind what outwardly appears to be safe harbor exceptions for payments to marketers and others.  Prosecutors and regulators are also eyeing remuneration that is paid directly to the patients themselves.

Prosecutors Are Prepared to Use the Tools Provided By EKRA

After getting off to a relatively slow start, enforcement of the Ending Kickbacks in Recovery Act (EKRA) has been rapidly gaining steam. EKRA prohibits anyone engaged in services covered by a health care benefit program from knowingly and willfully: (1) soliciting or receiving remuneration (including any kickback, bribe, or rebate), directly or indirectly, whether in cash or in kind, for referring a patient to a recovery home, clinical treatment facility, or laboratory; or (2) paying or offering remuneration (including any kickback, bribe, or rebate) directly or indirectly to induce a referral or an individual to a recovery home, clinical treatment facility or laboratory, or in exchange for the individual using the services of that recovery home, clinic treatment facility or laboratory.

In short, EKRA prohibits requesting, receiving, offering, or paying bribes and kickbacks for referring patients to clinical treatment facilities, and offering or paying bribes and kickbacks to a patient selecting a clinical treatment facility. Each violation of the statute carries a federal prison sentence of up to 10 years and a fine of up to $200,000.

Of note, one of the major expansions of existing criminal law is EKRA’s application to any health care benefit program, including private insurance. Previously, the federal anti-kickback statute prohibited kickbacks only in those instances where federal health care programs were involved, like Medicare. EKRA also eliminates a number of safe harbor provisions. Bottom line: conduct which may have been legal before EKRA could now be illegal post-EKRA.

Recent Criminal Cases Indicative of Heightened Scrutiny of Clinical Treatment Facilities and Those Associated With Them

As mentioned, a marketer pleaded guilty in an Orange County federal court last week for his part in a kickback scheme. The charges implicate several other unidentified treatment facilities and the owners of those facilities, as well as one other unidentified marketer.

It is apparent that charges against this marketer represent just one part of a larger, ongoing investigation into substance use disorder treatment facilities and their owners, as well as into others connected to those clinics, such as marketers and other service providers. In fact, court records suggest that this matter is related to two other criminal cases pending in Orange County.

In one of those cases, an individual who controlled two recovery facilities pleaded guilty to a single EKRA violation. In connection with his guilty plea, the defendant admitted to paying over $1 million in kickbacks to a marketer and another unidentified “body broker.” He also acknowledged concealing the kickback payments with sham contracts calling for fixed monthly payments to marketers. The defendant has agreed to forfeit $917,000 in cash that had been seized by authorities, and he faces approximately two to three years in prison when sentenced in the next few months.

In the other case, the defendant was charged in a criminal complaint and arrested by the FBI earlier this year. Thereafter, he was named in a 23-count federal indictment, charging him with multiple EKRA violations in connection with his operation of a marketing company. The government alleges this defendant was also a “body broker” who referred patients to Orange County treatment facilities in return for $500,000 in kickback payments—payments that were allegedly concealed by sham contracts that, on their face, banned payment for referrals. In actuality, the agreements were designed to conceal referral payments, and according to the indictment, the kickbacks were based on the number of patients referred and the services provided to the patients. That trial is set for early next year.

Conclusion

There is no reason to believe federal investigations and arrests will end with the three federal criminal cases discussed above. Instead, all indications are that federal authorities are actively investigating the unidentified players referenced in various charging documents, along with their associates, and others in the industry.

How can those in the substance use disorder treatment space protect themselves from running afoul of EKRA and other relevant laws going forward? For one thing, marketing agreements cannot simply be reused and relied upon by multiple facilities and individuals. Rather, the entire relationship and agreement between treatment facility and marketer needs to be examined by counsel. But more broadly, treatment facilities, their owners and operators, and marketers should confer with counsel to remain on the correct side of all applicable laws, rules, and regulations.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.