Some E-Commerce Deals are Illegal
By Michael J. Schroeder, Esq.Editor's note: Mr. Schroeder is a well-respected attorney, particularly in laws affecting chiropractic. He is the vice president of the National Association of Chiropractic Attorneys.
"E-Chiropractic Commerce" was written as legal advice sought by the California Chiropractic Association (CCA) to clarify internet issues and concerns related by CCA members. Dynamic Chiropractic would like to thank the CCA for allowing this article to be shared for the benefit of the entire chiropractic profession.
The advent of e-commerce raises special issues in health care, because health care 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 health care costs. Federal and state lawmakers believe that regulating virtually every type of payment that can be made to or from a health care provider will reduce health care costs by reducing fraud and kickbacks.
Against this background, many doctors 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 health care products and services to market these products and services to patients. The fact that a doctor is being offered money in return for access to patients of the doctors should be a red flag. Unfortunately, this is not the case. Most of the vendors and the doctors making e-commerce deals are proceeding forward as if there were no legal restrictions on the ability of doctors to profit from patient referrals if such referrals are made on the internet.
This article will describe two of the most common e-commerce deals offered to chiropractors and analyze the applicability of the federal and California illegal fee splitting and kickback laws. It is important to keep in mind that this analysis applies to all products and services sold via e-commerce, not just to vitamins and orthotics/prosthetics.
Vitamins and Prosthetics/Orthotics - The Two Most Common E-Commerce Deals Offered to Chiropractors
The "Vitamin Scenario"
The vitamin companies (and internet companies who have made distribution deals with the vitamin companies) are by far the most numerous and aggressive in offering e-commerce deals to chiropractors. The most common scenario is a vitamin or internet company that offers to build a website for the chiropractor for a nominal fee or for no charge. In return, the chiropractic doctor agrees to refer patients to the vitamin company, or agrees to provide an e-commerce location on the chiropractor's website where patients can purchase vitamins by credit card. If a patient does purchase the vitamins on the website, the vitamin company or internet company, not the doctor, 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 chiropractor. 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 doctor'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 Prohibits 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, but vitamins are not. In general terms, the federal anti-kickback law prohibits a doctor from having a financial relationship with anyone with whom the doctor 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 chiropractor 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.
The Vitamin Scenario and the Prosthetic/Orthotic Scenario Are Prohibited under California Law
California Business & Professions Code (Section 650) prohibits any licensed doctor in California from receiving anything of value "as compensation or inducement for referring patients, clients, or customers to any person." Most states have similar anti-referral statutes. These anti-referral statutes are far broader in their reach than the federal anti-referral statute. Not only are all goods and services typically included within these state statutes, but these statutes also extend not only to patients, but to clients and customers.
This distinction is very significant for two reasons. First, many e-commerce vendors and internet companies are misleading doctors by telling them that the federal and state fraud and abuse laws do not apply because the doctor 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 health care products and services.
In both scenarios, the doctors are receiving money for sending customers to e-commerce vendors. Thus, both the vitamin scenario and the prosthetic/orthotic scenario are absolutely prohibited by Section 650. Violations of Section 650 are criminal. Doctors are also subject to having their licenses suspended or revoked.
Legal E-Commerce in Vitamins and Prosthetics/Orthotics Is Possible
The primary flaw in the scenarios set forth above, is that the doctors themselves are not the providers of either the vitamins or the prosthetics/orthotics. Rather, the doctor is referring the doctor's patients to a vendor or internet company through the doctor's website, and then receiving a commission.
If a doctor simply changed the structure of the doctor's e-commerce deal to match how vitamins and orthotics are probably sold at the doctor's office, the legal effect would be very different. In a doctor's office, the doctor usually purchases the vitamins directly from a vitamin company and then provides them to the patient. In the case of a particularly expensive or unusual orthotic, the doctor may wait until after a patient orders such a orthotic before purchasing it. In that case, the doctor collects the money from the patient. The doctor then pays the orthotic company. The orthotic company then ships the orthotic directly to the patient or to the doctor to fit the patient.
A doctor can structure an e-commerce arrangement in the same fashion. For example, a doctor could take credit card payments directly into the doctor's existing merchant account or set up a new merchant account to accept such payments. The doctor could then purchase vitamins and/or orthotics directly from the vendor and have them shipped to the patient.
This changes the doctor's legal relationship with both the patient and the vendor in a very significant way. As to the patient, the doctor is now a direct supplier rather than profiting from a patient referral to a third party. As to the vendor, the doctor 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 doctor 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 that a chiropractic doctor sells any product to a third party, the chiropractor faces potential exposure for products liability should the purchaser of the product be injured by a defect in the product from a vendor or manufacturer. Doctors are strongly advised to obtain a written indemnity agreement from the vendors and/or manufacturer to protect themselves from liability as well as being listed as an additional insured on the vendor and/or manufacturer's products liability insurance policy.
There is always the potential for malpractice liability should a patient claim that he or she was negligently provided with a product from the chiropractic doctor'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 doctors to protect themselves 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 doctor feel free to refer patients to the e-commerce entrepreneur's webstore.
Michael Schroeder, Esq
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."