The advent of e-commerce raises special issues in the healthcare arena, because healthcare is arguably the most heavily regulated profession in the country. Federal and state lawmakers are firmly convinced that fee splitting and kickbacks are a major cause of the rapid increase in healthcare costs.
Federal and state lawmakers believe that regulating virtually every type of payment that can be made to or from a healthcare provider will reduce healthcare costs by reducing fraud and kickbacks.
Against this background, many acupuncturists across the country are being approached to enter into e-commerce deals. What primarily drives most of these proposals is the desire by Internet companies and vendors of healthcare products and services to an acupuncturist's patients. The fact that an acupuncturist is being offered money in return for access to that acupuncturist's patients should be a red flag. Unfortunately, this is not the case. Most of the vendors and the acupuncturists making e-commerce deals are proceeding forward as if there were no legal restrictions on the ability of acupuncturists to profit from patient referrals if such referrals are made on the Internet.
This article1 will describe two of the most common e-commerce deals offered to acupuncturists and analyze the applicability of the federal and California illegal fee splitting and kickback laws. It is important to keep in mind that the analysis set forth below applies to all products and services sold via e-commerce, not just to vitamins and orthotics/prosthetics.
Vitamins and Prosthetics/Orthotics are the Two Most Common E-Commerce Deals Offered to Acupuncturists
The "Vitamin Scenario"
The vitamin companies (and Internet companies that have made distribution deals with the vitamin companies) are by far the most numerous and aggressive in offering e-commerce deals to acupuncturists. The most common scenario usually works as follows. The vitamin or Internet company offers to build a web site for the acupuncturist for either a nominal fee or for no charge. In return, the acupuncturist either agrees to refer patients to the vitamin company or agrees to provide an e-commerce location on the acupuncturist's web site wherein patients can purchase vitamins by credit card. If a patient does purchase the vitamins on the web site, the vitamin company or Internet company, not the acupuncturist, charges the patient's credit card. The vitamin company then ships the vitamins to the patient and sends a rebate and/or commission check to the acupuncturist. If there is an Internet company involved, they also keep a percentage of the sale, and may even charge the vitamin company a fee for selling their product on the acupuncturist's website.
The "Orthotic/Prosthetic Scenario"
Internet companies and manufacturers of orthotics and prosthetic devices such as inserts, cervical pillows and orthotics are the second most aggressive marketers of e-commerce deals. These deals typically are identical to the "vitamin scenario" set forth above, except for what is being sold.
Federal Laws on Fee Splitting and Kickbacks Prohibit the Orthotic/Prosthetic Scenario
The federal laws (42 U.S.C. ¤1395 et seq.) on kickbacks and illegal fee splitting only apply to 11 categories of products and services. Orthotic/prosthetic devices are one of the 11 categories. Vitamins are not. In general terms, the federal anti-kickback law prohibits a healthcare provider from having a financial relationship with anyone with whom the healthcare provider has a referral relationship, unless the referral falls with an enumerated exception. There is no enumerated exception for the prosthetic/orthotic scenario, so this is barred by federal law. Thus, a healthcare provider is prohibited under federal law from receiving a commission or rebate on a prosthetic/orthotic scenario e-commerce deal. Vitamins, since they are not a Medicare program-related item or service, are not reached by this law.
Both the Vitamin and the Prosthetic/Orthotic Scenarios are Prohibited under California Law
Section 650 of the California Business & Professions Code prohibits any licensed healthcare provider in California from receiving anything of value "as compensation or inducement for referring patients, clients, or customers to any person". Most states have a similar antireferral statute. These antireferral statutes are far broader in their reach than the federal antireferral statute. Not only are all goods and services typically included within these state statutes; these statutes also extend not only to patients, but also to clients and customers.
This distinction is very significant for two reasons. First, many e-commerce vendors and Internet companies are misleading acupuncturists by telling them that the federal and state fraud and abuse laws do not apply because the acupuncturist is referring "customers," not "patients." This distinction is almost always irrelevant under state law. In addition, these state laws are usually not restricted to just 11 categories of healthcare products and services.
In both scenarios, the acupuncturists are receiving money for sending customers to e-commerce vendors. Thus, both the vitamin and the prosthetic/orthotic scenarios are absolutely prohibited by Section 650. Violations of Section 650 are criminal. Acupuncturists are also subject to having their licenses suspended or revoked.2
Legal E-Commerce in Vitamins and Prosthetics/Orthotics is Possible
The primary flaw in the scenarios set forth above is that the acupuncturists themselves are not the providers of either the vitamins or the prosthetics/orthotics. Rather, the acupuncturist is referring his or her patients to a vendor or Internet company through the acupuncturist's web site and then receiving a commission.
If an acupuncturist simply changed the structure of the e-commerce deal to match how vitamins and orthotics are probably sold at his or her office, the legal effect would be very different. In an acupuncturist's office, the acupuncturist usually purchases the vitamins directly from a vitamin company, then provides them to the patient. In the case of a particularly expensive or unusual orthotic, the acupuncturist may wait until after a patient orders such a product before purchasing it. In that case, the acupuncturist collects the money from the patient. The acupuncturist then pays the orthotic company. The orthotic company then ships the orthotic directly to the patient (or to the acupuncturist to fit the patient).
An acupuncturist can structure an e-commerce arrangement in the same fashion. For example, an acupuncturist could take credit card payments directly into his or her existing merchant account or set up a new merchant account to accept such payments. The acupuncturist could then purchase vitamins and/or orthotics directly from the vendor and have them shipped to the patient.
This changes the acupuncturist's legal relationship with both the patient and vendor in a very significant way. To the patient, the acupuncturist is now a direct supplier, rather than someone profiting from a patient referral to a third party. To the vendor, the acupuncturist is purchasing from a wholesaler and selling the product retail, rather than receiving a rebate for a patient referral to a retail supplier. The key in these arrangements is to make sure that the acupuncturist is the supplier of the products and services, rather than simply receiving a commission or rebate for a referral.
Other Liability Issues Should Be Considered
Any time an acupuncturist sells a product to a third party, the acupuncturist faces potential exposure for product liability should the purchaser of the product be injured by a defect in the product for a vendor or manufacturer. An acupuncturist would be strongly advised to obtain a written indemnity agreement from the vendor and/or manufacturer protecting the acupuncturist from liability, as well as being listed as an additional insurer or on the vendor and/or manufacturer's product liability insurance policy.
In addition, there is always the potential for malpractice liability should a patient claim he or she was negligently provided with a product from the acupuncturist's e-commerce site that was inappropriate to the patient's condition, disease or injury.
All e-commerce entrepreneurs claim that their e-commerce deals are legal. Most of them are not. One of the best ways for an acupuncturist to protect himself or herself is to refuse to get into any of these deals unless the e-commerce entrepreneurs can provide a legal opinion from a well-known and reputable law firm confirming that the contemplated e-commerce deal complies with both federal and state fraud and anti-fee splitting laws. Then and only then should the acupuncturist feel free to refer her or his patients to the e-commerce entrepreneur's web store.
This article is intended to provide general information and is not intended as a substitute for competent legal advice from your own attorney.
Significantly, the California Board of Chiropractic Examiners recently requested a formal opinion from the California attorney general's office of the following question: "Does Business and Professions Code 650 bar chiropractors from participating in an Internet marketing plan in which chiropractors refer patients to the web site and receive 20% of the price of naturopathic products purchased by patients from the Internet company MotherNature.com?"
Michael Schroeder has formed more than 300 chiropractic-medical practices since 1982. He is the current vice president and general counsel for the American Acupuncture Council, and for the last twelve years has been the vice president of the National Association of Chiropractic Attorneys (NACA). In 1995, NACA honored Mr. Schroeder as their "Attorney of the Year."