This week a federal district court in Ohio ruled in favor of Mobilex USA (Mobilex), the country’s largest mobile medical imaging company, on a motion for summary judgment in a False Claims Act (FCA) suit filed by a former employee, Kevin P. McDonough.  McDonough accused Mobilex of underpricing imaging services supplied to Medicare Part A beneficiaries so that it could obtain more lucrative Medicare Part B business.  Mobilex bills nursing homes directly, based on negotiated contracted rates, for Medicare Part A services because the nursing homes receive a per diem payment that covers most services, including mobile imaging, furnished to Medicare Part A beneficiaries.  The contracted rates typically are less than what Mobilex receives when it bills Medicare directly for Part B services.  McDonough alleged that this scheme of underpricing one service to secure additional business – commonly referred to as “swapping” – violated the Anti-Kickback Statute (AKS), which in turn led to violations of the FCA.

Specifically, McDonough asserted that Mobilex priced Part A services below cost because it should have included certain overhead expenses, such as executive salaries and property costs.  In other words, McDonough argued that the proper measure of costs is fully loaded or total costs.  McDonough further claimed that, by excluding overhead costs, Mobilex kept its prices artificially low, which amounted to kickbacks to its clients.  These kickbacks, in turn, encouraged clients to give their Medicare Part B business to Mobilex.

The court flatly rejected the notion that fully loaded or total costs is the only appropriate measure of costs in this context and pointed to another swapping case in which the court found that use of an incremental cost analysis to calculate anticipated profits was a permissible measure of costs.  McDonough sought to rely on OIG Advisory Opinions (including 99-2 and 12-09) in which the OIG considered pricing below total costs to be “suspect” under the AKS in similar circumstances, but the court made clear that OIG Advisory Opinions do not establish “rules of decision” and do not receive “judicial deference.”  Of note is the fact that OIG has previously stated, in a 2000 letter intended to clarify statements made in Advisory Opinion 99-13, that an AKS violation is “not determined by the size of the discount” but that a violation arises if the discount is “implicitly or explicitly tied to referrals of Federal business.”

Here, McDonough lacked any direct evidence of intent to violate the AKS, and the court refused his attempt to make a circumstantial case.  In fact, the court noted that Mobilex made efforts to offer competitive prices that reflected the market, tracked costs as well as its profits and losses, and reviewed contracts when prices fell below a certain threshold, in an effort to ensure AKS compliance.

Although this one district court decision does not bind any other court – or the OIG – it does offer some helpful compliance guidance to independent laboratories, durable medical equipment suppliers, and other ancillary service providers who have client billing arrangements with, for example, hospitals, physician practices, or nursing homes.   Regardless of whether fully loaded or incremental costs serve as the basis for setting rates to be offered to clients, an ancillary services provider should ensure that rates are fair market value, consistent with prices charged in the market, and established based on a documented method.  In addition, client prices should neverbe based on a direct or indirect promise to refer other business covered by Medicare Part B.  Finally, it is important to track whether client prices are resulting in profits or losses and to monitor contract prices to ensure they make good business sense.  If contract prices are resulting in losses, the company should consider raising them to avoid risk under the AKS.