11th Circuit Establishes Scienter Requirement for Violation of the Medicare/Medicaid Anti-Kickback S
In the recent case of United States v. Starks, 157 F.3d 833 (11th Cir. 1998), for the first time the United States Court of Appeals for the 11th Circuit articulated its view on the degree of scienter, or guilty knowledge, required before a defendant can be convicted of a violation of the Medicare/Medicaid anti-kickback statute, 42 U.S.C. §1320a-7b(b)(1) and (2) (the “anti-kickback statute”). The 11th Circuit held that in order to sustain a conviction for violating the anti-kickback statute the government need only prove that the defendant had knowledge that his or her conduct was unlawful and need not prove that the defendant knew that the conduct specifically violated the anti-kickback statute. In doing so, the 11th Circuit followed the traditional legal principle that ignorance of the law is no excuse.
The anti-kickback statute, which is §1128B(b) of the federal Social Security Act, makes it illegal for a person “knowingly” and “willfully” either to solicit or receive or to offer or pay “any remuneration directly or indirectly, overtly or covertly, in cash or in kind” in connection with referrals of patients or other goods and services covered by Medicare, Medicaid, CHAMPUS, or any other “federal health care program” as defined in 42 U.S.C. §1320a-7b(f). A violation of the anti-kickback statute is a felony punishable by a maximum fine of $25,000 or imprisonment up to five years, or both. In addition, a conviction under the statute can lead to automatic exclusion from the Medicare and Medicaid programs. Moreover, the United States Department of Health and Human Services (HHS) may, regardless of a criminal conviction, exclude persons from the Medicare and Medicaid programs if after an administrative process they are found to have violated the anti-kickback statute, or it may impose civil monetary penalties for activities prohibited by the statute. The elements of a violation of the anti-kickback statute that must be proved in a criminal or civil case are the same, including the statute’s “knowingly” and “willfully” scienter requirement.
Misdemeanor offense and was limited in scope to prohibiting only kickbacks, bribes, and rebates in connection with the referral of Medicare or Medicaid patients or furnishing items or services reimbursed by those programs. However, the statute was amended and made more complex over the ensuing years. In 1977 the Medicare and Medicaid Anti-Fraud and Abuse Amendments Act expanded the scope of the statute to prohibit any “remuneration,” whether direct or indirect, overt or covert, in cash or in kind, and the statute was upgraded to a felony. For the first time, statutory exceptions were enacted exempting bona fide discounts and employment arrangements from the scope of the statute. Thus, after the 1977 amendment the anti-kickback statute prohibited a broader range of transactions beyond actual bribes, kickbacks, or rebates. The Omnibus Budget Reconciliation Act of 1980 (OBRA) modified the anti-kickback statute to require that the prohibited conduct be committed “knowingly” and “willfully.” The legislative history of OBRA shows that this change was made because Congress was concerned that a criminal penalty could be imposed on an individual whose conduct, while improper, was inadvertent. In 1987, the Medicare and Medicaid Patient and Program Protection Act amended the anti-kickback statute further and directed HHS to promulgate “safe harbor” regulations to specifically exclude certain types of commercial transactions or arrangements from the scope of the statute. The legislative history of the 1987 amendment indicates Congress’ concern with the breadth of the anti-kickback statute and the uncertainty among health providers as to the types of transactions proscribed by the statute. The 1987 amendment also gave HHS the authority to exclude violators of the anti-kickback statute from the Medicare and Medicaid programs. Finally, the Health Insurance Portability and Accountability Act of 1996 amended the statute to allow HHS to issue advisory opinions regarding whether a particular transaction or arrangement is prohibited by the statute.
In response to the Congressional mandate, HHS has issued “safe harbor” regulations under the anti-kickback statute and a series of advisory opinions. A transaction or arrangement that meets each of the requirements of one of the “safe harbors” will not be subject to a criminal or civil penalty under the statute regardless of the parties’ intent. However, a transaction or arrangement that does not fit within a “safe harbor” is not necessarily a violation of statute but must be analyzed according to its facts on a case-by-case basis.
The expansion of the scope of the anti-kickback statute in recent years as well as the promulgation of the “safe harbor” regulations has made that statute one of the more complex federal laws regulating the health care industry. Activities that are not per se illegal can fall within the ambit of the statute, and business transactions such as leases and joint ventures that would not be illegal outside of the health care industry can easily violate the anti-kickback statute if not structured properly. Thus, the degree of scienter that must be established by the government to prove a violation of the anti-kickback statute can be a pivotal element in a civil or criminal proceeding under that statute.
Prior to Starks, three different federal appellate courts had reached three different conclusions as to the meaning of the terms “knowingly” and “willfully” as used in the anti-kickback statute and the degree of scienter required for a violation.
In the seminal case of Hanlester Network v. Shalala, 51 F.3d 1390 (9th Cir. 1995), HHS brought an administrative action to exclude a general partnership (the Hanlester Network), its partners, and several of its executive officers from participating in the Medicare program and accused them of violating the anti-kickback statute in connection with the sale and operation of a series of limited partnership laboratories joint ventured with physician-investors. On appeal from administrative and district court rulings in favor of HHS, the Ninth Circuit reversed. It held that in order to uphold a violation of the anti-kickback statute the government must prove not only that the defendant knew that the statute prohibits offering or paying remuneration to induce patient referrals, but also that the defendant engaged in the prohibited conduct with the intent to disobey that specific statute. Although Hanlester was a civil case, its holding as to the required scienter is equally applicable to criminal cases. Thus, under the Hanlester standard a defendant cannot be convicted of a violation of the anti-kickback statute unless, at the time he or she committed the alleged act, the defendant knew that the activity violated that statute. Since it is often difficult to determine in advance with certainty whether a particular transaction violates the anti-kickback statute, the Hanlester decision set a high degree of scienter.
However, two subsequent federal appellate court decisions refused to follow Hanlester and ruled that a lower degree of scienter was sufficient to sustain a conviction under the anti-kickback statute. Both of these cases involved actual cash payments to providers in exchange for patient referrals and not the type of complex commercial transaction found in Hanlester. In the first decision, United States v. Jain, 93 F.3d 436 (8th Cir. 1996), cert. denied, 521 U.S. ___, 117 S. Ct. 2452, 138 L. Ed. 2d 210 (1997), Dr. Jain, a psychologist, had a letter agreement with a psychiatric hospital stating that he would be paid $1,000 per month for marketing services on behalf of the hospital. Government witnesses testified at the trial that Dr. Jain did no marketing for the hospital and the payments by the hospital to Dr. Jain were in reality compensation for patient referrals he made to the hospital. Dr. Jain testified on his own behalf and admitted that he knew that receiving payments for patient referrals was illegal and wrong, but he denied that the payments he received from the hospital were for that purpose. Apparently there was no evidence that Dr. Jain specifically intended to violate the anti-kickback statute. The trial judge instructed the jury that good faith was a defense to the charges against the defendant, and he explained in his jury charge that Dr. Jain acted in good faith if he believed he was being paid for promoting the hospital and not for referring patients to it. Nevertheless, the jury found Dr. Jain guilty of violating the anti-kickback statute.
On appeal the Eighth Circuit affirmed Dr. Jain’s conviction. It held that proof that the defendant knew his conduct was “wrongful” was sufficient even if there was no proof that he knew that he was specifically violating the anti-kickback statute or even had knowledge of that statute. Dr. Jain relied upon two United States Supreme Court decisions: Cheek v. United States, 498 U.S. 192, 111 S. Ct. 604, 112 L. Ed. 2d 617 (1991) (“willful” requirement in criminal tax statute not met if defendant is not aware that his conduct violates the law); and Ratzlaf v. United States, 510 U.S. 135, 114 S. Ct. 655, 126 L. Ed. 2d 615 (1994) (applying Cheek to criminal violation of federal Money Laundering Control Act and requiring that the government prove the defendant knew his activity violated the statute). Although recognizing that the anti-kickback statute was very broad in its scope and akin to the statutes involved in Cheek and Ratzlaf, the Eighth Circuit reasoned that the term “willfully” in the anti-kickback statute modified a series of prohibited acts rather than punishing the willful violation of a specific statute.
In the second decision, United States v. Davis, 132 F.3d 1092 (5th Cir. 1998), the defendant was convicted of two counts of violating the anti-kickback statute by making cash payments to physicians for Medicare patient referrals. Relying on Hanlester, Davis contended on appeal that his jury should have been instructed by the trial judge that a violation of the anti-kickback statute required not only knowledge on his part that his conduct was illegal, but also knowledge of the specific statute that his conduct violated. The Fifth Circuit, however, read Hanlester narrowly, and relying on dicta in that case it upheld Davis’ convictions. The Fifth Circuit held that to prove a violation of the anti-kickback statute, the government need only prove that the defendant had knowledge that the conduct in question was unlawful and was committed with the specific intent to do something the law forbids, and it need not prove that the defendant had knowledge of the particular law allegedly violated.
The Jain and Davis courts both required a lesser degree of scienter than that required by the Ninth Circuit in Hanlester, although the Jain court attempted to impose a higher degree of scienter than that imposed in regular criminal prosecutions. Thus, at the time of the Starks decision, there was a split among the federal appellate courts as to the degree of scienter required to prove a violation of the anti-kickback statute. Put another way, the issue is whether the government must prove that the defendant committed the prohibited act intentionally or, instead, whether it must prove that the defendant knew the act violated the anti-kickback statute.
The underlying facts in Starks presented the 11th Circuit with a clear case of criminal activity. Andrew Siegel was the president and owner of a drug treatment program. His program contracted with a hospital to operate a chemical dependency unit for pregnant women in exchange for a share of the hospital’s profits from the program. The hospital was a provider in Florida’s Medicaid program. In order to ensure a steady flow of patients for his program, Siegel and his subordinates bribed Angela Starks and Barbara Henry, both of whom were employees of the Florida governmental agency known at that time as the Department of Health and Rehabilitative Services (HRS). As part of their HRS duties, Starks and Henry counseled pregnant women about drug abuse and referred them for drug treatment. Siegel paid Starks and Henry $250 for each patient they referred to his drug treatment program: $125 when a referred woman began the program and $125 after she had stayed in the program for two weeks. They were paid either in cash or by checks falsely coded to cover up their true purpose, and the payments were delivered to them at locations away from their HRS office. In total, Siegel paid Starks and Henry approximately $6,000 for the patients they referred to his program, and the hospital received approximately $323,000 in Medicaid payments for these same patients. Siegel, Starks, Henry, and one of Siegel’s employees were convicted in the United States District Court for the Middle District of Florida of conspiracy to violate the anti-kickback statute and criminal violations of that statute. At the close of the trial the judge instructed the jury by giving it the 11th Circuit’s Pattern Jury Instruction regarding the term “willfully” which defines that term to mean that the criminal activity was committed voluntarily and purposefully, “with the specific intent to do something the law forbids, that is with a bad purpose, either to disobey or disregard the law.”
On appeal to the 11th Circuit, Starks and Siegel asserted, among other grounds, that there was reversible error when the trial judge refused to instruct the jury that in order to be convicted of a violation of the anti-kickback statute the government would have to prove that the defendants knew that their scheme to make and accept payments for patient referrals violated that specific statute. Subsequent to the oral argument before the 11th Circuit in Starks, the United States Supreme Court decided the unrelated case of Bryan v. United States, 524 U.S. __, 118 S. Ct. 1939, 141 L. Ed. 2d 197 (1998), and the Bryan decision became the cornerstone of the 11th Circuit’s opinion in Starks.
Bryan was convicted of violating a provision of the federal firearms law that makes it a crime to “willfully” deal in firearms without a federal license. The evidence in his case showed that Bryan did not have a federal license to deal in firearms; he used so-called “straw purchasers” in Ohio to acquire firearms that he could not have purchased himself; he removed the serial numbers from the guns; and he resold them in New York City on street corners. This evidence, the Supreme Court concluded, was sufficient to prove that Bryan knew that his conduct was unlawful, but there was no evidence that he was aware of the federal law that prohibits dealing in firearms without a federal license. In his closing instructions to the jury, the trial judge at Bryan’s trial explained the term “willfully” to mean that although the defendant must act with the intent to do something that the law forbids, the defendant need not be aware of the specific law or rule that his conduct may be violating.
The Supreme Court, in what amounted to a five-to-three decision, upheld Bryan’s conviction. According to the Bryan majority, a jury may find a defendant guilty of violating a criminal statute employing the term “willfully” if the government merely proves that the defendant “acted with knowledge that his conduct was unlawful.” Bryan, 524 U.S. at __, 118 S. Ct. at 1945, 141 L. Ed. 2d at 205–206. The majority opinion in Bryan also stated that the “willfully” requirement in the federal firearms statute “does not carve out an exemption to the traditional rule that ignorance of the law is no excuse; knowledge that conduct is unlawful is all that is required.” Bryan, 524 U.S. at __, 118 S. Ct. at 1947, 141 L. Ed. 2d at 208.
In reaching its decision, the majority in Bryan distinguished its prior decisions in Cheek and Ratzlaf holding that the term “willfully” in the federal tax law and anti-money laundering statute required a higher degree of scienter to be proved because, in their view, those cases “involved highly technical statutes that presented the danger of ensnaring individuals engaged in apparently innocent conduct. . . and require that the defendant have knowledge of the law.” Bryan, 524 U.S. at __, 118 S. Ct. at 1946–47, 141 L. Ed. 2d at 207. According to the Bryan majority, that danger was not present in a prosecution for a violation of the federal firearms statute.
In its opinion upholding Starks’ and Siegel’s convictions, the 11th Circuit first noted that the Bryan Court upheld a jury instruction on the term “willfully” that was “strikingly similar” to the trial judge’s instruction at the conclusion of their trial. Starks, 157 F.3d at 838 n.6. In the 11th Circuit’s view, the government had produced ample evidence, including the furtive methods by which Siegel remunerated Starks and Henry, from which the jury could have reasonably inferred that they were breaking the law, even if they may not have known that they were specifically violating the anti-kickback statute. Starks, 157 F.3d at 839 n.8.
Finally, the Starks court followed the majority’s analysis in Bryan and refused to accept the argument that the term “willful” in the anti-kickback statute was intended to create an exception to the principle that ignorance of the law is no excuse. The 11th Circuit distinguished the Ratzlaf – Cheek line of cases and said:
Section 1320a-7b [the anti-kickback statute] is not a highly technical tax or financial regulation that poses a danger of ensnaring persons engaged in apparently innocent conduct. Indeed, the giving or taking of kickbacks for medical referrals is hardly the sort of activity a person might expect to be legal. . . . 57 F.3d at 838.
The 11th Circuit thus concluded that the jury instruction on the term “willfully” given by the trial judge in Starks correctly stated the law, and the government was not required to prove that Starks and Siegel knew that their activities violated the anti-kickback statute.
Starks is the first federal appellate court to determine the scienter requirement for a violation of the anti-kickback statute after the Supreme Court’s decision in Bryan. Although the Starks decision is significant for this reason, it also supports the proposition that bad facts make bad law. Perhaps if the facts in Starks had not involved such blatant criminal activity but, instead, involved a complex commercial transaction like the one in Hanlester that is not per se illegal, the result would have been different. Presented with the latter case, the 11th Circuit may have concluded that the anti-kickback statute is a highly technical statute, like the federal tax or money laundering statutes involved in Cheek and Ratzlaf, that poses a danger of capturing persons engaged in apparently innocent conduct, and, therefore, requires a higher degree of scienter.
The legislative history of the anti-kickback statute, including the Congressional mandate that HHS create “safe harbors” for that statute and the 1996 legislation permitting HHS to issue advisory opinions interpreting the statute, shows Congress’ concern for the scope of the anti-kickback statute. The legislative history also gives support for the proposition that the statute is a highly technical statute posing the danger of “ensnaring individuals engaged in apparently innocent conduct” that concerned the Bryan majority. Also giving support to this proposition are the voluminous pages of regulations issued by HHS in creating the “safe harbors” for that statute as well as HHS’ advisory opinions. Although rejected by the 11th Circuit in Starks, a valid argument can be made that the anti-kickback statute is more akin to the complex and highly technical criminal statutes involved in Cheek and Ratzlaf than it is to the type of statute involved in Bryan.
Nevertheless, the law in the 11th Circuit now permits the government to prove a criminal or civil violation of the anti-kickback statute with the degree of scienter required in a garden variety criminal case rather than the higher degree of scienter required for a violation of the federal tax laws or other complex white collar criminal statutes. A health care provider located in the 11th Circuit now can be convicted of a violation of the anti-kickback statute, with all of its onerous consequences, without any proof that it specifically intended to violate that statute or even knew that the anti-kickback statute existed. Starks may thus encourage the government to prosecute more cases under the anti-kickback statute that do not involve per se illegal activities. q
I. Paul Mandelkern is of counsel to the Orlando firm of Lowndes, Drosdick, Doster, Kantor & Reed, P.A., where his practice is concentrated on health care law. He received his law degree from Duke University in 1974 and an LL.M. in taxation from the University of Florida in 1982. Mr. Mandelkern is a member of the Health Law Section and the bosrd of directors of the Florida Academy of Healthcare Attorneys.
This column is submitted on behalf of the Health Law Section, Michael John Bittman, chair, and Robert C. McCurdy, editor.
