The Hanlester Network, et al., Melvin L. Huntsinger, M.D., Ned Walsh, DAB No. 1275 (1991)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

In the Case of:              
The Inspector General     
  -v.-  
The Hanlester Network, et al.;  
and
Melvin L. Huntsinger, M.D.  and Ned Welsh,  
Respondents.

DATE: September 18, 1991
Docket Nos. C-186 through C-192, C-208, and C-213
Decision No. 1275

 

        FINAL DECISION ON REVIEW OF ADMINISTRATIVE LAW JUDGE
     DECISION


The Inspector General (I.G.) of the Department of Health and Human
Services appealed from a decision by an Administrative Law Judge (ALJ)
to an Appellate Panel of the Departmental Appeals Board.

Section 1128(b)(7) of the Social Security Act (Act) authorizes a
permissive exclusion from participation in Medicare and any State health
care program for any individual or entity which has "committed an act
which is described" in section 1128B(b) of the Act (Medicare and
Medicaid anti-kickback statute). 1/  Based on these provisions, the I.G.
had proposed to exclude 10 individual, corporate, and partnership
entities, nine of which requested a hearing before an ALJ.

Administrative Law Judge Steven T. Kessel issued his decision on March
1, 1991 (ALJ Decision).  He concluded that four of the Respondents had
violated section 1128B(b)(2) of the Act through the conduct of their
agent, but determined that no permissive exclusion should be imposed
based on this violation.  He also concluded that the I.G. had failed to
prove other alleged violations of section 1128B(b)(1) or (2).  The I.G.
filed timely exceptions to the ALJ Decision, alleging error in nine of
the ALJ's 227 Findings of Fact and Conclusions of Law (FFCLs).  For the
reasons stated below, we conclude that the ALJ misread what the statute
requires and improperly evaluated whether to impose an exclusion.  We
remand this case to the ALJ for further action consistent with this
decision.


    SUMMARY

This is the first case proposing exclusions for acts proscribed under
the anti-kickback statute.  The purpose of the statute was to protect
the Medicare and Medicaid programs from increased costs or abusive
practices which result from health care decisions affected by provider
self-interest, rather than by legitimate considerations such as cost,
quality, and necessity of services.  One section of this statute is
directed at anyone who offers or pays "any remuneration (including any
kickback, bribe, or rebate) directly or indirectly, overtly or covertly,
in cash or in kind . . . to induce" referral of program-related
business.  Another section is directed at anyone who solicits or
receives such remuneration "in return for" referrals.  Both sections are
at issue here.

The I.G. had alleged that distributions offered or paid by limited
partnership laboratories to physician investors in a position to refer
program-related tests were knowingly and willfully offered or paid as
"remuneration . . . to induce" referrals.  The key issue on appeal is
whether the I.G. must prove that the offer or payment was conditioned on
the physicians agreeing to refer program-related business to the
laboratory, so that the physicians' choice of laboratories was
precluded.  We conclude that such an agreement is not a necessary
element of a violation.

The plain meaning of the statutory language, as well as its context,
purpose, and history, support a conclusion that a violation occurs
whenever an individual or entity knowingly and willfully offers or pays
anything of value, in any manner or form, with the intent of exercising
influence over a physician's reason or judgment in an effort to cause
the referral of program-related business.  Nothing in the statutory
language explicitly or implicitly requires an agreement, nor can the
legislative history or case law on the anti-kickback statute reasonably
be read to require an agreement.

The ALJ's analysis is not consistent with any commonly accepted approach
to statutory construction and was apparently driven by a misplaced
concern that, unless an agreement were required, the statute would reach
activities which are common in the health care field.  First, such a
concern can never justify introducing into the statute an element which
simply is not there (even if that statute may be the basis for a
criminal prosecution).  Second, Congress clearly intended to reach
common activities that it considered harmful to the programs and
provided a means through which benign arrangements could be protected.
While evaluating all of the circumstances surrounding a particular
transaction or relationship in order to determine a party's intent may
be burdensome, this is what the statute requires.  In any event, the
test created by the ALJ is itself subject to varying interpretations and
is not easy to apply.

The I.G. had also alleged that the Respondents, in their relationship
with a major laboratory corporation which managed the partnership
laboratories, knowingly and willfully solicited or received
"remuneration . . . in return for" referrals.  The ALJ found no direct
payment to any Respondent nor any guaranteed flow of business to the
manager laboratory.  The key issue is whether these findings mandate a
conclusion that there was no violation.  We conclude that these factors
are not determinative.  The statute focuses on the substance, rather
than the form, of any transaction or relationship.  Moreover, the
absence of a guarantee of referrals does not mean that referrals, once
made, are any less "in return for" remuneration, where there is an
intentional connection between the referral and the remuneration.

The third major issue is whether certain Respondents should be excluded
from the programs because the ALJ found that they had violated the
statute through the acts of their agent (a marketing director who made
presentations to potential limited partners conditioning their
participation on agreements to refer).  The I.G. argued that the ALJ, in
determining that no exclusion should be imposed on these Respondents,
erred because he did not properly weigh all relevant factors.  While we
reject some of the I.G.'s arguments on this issue, we conclude that the
ALJ should reconsider imposing an exclusion, even if he finds no other
violation.  The ALJ gave too much weight to the fact that the marketing
director resigned, without considering the continuing effect of her
presentations on the structure of the partnerships, and improperly
placed a burden on the I.G. to prove actual harm.

Because of our conclusions, we remand this case to the ALJ to make
further findings consistent with our conclusions on the legal issues.
We provide guidance on some of the relevant factors to be considered on
remand.

Below, we first provide the following background information to assist
the reader in understanding the issues:  relevant facts (Part I, p. 4),
a summary of the ALJ Decision (Part II, p. 8), the I.G.'s exceptions
(Part III, p. 9), and the language and history of the anti-kickback
statute (Part IV, p. 10).  We then present our analysis of the two
statutory sections, first discussing section 1128B(b)(2) of the Act
(Part V, p. 14) and then discussing section 1128B(b)(1) (Part VI, p.
44).  (We discuss the sections in this order to parallel the ALJ's
discussion and to address first the primary issue raised before us).
Next, we discuss the issues raised by the I.G. relating to the
appropriate remedy for the violation found by the ALJ (Part VII, p. 49).
Finally, we explain why we remand this case to the ALJ and provide
guidance for consideration on remand, consistent with our decision (Part
VIII, p. 53).


I.  Factual Background  2/

This case focuses on the complex interrelationships among the various
individuals and corporate or partnership entities involved in the
creation and operation of three limited partnership clinical
laboratories formed in California during the late 1980's.  The
Respondents are:  (1) the Hanlester Network; (2) the Keorle Corporation
(originally the Hanlester Corporation); (3) Pacific Physicians Clinical
Laboratory, Ltd. (PPCL); (4) Omni Physicians Clinical Laboratory, Ltd.
(Omni); (5) Placer Physicians Clinical Laboratory, Ltd. (Placer); (6)
Kevin Lewand; (7) Gene Tasha; (8) Ned Welsh; and (9) Melvin Huntsinger,
M.D.  One individual, Patricia Hitchcock, did not request a hearing
before the ALJ, and the I.G. excluded her from participation in Medicare
and Medicaid for a period of five years.

 A.  The Structure of the Hanlester Network

The Hanlester Network was a California general partnership formed on
January 1, 1987.  The Hanlester Corporation owned the majority interest
in the Hanlester Network; Mr. Tasha and Mr. Welsh were also general
partners.  Mr. Lewand owned the Hanlester Corporation and was President
of the Hanlester Network until January 1989.  In January 1989 the
Hanlester Corporation sold its interest in the Hanlester Network to Mr.
Tasha, an officer in the Hanlester Network, and was renamed the Keorle
Corporation.  Mr. Lewand remained Keorle's owner.

Mr. Welsh was a vice-president in the Hanlester Network until he left in
the summer of 1987.  Ms. Hitchcock was its Vice-President for Marketing
until November 1988 when she resigned.

 B.  The Limited Partnership Laboratories

Between March 1987 and March 1988, the Hanlester Network issued private
placement memoranda offering limited partnership shares in three
clinical laboratories (PPCL, Omni, and Placer) serving defined
communities within California (Los Angeles, Pasadena, and Sacramento);
600 partnership shares were offered for PPCL and 800 each for Omni and
Placer.  The other principal aspects of each partnership offering were
the same.  Each share cost $500 with a three-share minimum purchase.
The number of investors in each partnership was limited to 35
individuals or entities.  The offerings for each laboratory were limited
to licensed physicians residing in California who actively practiced
medicine in the laboratory's geographical area and to others whose
ownership of shares would, in the Hanlester Network's judgment, benefit
the laboratory.  The Hanlester Network was the general partner in each
limited partnership laboratory; it retained exclusive authority to make
management decisions for each laboratory.

An attorney employed by the Hanlester Network and Mr. Lewand prepared
private placement memoranda for each partnership offering.
Additionally, the attorney met with Mr. Tasha, Mr. Welsh, and Ms.
Hitchcock and generally advised them to restrict their sales
presentations to the information contained in the memoranda.  In the
private placement memoranda, prospective limited partners were informed
that, initially, substantially all business would be obtained from them
and that they would continue to be the primary source of partnership
business.  Business would also be solicited from non-partner physicians.
Physicians who regularly ordered outpatient tests would be sought as
limited partners.  The memoranda informed prospective limited partners
of the risks inherent in their investment.  Additionally, the memoranda
noted that, under California law, it would be illegal to offer or pay
consideration to a physician to induce or compensate that physician to
refer patients to a laboratory.  The memoranda indicated that a
partner's return on investment would be based on partnership profits,
not the number of referrals.  Based on assumptions regarding business
volume and estimated costs, the memoranda told prospective limited
partners that they could expect an annual profit of greater than 50% of
their investment.

To varying degrees, Mr. Tasha, Mr. Welsh, and Ms. Hitchcock each made
sales presentations to prospective limited partners in PPCL, Omni, and
Placer.  Generally, the Hanlester Network, while assuring prospective
limited partners that patronage of partnership laboratories was
voluntary, also asserted that it would be a "blueprint for failure" if
partners did not refer.  The scope of Ms. Hitchcock's presentations
exceeded the parameters of the private placement memoranda. 3/  Ms.
Hitchcock told some prospective partners that they could expect annual
returns in the range of 300-400% on the purchase price of their shares,
that their investments were virtually guaranteed, that an "off the
record" condition of sale was that the number of shares sold would be
tied to the anticipated volume of business expected from the prospective
limited partners, and that limited partners who did not refer business
to the partnership laboratories would be pressured by the Hanlester
Network to increase referrals or sell back their interest.

Ms. Hitchcock's compensation from the Hanlester Network included a
percentage of the price of partnership interests she sold and a
percentage of the dollar volume of tests referred by physicians to the
partnership laboratories.

 C.  The Laboratory Management Agreements

The Hanlester Network told prospective limited partners in the three
laboratories that it had negotiated a management subcontract with
SmithKline Bio-Science Laboratories, Inc. (SKBL).  SKBL contracted to
provide laboratory management services to PPCL, Omni, and Placer.

Under the contract, each laboratory was responsible for providing
facilities and equipment, repairing and maintaining laboratory space,
and paying utility costs.  SKBL was responsible for providing and
compensating all laboratory staff, supervising operational activities,
providing and servicing additional equipment, and handling the
laboratories' billings and collections.  The final version of SKBL's
management contract with the laboratories provided that SKBL's monthly
management fee would be $15,000 or 76% of all net cash receipts,
whichever was greater.

The Hanlester Network entered into a corresponding support services
agreement with SKBL, under which the Hanlester Network set up and
managed the client accounts of the partnership laboratories.  The
Hanlester Network received no compensation for these services.

SKBL established accounts for each partnership laboratory into which it
deposited the laboratory's earnings.  Payments to SKBL, the Hanlester
Network, and the partnership laboratories under the various contracts
were made from these accounts.  SKBL began paying the partnership
laboratories based on expected, rather than actual, collections.  The
expected collections exceeded the actual collections.  SKBL treated the
resulting differences in payment as advances which would be deducted
from future payments; however, it is not clear if any effort at
reconciliation of the differences ever occurred.  Each partnership
laboratory paid limited partners annual returns of 50% or better (except
for PPCL's first year when it paid 18%).

SKBL chose to perform much of the work sent to the partnership
laboratories at its own facilities.  Consequently, the limited
partnership laboratories performed only 10 to 15% of the work sent to
them.

While Dr. Huntsinger did not work for any of the Respondents, he was
identified in a sales brochure as the Hanlester Network's Medical
Director.  Dr. Huntsinger also contacted prospective limited partners to
inquire about their interest in the joint venture laboratories.  Dr.
Huntsinger owned 30 limited partnership shares in PPCL.  SKBL hired Dr.
Huntsinger as the Medical Director for Omni and PPCL.  Additionally,
after the laboratories became operational, Dr. Huntsinger, at Mr.
Tasha's request, contacted various limited partners in PPCL and Omni to
notify them that, based on comparisons with other limited partners, they
were not referring sufficient business to the laboratories.  Dr.
Huntsinger also informed them that their failure to make sufficient
referrals was damaging the interests of other limited partners.


II.  The ALJ Decision

Generally, the ALJ found that the Hanlester Network, PPCL, Omni, and
Placer, by virtue of the acts (albeit unauthorized) of their agent Ms.
Hitchcock, knowingly and willfully offered remuneration to physicians to
induce them to refer program-related business in violation of section
1128B(b)(2) of the Act.  However, the ALJ found "unique circumstances
here which preponderate against imposing an exclusion."  ALJ Decision at
95.  Primarily, he found that the Respondents' liability emanated
entirely from Ms. Hitchcock's conduct and that their untrustworthiness
ended when Ms. Hitchcock resigned.  Thus, the ALJ concluded, no
legitimate remedial purpose would be served by excluding these
Respondents from participating in Medicare or Medicaid.

The ALJ concluded that the I.G. did not prove that Mr. Lewand, Mr.
Tasha, Mr. Welsh, Mr. Huntsinger, and the Keorle Corporation offered
limited partnership shares (1) conditioned on physicians agreeing to
send laboratory tests to the joint venture labs or (2) based on the
volume of business physicians were willing to send.  Additionally, the
ALJ concluded that the I.G. did not prove that the Respondents disguised
payments to limited partners for tests referred to the laboratories as
limited partnership distributions on investments or that the Respondents
offered compensation in return for tests.  Thus, the ALJ concluded that
Mr. Lewand, Mr. Tasha, Mr. Welsh, Mr. Huntsinger, and the Keorle
Corporation did not knowingly and willfully offer or pay remuneration to
physicians to induce them to refer program-related business in violation
of section 1128B(b)(2) of the Act.

The ALJ concluded that SKBL had not paid remuneration in return for the
referral of laboratory tests either by making distributions to the
limited partnership laboratories based on accrued rather than actual
collections or by its management relationship with the Hanlester Network
and the limited partnership laboratories.  Thus, the ALJ concluded that
none of the Respondents solicited or received remuneration in return for
referring program-related business in violation of section 1128B(b)(1)
of the Act.


III.  The Inspector General's Exceptions

The I.G. took exception to and asked that we vacate the following FFCLs:

202.  The I.G. did not prove that SKBL's decision to make distributions
to Respondents PPCL, Omni, and Placer based on expected collections of
revenues rather than on actual collections constituted payment of
remuneration to these Respondents and Respondent Hanlester in return for
their referring laboratory tests to SKBL. 4/

204.  The I.G. did not prove that the management relationship between
Respondents Hanlester, PPCL, Omni, and Placer, and SKBL was intended by
Respondents to disguise remuneration from SKBL to Respondents Hanlester,
PPCL, Omni, and Placer in return for these Respondents' referring
laboratory tests to SKBL.

217.  Section 1128B(b)(1) of the Act prohibits a party from knowingly
and willfully soliciting or receiving any payment in return for
referring items or services which are compensated for by Medicare or
Medicaid.

218.  Section 1128B(b)(2) of the Act prohibits a party from knowingly
and willfully offering or making any payment to obtain an agreement to
refer, or referral of, items or services which are compensated for by
Medicare or Medicaid.

219.  In order to violate section 1128B(b)(2) of the Act, a party must
knowingly and willfully offer to make a payment conditioned on the
offeree agreeing to refer items or services which are compensated for by
Medicare or Medicaid.

221.  The I.G. did not prove that Respondents Lewand, Tasha, Welsh,
Huntsinger, Hanlester, Keorle, PPCL, Omni, or Placer knowingly and
willfully solicited or received remuneration to refer items or services
which are compensated for by Medicare or Medicaid, in violation of
section 1128B(b)(1) of the Act.

223.  The I.G. did not prove that Respondents Lewand, Tasha, Welsh,
Huntsinger, or Keorle knowingly and willfully offered or paid
remuneration to physicians to induce them to refer items or services
which are compensated for by Medicare or Medicaid, in violation of
section 1128B(b)(2) of the Act.

226.  The I.G. did not prove that Respondents Hanlester, PPCL, Omni, or
Placer continue to be untrustworthy entities, or that they continue to
jeopardize the integrity of federally-funded health care programs, or
the welfare of beneficiaries and recipients of these programs.

227.  In this case no exclusion is reasonably needed to satisfy the
remedial purpose of section 1128 of the Act.


IV.  Language and History of the Statute

Medicaid, Title XIX of the Act, was adopted in 1965 as a means of
providing access to health care for the needy through federal and state
cooperation.  Medicare, Title XVIII of the Act, was initiated at the
same time to provide insurance for the medical care of the aged, blind,
or disabled.  Although the schemes designed by Congress to administer
the two programs differ greatly, Congress has long been concerned about
containing costs and preserving integrity in both programs.  See, e.g.,
McDowell, The Medicare-Medicaid Anti-Fraud and Abuse Amendments: Their
Impact on the Present Health Care System, 36 Emory L.J. 691, 699-705
(1987).

In 1972, specific penalties for fraud and kickbacks were added to expand
provisions on false statements, by providing:

 Whoever furnishes items or services to an individual for which
 payment is or may be made under this title and who solicits,
 offers, or receives any --

  (1) kickback or bribe in connection with the furnishing
  of such items or services or the making or receipt of
  such payment, or

   (2) rebate of any fee or charge for referring any such
   individual to another person for the furnishing of such
   items or services,

     shall be guilty of a misdemeanor and upon conviction thereof shall
     be fined not more than $10,000 or imprisoned for not more than one
     year, or both.

See Social Security Amendments of 1972, Pub. L. No. 92-603 (1972),
sections 242(b) (Medicare) and 242(c) (Medicaid) (1972) (identical
language).

Congress amended the law in 1977 to make a number of important changes.
5/  The description of the prohibited conduct was restructured into two
paragraphs.  The terms "kickback," "bribe," and "rebate" were subsumed
into the comprehensive term "remuneration." 6/  The breadth of the
provision was emphasized by specifying that it applied to actions
performed "directly or indirectly, overtly or covertly, in cash or in
kind."  The penalty was upgraded from a misdemeanor to a felony.  Thus,
the statute as amended in 1977 read as follows:

     (1)  Whoever knowingly and willfully 7/ solicits or receives any
     remuneration (including any kickback, bribe, or rebate) directly or
     indirectly, overtly or covertly, in cash or in kind --

   (A) in return for referring an individual to a person
   for the furnishing or arranging for the furnishing of
   any item or service for which payment may be made in
   whole or in part under [Medicare or Medicaid], or

  (B) in return for purchasing, leasing, ordering, or
  arranging for or recommending purchasing, leasing, or
  ordering any good, facility, service, or item for which
  payment may be made in whole or in part under [Medicare
  or Medicaid],

 shall be guilty of a felony and upon conviction thereof, shall
 be fined not more than $25,000 or imprisoned for not more than
 five years, or both.

 (2)  Whoever knowingly and willfully offers or pays any
 remuneration (including any kickback, bribe, or rebate) directly
 or indirectly, overtly or covertly, in cash or in kind to any
 person to induce such person --

  (A) to refer an individual to a person for the
  furnishing or arranging for the furnishing of any item
  or service for which payment may be made in whole or in
  part under [Medicare or Medicaid], or

  (B) to purchase, lease, order, or arrange for or
  recommend purchasing, leasing, or ordering any good,
  facility, service, or item for which payment may be made
  in whole or in part under [Medicare or Medicaid],

 shall be guilty of a felony and upon conviction thereof, shall
 be fined not more than $25,000 or imprisoned for not more than
 five years, or both. 8/

The committee reports stated that the amendments were intended to
strengthen penalties and to "clarify and restructure those provisions .
. . which define the types of financial arrangements and conduct to be
classified as illegal," because the prior provisions had "not proved
adequate deterrents."  H.R. Rep. No. 393, Part II, 95th Cong., 1st Sess.
53 (1977); see also S. Rep. No. 453, 95th Cong., 1st Sess. 11 (1977).

Finally, in 1987 the Medicare and Medicaid provisions were consolidated
without relevant change as the present section 1128B(b).  Medicare and
Medicaid Patient Protection Act of 1987, Pub. L. No. 100-93, section 4
(1987).  At the same time, an administrative remedy was created in
addition to the criminal penalty, by authorizing exclusion from Medicare
and Medicaid of any person found to have committed acts described in
section 1128B.  Id. at section 2. 9/


V.  Legal Analysis of Section 1128B(b)(2)

The first major issue in this case is whether the distributions offered
by the partnership laboratories to physician investors in a position to
refer program-related tests were "remuneration . . . to induce"
referrals within the scope of section 1128B(b)(2).  Below, we outline
the ALJ's analysis of the legal elements of a violation and then explain
why we disagree.

 A.  The ALJ's Analysis

The ALJ stated his overall conclusion as follows:

 [I]n enacting section 1128B(b)(2), Congress prohibited
 agreements by health care providers which precluded them from
 making choices which were in the financial or quality of care
 interest of federally-funded health care programs and their
 beneficiaries and recipients.  These prohibited agreements
 included bribes, kickbacks, and rebates and similar
 arrangements.  The unifying characteristic of the conduct which
 Congress proscribed is that it consists of offers of agreements
 or agreements which foreclose the options of health care
 providers to order services which are cost-efficient and which
 are of the best quality.  Offers or payments that were intended
 to influence provider choice, as opposed to agreements which
 foreclosed provider choice, are not within the scope of the
 legislative prohibition.

ALJ Decision at 62 (emphasis added, footnote omitted).

The ALJ's analysis in support of this conclusion may be summarized as
follows:

o       The evolution and legislative history of section 1128B(b)
"demonstrates that . . . Congress was concerned with offers and
agreements to pay kickbacks as a quid pro quo for referred business. . .
.  [N]othing . . . suggests that Congress intended to proscribe
arrangements which encouraged parties to make referrals as opposed to
unethical agreements which required such referrals."  ALJ Decision at
62.

o       Since section 1128B(b) is a criminal statute, the rules for
"interpreting and applying" section 1128B(b) are those which would be
applied in a criminal enforcement proceeding.  Specifically, the section
must be construed narrowly and should not be applied in a manner which
exceeds the reach established by federal courts in criminal cases.  Id.
at 65-66.

o       The common and ordinary meaning of the term "remuneration" is a
payment in return for a service, loss, or expense, and, as used in
section 1128B(b), "the term means payment in return for a quid pro quo."
Id. at 67 (footnote omitted).

o       The juxtaposition of the term "remuneration" with the words
"kickback," "bribe," and "rebate" means that Congress intended that the
"proscribed remuneration be of a character similar to kickbacks, bribes,
or rebates," and this is evidence that "any remuneration" means
"traditionally unethical agreements."  Id.

o       Section 1128B(b)(2) must be read in pari materia with section
1128B(b)(1).  "Given the law's history and the meaning of its language,
there would be no point in giving asymmetrical application to the two
sections."  Id. at 68 (footnote omitted).  Since section 1128B(b)(1)
prohibits remuneration "in return for" referral, it "plainly prohibits
agreements."  Id.

o       Even though 1128B(b)(2)(A) is "arguably ambiguous" and "when
read in isolation, could be construed to support the I.G.'s 'inducement
equals encouragement' theory of unlawfulness," the "plain meaning" of
1128B(b)(2)(B), like 1128B(b)(1), is that "payments to induce agreements
to refer business are unlawful."  Therefore, any possible ambiguity in
1128B(b)(2)(A) is "eliminated when it is read in context, as it should
be."  Id. at 68-69.

o       "The courts have not held that proof of an agreement to refer
program-related business is a prerequisite to establishing a violation
of section 1128B(b)(2)," but the cases in which violations of this
section or its predecessor have been found "involve offers of agreements
or agreements . . . .  None of the cases have found unlawful an offer or
payment which is intended to encourage referrals, but which does not
require referrals as a quid pro quo . . . ."  Id. at 69.

o       The I.G.'s analysis "relies on a literal application of the
phrase 'to induce' without due regard to the context in which it is
used, legislative history, the maxims of statutory construction, and
judicial decisions which have applied the Act to specific facts."  The
I.G.'s analysis "incorrectly presumes that the Act sought to prevent any
payments which influenced or encouraged a provider to refer business,
when in fact the Act was directed at agreements to refer business."  Id.
at 71-72.

 B.  Summary of our analysis regarding 1128B(b)(2)

The ALJ erred in concluding that section 1128B(b)(2) proscribes only
offers of agreements or agreements precluding provider choice. 10/  His
analysis is fundamentally flawed and, in our view, appears driven
primarily by a concern for the possible effects of adopting the
alternative the I.G. proposed (that mere "encouragement" is sufficient
to constitute a violation).

We begin our analysis with the statutory language, its context and its
purpose.  We then consider what use may be made of the principles of
statutory construction and the legislative history, before turning to
the case law.  The main points of our analysis are summarized here and
discussed more fully in the following section.

 a)  We find that the ALJ failed to give effect to the provision
 as written by Congress.  While the words "to induce" and
 "remuneration" may have more than one possible meaning, the ALJ
 has not chosen among the ordinary meanings of the words used,
 but rather has introduced an element (i.e., an agreement
 precluding provider choice) which cannot reasonably be derived
 from those words.  The word "induce" in this context is properly
 understood to mean something more than mere encouragement, but
 cannot reasonably be read to require an agreement precluding
 provider choice.

 b)  Tenets of statutory construction and legislative history are
 to be used, at most, to resolve ambiguity or uncertainty among
 possible meanings of the statutory language, i.e., to clarify
 but not to evade or rewrite.  Further, we find that the
 principles of statutory construction on which the ALJ relied are
 either inapplicable or incorrectly applied.  While it is
 certainly true that narrow construction of criminal statutes is
 to be preferred in selecting between two possible
 interpretations, even criminal law must be construed as written.
 The law, though broad, is not therefore vague or
 unconstitutional.  Moreover, it is not necessary to read in a
 requirement of an agreement in order to avoid absurd results.
 "Remuneration" was added to the statute precisely to broaden it
 beyond traditionally recognizable corrupt payments, such as
 bribes and kickbacks, and the use of the principle of ejusdem
 generis to override structure and plain meaning is improper.
 The principle of in pari materia does not mean that the phrase
 "in return for" in 1128B(b)(1) should be imported into
 1128B(b)(2) and then be read to mean "as a condition for . . .
 agreeing to refer."  ALJ Decision at 81.

 c)  We find that a thorough review of the legislative background
 clearly shows that Congress' concerns were wider than agreements
 precluding provider choice.  In fact, the legislative history
 fully supports the plain meaning of the law as extending to "any
 remuneration" intended "to induce" referrals.

 d)  We find that, in reviewing the criminal cases applying the
 statute, the ALJ incorrectly focused on the facts with which the
 cases dealt, rather than on the standards which the courts
 articulated.  No court has limited the reach of the statute to
 agreements precluding provider choice, as the ALJ himself
 acknowledged.  Furthermore, the facts of the cases do not
 necessarily involve such agreements.

 C.  Discussion

  1.  The plain meaning of the term "to induce" does not
  imply the addition of an element of agreement to the
  statutory language.

The language of the provision being applied here, which should be the
starting point in any analysis, does not refer to agreements at all, nor
does it say anything about preclusion of provider choice.  The ALJ
glosses over this essential point.  Section 1128B(b)(2) states, in
relevant part:

 Whoever knowingly and willfully offers or pays any remuneration
 (including any kickback, bribe, or rebate) directly or
 indirectly, overtly or covertly, in cash or in kind to any
 person to induce such person -- (A) to refer . . .
 [program-related business] . . . shall be guilty of a felony . .
 . .

The I.G. asserted that the term "to induce" is synonymous with "to
influence" or "to encourage," relying on dictionary definitions.  I.G.
Brief (Br.) at 40.  The ALJ's analysis is premised on the faulty
assumption that one must read the statute either to prohibit agreements
which preclude providers from making choices (his approach) or to
prohibit any encouragement of a referral (accepting the I.G.'s
alternative definition).  The ALJ apparently feared that the
interpretation of "induce" as "encourage" might lead to absurd or unjust
results. 11/  We do not consider this either/or approach to be
necessary.  "Induce" has meanings stronger than to encourage which are
consistent with the purpose of the Act and do not lead to an absurd
result.

The term "induce" is given the following meaning --

 To bring on or about, to affect, cause, to influence to an act
 or course of conduct, lead by persuasion or reasoning, incite by
 motives, prevail on. . . .

Black's Law Dictionary 697 (6th ed. 1990) (Black's).

"Induce" is nowhere defined simply by reference to influence or
encouragement.  Thus, we conclude that "to induce" connotes an intent to
exercise influence over reason or judgment in an effort to cause a
desired action and is on its face a stronger term than merely "to
encourage" or "to influence."  While "encourage" or "influence" may
sometimes loosely be used to substitute for "induce," Congress may
reasonably be understood to have used the term with its own unique
connotations which are different from those associated with "encourage"
or "influence."

Words in a statute are presumed to be used in their ordinary and usual
sense.  See Caminetti v. United States, 242 U.S. 470 (1917); United
States v. Ron Pair Enterprises, Inc., 489 U.S. 235 (1989).  Where those
words have a plain meaning, our role is simply to enforce the law
according to its terms.  If the language of the statute itself is clear,
then that language is conclusive, especially absent a clearly expressed
legislative intent to the contrary.  See Russello v. United States, 464
U.S. 16 (1983); United States v. Wong Kim Bo, 472 F.2d 720 (5th Cir.
1972).  We find that the ordinary and common meaning of "to induce" is
as we have stated.  Therefore, we are bound to enforce the statute
without addition or subtraction from its terms.

This conclusion is bolstered by the context, since the statutory
language itself refers to "remuneration . . . to induce."  The reference
to remuneration implies that the inducement must consist of more than
simple encouragement or verbal persuasion.  The meaning of "any
remuneration" is discussed further below, but for these purposes it is
clear that what the words of the statute forbid is offering or paying
something of value with the intention of causing the recipient to make
referrals because of the influence of that remuneration over the
recipient's reason or judgment.  Thus, we agree with the ALJ that any
ambiguity in the meaning of "induce" is eliminated by reading it in the
statutory context, but we disagree that that context anywhere implies an
agreement element. 12/

The ALJ's conclusion that section 1128B(b)(2) prohibits only offers of
agreements or agreements precluding provider choice is not consistent
even with typical kickback arrangements.  In such schemes, the provider
may choose not to make a referral or may refer to any other provider.
The arrangement is simply that, any time the provider does refer to the
offeror, he expects to receive a kickback.  The potential harm is that
the provider's judgment will not be based solely on legitimate
considerations such as cost, quality, and the need for the services, but
will at least in part be based on the provider's expectation that he
will receive the kickback.  The obvious link between the act of
referring and the payment of the kickback is not tantamount to an
agreement precluding provider choice.

Our analysis furthers the statute's underlying purpose, shown both by
its own terms and by its relationship with other parts of the Social
Security Act, of removing a conflict of interest in medical
decision-making, where the physician's financial self-interest may
override the best interests of the patients and the programs.  The
potential for conflict of interest exists between patients and
physicians in all fee-for-service arrangements.  However, in the case of
private patients, the personal relationship with the physician may serve
to motivate the physician to offer the best referral in terms of quality
and economy and the private patient is motivated to save money so that
disclosure of the physician's interest in the suggested referral might
prompt an inquiry as to whether better alternatives existed.  The
federal programs detach the payor from the patient, perhaps even more so
than private insurance.  Furthermore, the elderly and the poor are less
likely to have the mobility, financial resources, and wherewithal to
challenge their physicians or to make any effective use of information
disclosed to them.  Nor do they have any financial motivation to take
such action.  For this reason, the Act contains provisions directly
combatting overutilization.  See, e.g., section 1835(a)(1)(B)
(certification of services as medically required); section 1861(k)
(utilization reviews of hospital admissions); section 1902(a)(30) (state
plan provisions to avoid "unnecessary utilization" and to assure
"efficiency, economy, and quality of care").  The anti-kickback
provisions complement such efforts to control utilization and quality by
prohibiting financial incentives which aim at inducing providers to make
referrals for reasons other than medical necessity, quality of care, or
economy.

In summary, the words of the statutory provision, read in context and in
light of the internal evidence of their purpose, lead directly to our
conclusion that section 1128B(b)(2) does not require proof of an
agreement precluding provider choice in order to establish a violation.

  2.  No resort to principles of statutory construction is
  necessary or justifies adding an agreement element.

   a.  The rule of lenity

Since we find no ambiguity about whether an agreement is required as an
element of a section 1128B(b)(2) violation, we see no reason to seek
guidance from the various principles developed over the years as aids in
alleviating uncertainty.  We recognize that this is a criminal statute.
Where the language is equally susceptible of two meanings, it is
appropriate in criminal cases to prefer the narrower application, as we
have done above in reviewing the meaning of "to induce."  Nevertheless,
it is never permissible to construe so narrowly that what Congress
intended to embrace is excluded -- the object of interpretation even of
a criminal statute is to adopt the "sense of the words which best
harmonizes with the context and promotes in the fullest manner the
policy and objects of the legislature."  United States v. Hartwell, 73
U.S. 385, 396 (1867).

The ALJ relied on the "rule of lenity" articulated in United States v.
Enmons, 410 U.S. 396 (1973), which provides that criminal statutes
should ordinarily be construed to apply narrowly.  See ALJ Decision at
66.  The Court in Enmons held that the Hobbs Act (18 U.S.C. 1951),
imposing criminal sanctions for obstructing interstate commerce by
robbery or extortion, did not reach violent acts committed in connection
with legitimate collective bargaining objectives.  In reaching this
conclusion, the Court reasoned that it would take more explicit language
to lead to a conclusion that Congress intended the federal government to
police the orderly conduct of strikes.  The Court then concluded that
ambiguity in applying a criminal statute was resolved in favor of
lenity.  However, the rule of lenity as an interpretive aid in
construing criminal statutes is employed only where "reasonable doubt
persists about a statute's intended scope even after resort to" its
language, structure, and legislative history.  Moskal v. United States,
498 U.S.  , 111 S.Ct. 461, 465 (1990).  We do not find that the plain
meaning and context of the words "remuneration . . . to induce"
referrals leaves reasonable doubt or ambiguity about whether its scope
is restricted to agreements precluding provider choice.  The rule of
lenity is not an independent source of a requirement to narrow language
in a criminal provision simply because it is broadly written.

       b. Overbreadth

The anti-kickback statute, as written, is broad in scope.  The agreement
element imported into the statute by the ALJ, as well as his
unjustifiably restrictive reading of the term "remuneration," discussed
below, appear to represent an effort to narrow the intended breadth of
the statute.  Yet, the ALJ himself pointed out in his prehearing ruling
that "breadth is not synonymous with ambiguity."  ALJ Ruling on
Respondents' Motion and Request for Ruling (May 8, 1990) at 6.  The
terms of the statute describe a wide range of conduct, but they are
neither unclear nor vague.  Attacks on the statute for vagueness have
been repeatedly rejected by the courts.  See United States v. Bay State
Ambulance and Hospital Rental Service, Inc., 874 F.2d 20 (1st Cir.
1989); United States v. Perlstein, 632 F.2d 661 (6th Cir. 1980); United
States v. Tapert, 625 F.2d 111 (6th Cir. 1980); Hancock, supra.

The Bay State court held that --

     When the Medicare Fraud statute is analyzed under the applicable
     standards, and in light of the fact that inducement is the gravamen
     of the offense, the statute passes constitutional muster even
     though the criminal nature of the statute requires "a relatively
     strict test" for constitutionality. . . .  [T]he statute is an
     economic regulation which allows for greater latitude by
     Congress--the Medicare Fraud statute is directed at drains on the
     public fisc.

874 F.2d at 32 (quoting Village of Hoffman Estates v. The Flipside,
Hoffman Estates, Inc., 455 U.S. 489, 499 (1982)).  The court also
pointed out that the statute does not impact on First Amendment rights,
which means that challenges to the law for vagueness would be judged
only as applied in the instant facts, not in hypothetical situations.
Id. at 32-33 (citing Maynard v. Cartwright, 486 U.S. 356, 361-363
(1988)). 13/  The court emphasized that the "key to a Medicare Fraud
case is the reason for the payment" and that the focus on the intent to
induce operates to avoid any risk of inadvertent violations.

     c. "Absurd" results

Some cases have held that a statute should not be interpreted to intend
an absurd result.  However, it is a legislative not a judicial role to
rewrite the law.  We must take the law as Congress chose to write it and
apply that law to the facts of each particular case.  If a particular
case, while technically violating the terms of the statute, clearly
oversteps the bounds of legislative concerns addressed by the law in
such a way as to lead to injustice or absurdity, we are instructed to
presume "that the legislature intended exceptions to its language which
would avoid results of this character."  United States v. Kirby, 74 U.S.
482, 487 (1868).  However, we have no mandate to amend the law to
introduce a bright line test of our own invention in the hope of
preventing such potential misapplication.  We do not see that the case
before us presently raises any such concerns.

To the extent that some arrangements that violate the statute have
beneficial aspects, they may nevertheless fall within the broad
proscription.  In protecting federal funds spent to purchase health
care, Congress was free to proscribe practices which held the potential
for abuse even if some innovative or efficient arrangements were
foreclosed as a result.  Thus, it does not avail to argue that the law
cannot mean what it says because on its face it may impact some "common
and legitimate" practices in the health care industry.  "Common" does
not necessarily mean "legitimate."  As discussed below, Congress
determined after extensive hearings that fraudulent and abusive
practices were common, in fact rampant, in the health care industry.
Once federal law forbids a practice it is no longer "legitimate," even
if it had been previously.  Further, Congress provided mechanisms for
preserving particularly useful or harmless arrangements by providing for
safe harbor regulations and by enacting specific exceptions. 14/

     d. "Remuneration"/Ejusdem generis

The ALJ reasoned that the statutory language relating to the required
remuneration supported his analysis in two respects.  He defined
"remuneration" as paying an equivalent for services and extrapolated
from the concept of equivalence to the need for some quid pro quo and
thence to the requirement of an agreement.  Thus, the ALJ stated:

     The common and ordinary meaning of "remuneration" . . . is a
     payment in return for a service, loss, or expense.  As used within
     section 1128B(b), the term means payment in return for a quid pro
     quo.

ALJ Decision at 67 (footnote omitted).  Further, he considered that the
phrase "including any kickback, bribe, or rebate" evidenced an intention
to limit the kinds of remuneration to "traditionally unethical"
arrangements.  He concluded that "traditionally unethical" arrangements
are those with the effect of restricting providers' freedom in making
referrals and therefore the "remuneration" language reflects an
intention to prohibit only agreements precluding provider choice.

Certainly the term "remuneration" does connote the idea of value paid in
exchange for something (more than, for example, the word "payment" might
have).  Therefore, just as we discuss with regard to the phrase "in
return for" that appears in section 1128B(b)(1), we understand
"remuneration" to imply a requirement that the offer or payment must
have some intentional connection with the referrals sought.  However, we
find no support in this for the idea that what must be sought to be
induced by the offer or payment of a remuneration must be an agreement
by which a provider will be required to make referrals or, as the ALJ
ultimately articulated it, an agreement precluding provider choice.
Rather, what the offeror must be seeking to induce by the proffered
remuneration is a referral.

The ALJ reads far too much into the fairly straightforward word
"remuneration" and ignores the surrounding language of the statutory
provision.  The statute prohibits "any remuneration (including any
kickback, bribe, or rebate) directly or indirectly, overtly or covertly,
in cash or in kind . . . ."  All the emphasized portions suggest
language of inclusion rather than limitation, expansively referring to
"any remuneration" and providing for any conceivable form or manner of
offer or payment (overtly, etc.).

The most logical construction of the parenthetical "including any
kickback, bribe, or rebate" is that it was intended to make certain that
no actions reached by the previous statute would be lost from coverage
by the change in language intended to broaden the scope.  This
conclusion is particularly sound in light of the legislative history,
discussed more fully below, showing that the term "remuneration" was
added to broaden the pre-existing language which referred only to
kickbacks, bribes and rebates.  It makes no sense then to hold that
Congress retained these terms to defeat its own purpose of broadening
the scope of the provision.  The courts have read the parenthetical as
preventing a narrow reading of "remuneration" to apply only where the
recipient provides some professional service in exchange for the
payment.

     By including such items as kickbacks and bribes, the statute
     expands "remuneration" to cover situations where no service is
     performed.  That a particular payment was a remuneration (which
     implies a service was rendered) rather than a kickback, does not
     foreclose the possibility that a violation nevertheless could
     exist.

U.S. v. Greber, 760 F.2d 68, 71 (3rd Cir. 1985), cert. denied, 474 U.S.
988 (1985) (emphasis added). 15/

The ALJ, however, said that the term "any remuneration" was "qualified .
. . with the words 'kickback,' 'bribe,' and 'rebate'" and that the
"juxtaposition of these terms in the Act means that Congress intended
that . . . the proscribed remuneration be of a character similar to
kickbacks, bribes, or rebates."  ALJ Decision at 67.  He cited the
concept of ejusdem generis, which provides that a general term connected
with a list of specific examples is usually intended to be limited to
things similar in nature to the examples.  If the statute read
"remuneration, such as kickbacks, bribes, and rebates," or "kickbacks,
bribes, rebates, or other remuneration," then ejusdem generis might
usefully suggest that the offer or payment must be of something similar
to kickbacks, etc.  The parenthetical here, however, cannot reasonably
be read as a limiting list of examples.  In this context, we find that
"including" is used to make clear that remuneration encompasses the acts
named, but not to imply that remuneration is restricted to them. 16/

The cases on which the ALJ relies for the applicability of ejusdem
generis are not usefully applied here.  For example, in Auto-Ordinance
Corp. v. United States, 822 F.2d 1566 (Fed. Cir. 1987), the court
interpreted the word "accessories" to firearms to include
"compensators," even though they were not named among a list of
examples, because they were similar in nature to "recoil pads," which
were specifically included.  The case thus would support the inclusion
of anything similar in nature to a kickback, bribe or rebate, but does
not support the ALJ's constricted reading of remuneration.  Schreiber v.
Burlington Northern, Inc., 472 U.S. 1 (1985), construes the prohibition
of "fraudulent, deceptive, or manipulative acts or practices" in tender
offers to reach only manipulation involving deception or non-disclosure.
In so doing, the Court relied on a prior holding that "manipulative" is
"virtually a term of art . . . [in] the securities markets . . .
[meaning acts] designed to deceive or defraud investors. . . ."  Id. at
6 (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976)).  We
are not dealing here with terms with technical meanings.

The cases cited for the principle that specific terms enumerated as
illustrative of a general term should be read to limit the general term
to things of similar nature are also not helpful in understanding the
language at issue.  In Central Forwarding, Inc. v. ICC, 698 F.2d 1266,
1279 (5th Cir. 1983), the grant of authority to regulate, inter alia,
"qualifications and maximum hours of service of employees" in the
trucking industry was held not to extend to regulating employees' wages.
The court rejected the extension of authority to promote "continuous and
adequate" service to permit wage regulations in the face of the explicit
and limited regulatory authority relating to employees.  The court's
conclusion not only made structural sense but was supported by the
overall complex legislative scheme involved and by extensive legislative
history, none of which we find here to support the ALJ's construction of
"remuneration."  Trinity Services, Inc. v. Marshall, 593 F.2d 1250 (D.C.
Cir. 1978), involved whether severance pay from a successor contractor
to employees of its predecessor not rehired by it is covered by the term
"fringe benefits."  The statute listed specific benefits (with severance
pay not among them) followed by "other bona fide fringe benefits."  The
court found that severance pay required from an employer to its own
employees would be covered, but that an obligation undertaken by a
successor toward another's employees is not a "fringe benefit," because
it is not similar in nature.  We are not construing a similar catchall
phrase at the end of an illustrative list.  Rather, as explained above,
we read the parenthetical as expanding the reach of "remuneration"
beyond possible narrow constructions.  Finally, the Supreme Court case
of Harrison v. PPB Industries, Inc., 446 U.S. 578 (1980), which the ALJ
cited, describes ejusdem generis as merely an "instrumentality" in the
search for the meaning of words.  In rejecting its use in interpreting
the phrase "any other final action," the Court specifically pointed to
the "expansive" word "any."  Id. at 589 (emphasis in original).  The
case is thus strong support for our broad reading of the phrase "any
remuneration."

Finally, even if we were to treat kickbacks, bribes, and rebates as the
general type of remuneration to be prohibited, this approach would not
lead us to conclude, as the ALJ did, that this list refers only to
traditionally corrupt or unethical agreements involving agreements
precluding provider choice.  As we note elsewhere, even the specific
arrangements listed in the statute are not necessarily premised on
agreements precluding provider choice.  Moreover, the term "rebate" does
not on its face suggest a corrupt or unethical arrangement.  Rebates are
common and acceptable in the general marketplace.  Rebates become
corrupt and unethical, however, in the context of the Medicare and
Medicaid programs because of the potential harm from affecting provider
choice.

Thus, we conclude that the phrase "any remuneration," considered in
context here, can best be understood as a comprehensive reference to
anything of value employed with the proscribed intent of inducing
referrals.

     e.  In pari materia

The ALJ reached into section 1128B(b)(1) for the language "in return
for," read into it the element of "agreement," and then injected it into
(b)(2) by claiming to read the two sections in pari materia.  The ALJ
reasoned that there was no point to an asymmetrical application of
sections (b)(1) and (b)(2).  As discussed below, the ALJ's expansion of
"in return for" to mean conditioned on an agreement precluding provider
choice is not supported even in relation to (b)(1).  Even if the phrase
"in return for" did have such a meaning, there is no reason to add an
element to (b)(2) that goes beyond the actual language of that section.

Statutes are read in pari materia where they relate to the same subject
matter and the meaning of one statutory provision is regarded as
resolving questions concerning the meaning or application of the other.
For example, the words or phrases used in one statutory provision are
given the same meaning as the words or phrases in another found to be in
pari materia.  Haig v. Agee, 453 U.S. 280 (1981); Northcross v. Bd. of
Educ. of Memphis City Schools, 412 U.S. 427 (1973); Forman v. United
States, 767 F.2d 875 (Fed. Cir. 1985); see generally Sutherland Stat.
Const., sections 51.01-51.03 (4th ed.).  The doctrine of in pari materia
is not properly resorted to as an interpretative aid here.  We are not
dealing here with separate statutory provisions one of which is unclear
in meaning or application, but rather with subsections of one statutory
provision.  Moreover, the two subsections deal with different classes of
persons, i.e., those who receive or solicit remuneration ((b)(1)) and
those who offer or pay remuneration ((b)(2)).

In Wong Kim Bo the court held that statutes should not be interpreted so
that the language that Congress has used is rendered meaningless.  The
court stated:

 [W]here Congress includes particular language in one section of
 a statute but omits it in another section of the same Act, it is
 generally presumed that Congress acts intentionally and
 purposely in the disparate inclusion or exclusion.

472 F.2d at 722; see also Estate of Bell v. C.I.R., 928 F.2d 901 (9th
Cir. 1991); accord I.N.S. v. Cardoza-Fonseca, 480 U.S. 421, 432 (1987).
17/  This presumption of intentionality is particularly applicable here
since the preexisting statute treated the offeror and recipient
together, and the 1977 amendments introduced a new structure by dividing
the proscribed conduct into separate sections.  The only explanation for
the new division must be that some difference was introduced into their
treatment.  That difference appears in the very distinguishing language
which the ALJ attempts to erase.

The ALJ suggested that his construction was more symmetrical.  Nowhere
has Congress indicated an interest in symmetry here.  Nor is the ALJ
correct that different treatment is senseless. 18/  It is perfectly
reasonable that the "payor," who is offering remuneration in an effort
to find a referral source responsive to his inducement, might be held in
violation for his efforts to cause providers to divert referrals,
without inquiring into the state of mind of those providers he
approached.  A "payee," on the other hand, who controls a referral
stream, may reasonably be considered to violate the law at the point
when he exchanges those referrals for a proffered remuneration or
solicits such an exchange.

  3.  The legislative history of section 1128B(b)(2)
  further supports our rejection of agreement as an
  element of the violation.

Nothing in the legislative history suggests that an agreement between
the offeror and the referral source is a required element of the
statute.  The ALJ found, as the Respondents asserted, that the
legislative history does not indicate that Congress intended to reach
beyond "offers and agreements to pay kickbacks as a quid pro quo for
referred business."  ALJ Decision at 62; Hanlester Br. at 12.  But the
broader reach derives from the very words of the statute enacted by
Congress.  Neither the Respondents nor the ALJ cited to any discussion
in the numerous reports on the 1977 amendments that demonstrates any
intention to impose such a limitation.  Rather, they rely on the
examples cited below as evidence that the legislators were aiming at
such a narrow target, while simply ignoring the examples of abuse in the
same legislative record that do not fit the pattern at which they would
prefer the law to have been aimed.  On careful reading of the
legislative record, we could find no explicit or implicit intention to
impose in the law the requirement of an agreement.  In fact, the
sponsors repeatedly refer to the intention of the 1977 amendments as
being an expansion of the anti-kickback prohibitions.

The pre-existing 1972 law had aimed at providing penalties for practices
"which have long been regarded by professional organizations as
unethical, as well as unlawful in some jurisdictions, and . . . [which]
contribute appreciably to the cost of the medicare and medicaid
programs," including "such practices as the soliciting, offering, or
accepting of kickbacks or bribes, including the rebating of a portion of
a fee or charge for a patient referral."  H.R. Rep. No. 231, 92nd Cong.,
1st Sess. 107-108 (1971), reprinted in 1972 U.S. Code Cong. & Ad. News
4989, 5093.

In subsequent years, repeated hearings, investigations, and reports
documented that, despite the 1972 enactment, both programs continued to
be compromised by fraudulent practices. 19/  The legislators expressed
frustration with the ineffectiveness of the efforts of professional
organizations, state programs, and federal agencies to deter abuse under
the existing law.  See Senate Fraud Hearing at 413 (Statement of Sen.
Domenici), 799-800 (Statement of Sen. Percy).

A wide range of practices and arrangements were implicated, among them
"Medicaid mills" shuffling patients among numerous providers for
low-quality care (Senate Fraud Hearing at 414-415) and disguised
kickbacks between pharmacies and nursing homes, including overlapping
ownership (Kickbacks Report at 7-22).  In the clinical laboratory area,
testimony described arrangements made by medical clinics for a flow of
tests to laboratories in which the clinic owners may have an interest
(Clinical Lab Fraud Report at 5-6), excess profits generated through
brokering of tests to reference laboratories (Id. at 31-34), and
unauthorized, discriminatory and excessive laboratory billing (Id. at
23-28); Senate Fraud Hearing at 417-425 (Testimony of Val Halamandaris,
Committee Associate Counsel).  The Clinical Lab Fraud Report concluded
that at least 20%, and possibly 50%, of the $213 million then spent by
Medicaid and Medicare on clinical laboratory services was "wasted," due
to fraudulent practices, kickbacks, or unnecessary services.  Clinical
Lab Fraud Report at 47-48.  The Kickbacks Report similarly found that
kickback and rebate practices were "rampant" throughout the Medicaid
system and harmed the program both by "increasing the cost" and by
"undermin[ing] the quality of services which are offered since operators
become more concerned with rebates than with care."  Kickbacks Report at
2.  The Kickbacks Report concluded with "a plea for aggressive action to
root out fraud and abuse . . . ."  Id.

The 1977 amendments were intended to respond to this call and close
perceived loopholes.  During the floor debate, the principal author of
the bill explained its purpose:

 In broadening these criminal provisions, your committee sought
 to made clear that kickbacks are wrong no matter how a
 transaction might be constructed to obscure the true purpose of
 a payment . . . [T]he committee stresses the need to recognize
 that the substance rather than simply the form of a transaction
 should be controlling.

123 Cong. Rec. 30280 (1977) (Statement of Rep. Rostenkowski) (emphasis
added). 20/

In redrafting the fraud provisions, Congress had before it considerable
testimony about growing sophistication in the structuring of referral
arrangements.  For example, Frank Holstein, a New Jersey state
investigator, testified, from his experience, that there were "many
efforts made to cover up rebates and kickbacks and to justify them in
very nice euphemistic terms."  Senate Fraud Hearing at 455.  He went on
to describe how such rebates resulted in poor quality:

 Obviously, the physicians -- those who get a kickback from the
 laboratory or who have a proprietary interest in the laboratory
 -- have little or no motivation to go to that lab and to take a
 look to see if the quality of the testing and the conditions are
 good or bad.  Their eyes are focused on the "greens" . . . .

Id. at 458.  Samuel Skinner, U.S. Attorney, Northern District of
Illinois, similarly pointed out:

     They have become very sophisticated in the health care field.  They
     know what cases we are prosecuting.  They are now using their
     ingenuity in an attempt to get around us.

Joint Hearing at 32.

A review of the abuses described in hearings and reports preceding
enactment of the 1977 amendments shows that the legislators were casting
a very wide net and many of the arrangements investigated did not
necessarily involve agreements precluding provider choice.  We thus find
no support for the ALJ's conclusion.

The ALJ cited examples, from the Kickbacks Report, of coercive
preconditions imposed by some nursing homes on pharmacists and of covert
agreements between some laboratories and physicians to demonstrate that
Congress intended to reach only "fraudulent or unethical agreements."
ALJ Decision at 64.  However, the same report describes abusive
arrangements which do not involve agreements or preconditions.  For
example, pharmacists were concerned about "the conflict of interest
presented where the ownership of the pharmacy and the nursing home
overlap," without mentioning referral agreements as a condition of such
ownership.  Kickbacks Report at 13; see also Senate Fraud Hearings at
978-79 (Statement of Sen. Chiles on physician ownership interest in home
health agencies).  Also, investigators set up a sting operation in the
form of a storefront clinic and reported that ten out of twelve clinical
laboratories which approached them "offered some form of inducement or
kickback . . . [ranging] from an educational program for physicians . .
. to maximize returns from public aid, to cash rebates of more than 50
percent. . . ."  Kickbacks Report at 23.  The report does not suggest
that the offers were made conditional on the physicians' agreement to
refer to or only to the offerors.  One state investigator reported that
"some laboratories either returned a set percentage of medicaid test
fees to some of the doctors referring business to their laboratories or
indulged in some other financial inducement-type payments to the doctors
. . ." without any indication that the doctors involved made agreements
to refer or were precluded from referring elsewhere.  Senate Fraud
Hearings at 450-51 (Statement of Mr. Holstein).

Many arrangements described as kickbacks involved remuneration (whether
cash percentages, phony consulting fees, or in kind "gifts") that varied
in response to the volume of referrals, but others were constant
payments (for example, $950 for a small space or a flat $5000 payment
per year) or varied for other reasons (for example, use of a lower price
list for a physician's private patients or free drugs or cosmetics for
nursing home staff).  See, e.g., Kickbacks Report, passim.  Obviously in
all these cases, the persons making or offering to make these payments
to referring doctors did so in the hope or expectation of motivating the
doctors to maintain or increase referrals to them.  Presumably, the
payments might cease or the offers be withdrawn at some point if they
did not result in profitable referral streams.  However, the important
point is that the descriptions of these schemes nowhere suggest that
they are abusive only when the doctors to whom the offers are made agree
to be bound in exchange to refer to the offerors.

As support for his concept that kickbacks must involve preclusion of
physician choice, the ALJ also quoted from findings that such kickbacks
schemes were so widespread as to almost foreclose opportunities for
ethical laboratories to obtain Medicaid accounts "unless they offer a
kickback."  ALJ Decision at 64-65 (quoting from Clinical Lab Fraud
Report at 47).  That some physicians were unwilling to direct business
to laboratories that would not offer kickbacks does not mean that
laboratories offering kickbacks were to be punished only if the
kickbacks were conditioned on physicians agreeing to foreclose their
options.  It makes no sense to infer a requirement of an agreement
precluding provider choice from the fact that unscrupulous laboratories
and physicians were so prevalent as to almost bar the honest from the
marketplace.

  4.  The case law does not support a conclusion that an
  agreement precluding provider choice is a necessary
  element of a violation of section 1128B(b)(2).

The ALJ cited certain federal criminal cases, applying the anti-kickback
provisions, as support for his conclusion that an agreement precluding
provider choice is a necessary element of a violation. 21/  The ALJ
stated --

     The courts have not held that proof of an agreement to refer
     program-related business is a prerequisite to establishing a
     violation of section 1128B(b)(2).  However, the cases in which
     courts have found violations of section 1128B(b)(2) or its
     predecessor involve offers of agreements or agreements to refer
     program-related business.  In each of these cases the defendants
     were found to have purchased referrals through some remuneration
     scheme or to have offered to purchase referrals.  None of the cases
     have found unlawful an offer or payment which is intended to
     encourage referrals, but which does not require referrals as a quid
     pro quo for acceptance of the offer or payment.

   *   *   *

 Although the payment schemes may vary, the common thread of the
 cases is that the unlawful schemes are premised on the
 provider's agreement to refer program-related business to the
 payor.

ALJ Decision at 69 and 71.

In FFCL 219, the ALJ concluded that a violation of section 1128B(b)(2)
occurred when there was an "offer . . . conditioned on the offeree
agreeing to refer" program-related business.  This formula differs from
that articulated and applied elsewhere in the ALJ Decision that the
requisite agreement is one that precludes provider choice.  In relating
the facts of this case to the facts of the court cases, the ALJ appears
to have been most impressed by the fact that, under the Hanlester
scheme, a physician-investor could participate in the partnership and
receive payments without ever making any referrals to the laboratories.
Thus, he considered the payments to limited partners merely to
"encourage" referrals, but not to be "conditioned" on them, and
therefore to fall outside the established case law.  However, the facts
found by the ALJ evidence a greater connection between the payments and
the referrals here than mere encouragement. 22/  Moreover, the case law
reaches remuneration not "conditioned" on an agreement to refer.

In Bay State, for example, a municipal employee received payments as a
consultant to an ambulance company and played a role in the award of the
city's contract for ambulance services to that company.  There, the
court rejected contentions that no showing had been made that (1) the
employee received any more than his consultant services were worth, (2)
the consulting contract with the ambulance company was entered into with
any specific intent that the employee influence the bid process (he had
received payments even before the bid process began), and (3) the
payments to the employee were conditioned on his affecting the city
contract.  The court emphasized that the "gravamen of Medicare Fraud is
inducement."  Id. at 29.  The court said it did not even matter that the
payments might reflect the value of his services because "[g]iving a
person an opportunity to earn money may well be an inducement to that
person to channel potential Medicare payments towards a particular
recipient."  Id.  The court further rejected the contention that a
violation required proof that "the payee actually performed the improper
acts for which he was paid."  Id. at 34.  Bay State thus holds that a
payment intended to induce a referral (or in that case a recommendation
to purchase) is illegal, even if it is not conditioned on or does not
result in a referral.

Thus, in the ownership setting, an illegal inducement may consist of an
opportunity to earn money on the investment, if a non-incidental purpose
of providing that opportunity is to induce referrals.  The result is the
same whether or not the referrals were specifically required or ever
took place.  The applicability of section 1128B to the ownership
situation is demonstrated by the decisions in Kats and Universal Trade.

While the ALJ acknowledged that no court has required proof of an
agreement to refer program-related business as a prerequisite to
establishing a violation of (b)(2), he found such an agreement, actual
or implied, to be the "common thread" in the facts of all these cases.
23/  While in some instances courts referred to these transactions as
"agreements," from our reading of these cases those characterizations
have no legal significance with regard to the elements of a violation.
Of course, since the gravamen of the violation here is intent, when
there is a pre-existing arrangement or "agreement," the intent to induce
program-related business may be more easily identified.  However, the
absence of such an "agreement" does not disprove intent.  Further, the
ALJ stretches the term "agreements" to mean merely "a formula pursuant
to which payments will be made" (Duz-Mor and Universal) or the payment
of a consulting fee as a "quid pro quo for each referral" (Greber).  The
ALJ seems to characterize the arrangements in the remaining cases as
"agreements" simply because the courts found some connection between the
value of the referred business and the remuneration offered, paid, or
received.

The ALJ stated that, from his reading of those cases, circumstances
existed for a trier of fact to infer existence of an agreement to refer
program-related business.  ALJ Decision at 72.  Such a reading is not
possible unless the term "agreement" is read so broadly that it
encompasses almost any transaction.  Furthermore, even if an agreement
may be inferred, it does not follow that an offer must be conditioned on
such an agreement in order to be illegal. 24/

What is also missing in any of these arrangements is any element of
preclusion of provider choice, such as the ALJ demanded in applying
1128B here.  While the illegal remuneration was an inducement in these
cases, no preclusion of provider choice appears except to the extent the
remuneration itself resulted in a referral (i.e., once each referral was
made, the referrer was precluded from referring that particular test
elsewhere).  Finally, even if in all these cases some form of
"agreement" to refer existed, that alone would not determine the legal
elements of a violation of the statute. 25/

To the extent the cases reached the elements of a violation (which most
did not, either because of the procedural status or the narrow issues
addressed), they support our reading of the provisions.  Thus, for
example, Duz-Mor dealt with the nature of the proscribed offer.  The
court cited analogous federal bribery cases defining "offer" as a
representation expressing an ability and a desire to pay a remuneration
coupled with an intent to induce desired action.  In the court's view,
Duz-Mor's proposal, suggesting a 15% rebate for referrals, clearly met
this standard.  Id. at 227.

Also, in Greber, the court recognized that the 1977 amendments were
enacted, in part, to address the Congressional concern with "the
practice of giving 'kickbacks' to encourage the referral of work."  Id.
at 71.  The court held that if one purpose of the payment was to induce
future referrals, the statute had been violated, even if the payment
served other functions as well.  Thus, if the payments were intended to
induce a physician to make a referral, the statute was violated, even if
they were also intended to compensate for professional services.  Id. at
72; accord Kats and Bay State.

In sum, the cases do not support the ALJ's conclusion.

  5.  Other arguments of the parties regarding section
  1128B(b)(2).

The I.G. suggested that, if we find ambiguity in the statute, we should
defer to the interpretation of the Secretary.  He further argued that
the best evidence of the Secretary's interpretation is in two sources,
the proposed Safe Harbor regulations and a Fraud Alert issued by the
I.G.  See I.G. Exhibit (Ex.) 101.0.  As discussed at length above we do
not find any ambiguity about whether the statutory language requires
proof of an agreement precluding provider choice.  Thus no need arises
to seek out or defer to an administrative interpretation.  In any case,
we do not find it appropriate to defer to either proposed regulations or
a statement of prosecutorial interests or intent.  Finally, we find that
neither document even purports to set forth an interpretation by the
Secretary of any of the language in dispute here.  We discuss each
separately below.

  a.  Proposed safe harbors

The issuance of safe harbor regulations does not alter the reach of the
anti-kickback statute, but only cloaks specific arrangements with
protection from prosecution if they might otherwise be found in
violation. 26/  Furthermore, a proposed regulation has no binding
effect.  Joyce Faye Hughey, DAB No. 1221 at 5-6, 8-9 (1991).  It would
be unfair to require the interested public to conform its conduct to a
proposed rule which may never take effect or which may be changed before
becoming effective.  Rowell v. Andrus, 631 F.2d 699, 702, n.2 (10th Cir.
1980).  We thus agree with the Respondents that proposed regulations
could not constitute timely notice.

Moreover, the I.G. did not make clear where the interpretation of the
statute to which he wished us to defer appears in the Notice of Proposed
Rulemaking publishing the proposed Safe Harbor regulations. 27/

     b.  The Fraud Alert

The Fraud Alert, which was mailed to physicians in May 1989, set out a
list of "questionable features" that "separately or taken together"
might indicate unlawful activity and then asked recipients to report any
joint ventures containing some of these features to the I.G.'s offices.
Fraud Alert Brochure, I.G. Ex. 101.0.  The Respondents complained that
the Fraud Alert was tailored to the facts of this case and was published
long after the partnerships were in operation.  The I.G. argued that the
Fraud Alert is entitled to deference as in the nature of agency
enforcement guidelines to which the Supreme Court required deference
under Martin v. OSHRC, 499 U.S.  , 111 S.Ct. 1171 (1991).  Martin is
inapposite.  It involved a conflict over the proper interpretation of an
ambiguous regulation that occurred in the context of a different federal
agency structure.  Martin in no way requires us to defer to the I.G.'s
interpretation of a statute that is not ambiguous.

Furthermore, the Fraud Alert contains no statement on the meaning of the
terms at issue here.  Rather, it represents a statement of the I.G.'s
interest, as prosecutor, in obtaining information about joint ventures
with specified features, "some" of which the I.G. "believes . . . may
violate" the statute.  I.G. Ex. 101.0.  The I.G. may publicly state what
factors it will consider in deciding to initiate enforcement action, but
the Act provides for a hearing and review procedure once enforcement
action is undertaken.  Section 1128(f) of the Act.

The I.G. relied on language from the conference report on the Stark
Bill, section 1877 of the Act, as amended by Public Law No. 101-239,
section 6204 (1989), as evidence that the Fraud Alert authoritatively
reflected Congressional intent.  I.G. Br. at 65 (quoting H.R. Conf. Rep.
No. 386 at 856, reprinted in 1989 U.S. Code Cong. & Ad. News 3459).  The
report, however, states only how the conferees wish the Stark Bill to be
construed and their intent not to affect the I.G.'s enforcement efforts.
The report does not express agreement with any specific interpretation
of the "current" law.  Even if it did, the comments of a committee
regarding interpretation of a law passed by an earlier Congress can be
given only limited weight.  Certainly the fact that when Congress
revisited this area in 1987 and 1989, it was fully aware of the breadth
with which the 1977 language was being interpreted in the courts and by
the enforcement agency, and yet chose not to narrow its scope,
reinforces our understanding that the meaning of the law is clear,
albeit broad.  However, this brief reference in a committee report
cannot serve to make binding an informal agency statement issued after
the ventures in question were well underway. 28/

Nevertheless, to conclude that the Fraud Alert is not a binding
interpretation of the statute does not imply that the factors to which
it refers are irrelevant in evaluating whether a particular arrangement
violates the statute.  To the extent these factors suggest relevant
inferences which may reasonably be drawn from particular choices of
investors, business structures, and financing arrangements, the Fraud
Alert may be a useful tool in applying the statute.

    c.  The HCFA letters

The Respondents argued that the ALJ Decision is the appropriate
interpretation of the Secretary, but then acknowledged that it would be
the Secretary's decision only if not "altered by the Board."  Next, the
Respondents proposed that "the interpretations entitled to the greatest
weight" are opinion letters issued in 1980-81, because they are "more
contemporaneous."  Hanlester Br. at 21-25.  The letters involved were
signed by an official of the Health Care Financing Administration (the
HHS component which administers Medicare and Medicaid) and responded to
apparent inquiries about the legality of particular arrangements.
Generally the letters, at least as read by the Respondents, suggest that
"legitimate" businesses are not the target of the law, self-referral
alone does not increase costs, and other program mechanisms would
prevent abuse.  It is not clear how useful these observations are since
(1) they do not define which businesses are legitimate; (2) they do not
claim that self-referral never increases costs, only that it need not
always do so; and (3) their reliance on other utilization control
provisions fails to explain why Congress so clearly felt that abuse was
continuing to occur despite them.

In any case, each letter disclaims authority to officially interpret the
statute.  See, e.g., Hanlester Ex. 15.  The Respondents did not claim
they relied on these letters in structuring their arrangement.  In any
event, such an argument would amount to an attempt to use estoppel to
make the interpretations in these letters binding on the Secretary,
despite their own disclaimers.  Estoppel will not lie against the
federal government in these circumstances.  See Heckler v. Community
Health Services of Crawford County, Inc., 467 U.S. 51 (1984); Office of
Personnel Management v. Richmond, 496 U.S.   , 110 S.Ct. 2465 (1990).


VI.  Section 1128B(b)(1) of the Act

The second major issue in this case is whether, in their relationship
with SKBL, the Respondents committed acts described in section
1128B(b)(1) of the Act.  The I.G. alleged generally that (1) the ALJ
erred by applying an improper legal standard in determining that the
Respondents had not committed such acts; and (2) we should remand to the
ALJ to reexamine the record based on the proper legal standard.  Below,
we first summarize the ALJ's analysis of this issue.  We then state why
we consider that analysis to be erroneous.

 A.  The ALJ's Analysis

As discussed above, in determining the meaning of section 1128B(b)(2),
the ALJ discussed his view of the evolution, history, purpose, and
language of section 1128B(b) as a whole, as support for his overall
conclusion that section 1128B(b)(2) proscribed offers of agreements or
agreements to refer precluding provider choice.  A key part of his
analysis was his conclusion that sections 1128B(b)(1) and (b)(2) were
intended to have the same scope, and, therefore, (b)(2) required an
agreement because (b)(1) did.  The language of (b)(1) which the ALJ said
required an agreement was the phrase "in return for," as well as the
term "remuneration" (which appears in both sections).

The ALJ stated what the I.G. must prove to establish a violation of
section (b)(1), as follows:

     Thus, a party will manifest the requisite intent to violate section
     1128B(b)(1) if that party agreed to accept payments in return for
     referring program-related business, even if that party also
     accepted the payments for other, lawful, reasons.

ALJ Decision at 80 (footnote omitted). 29/  He also stated that "the
meaning of this section is plain" and that --

 Whatever payment is solicited or received by the referring party
 must be intentionally solicited or received by that party as a
 condition for that party agreeing to refer program-related
 business.

Id. at 81.

Finally, in applying the section to the facts of this case, the ALJ
found that the I.G. did not prove that any Respondent solicited or
received remuneration from SKBL because "SKBL made no payments to
Respondents."  Id. at 81-82.  He found that, instead, Respondents PPCL,
Omni, and Placer made substantial payments to SKBL to remunerate SKBL
for its management services.  He explained that this did not mean the
Respondents did not benefit from their relationship with SKBL, but
stated that the Act "does not attach liability to parties simply because
they benefit from contracts."  Id. at 82.  He further found that the
I.G. did not prove that the Respondents agreed to refer program-related
business to SKBL, noting that the "management agreements do not
guarantee SKBL a flow of business from Respondents PPCL, Omni, and
Placer."  Id.

 B.  Our Analysis of Section 1128B(b)(1)

The ALJ erred in concluding that section 1128B(b)(1) is violated only
when there is solicitation or receipt of a payment in return for an
agreement precluding provider choice.  Section 1128B(b)(1) of the Act
provides:

 (1)  Whoever knowingly and willfully solicits or receives any
 remuneration (including any kickback, bribe, or rebate) directly
 or indirectly, overtly or covertly, in cash or in kind -- (A) in
 return for referring [program-related business], . . . shall be
 guilty of a felony . . . .

(Emphasis added.)

Nothing in the wording of this section requires an agreement precluding
provider choice.  Neither the phrase "in return for" nor the term
"remuneration" implies that such an agreement is required.  Moreover, to
prove a violation, the I.G. does not need to prove a guaranteed "flow of
business."

  1.  The phrase "in return for" does not imply agreement.

The phrase "in return for" in section 1128B(b)(1) certainly does imply a
connection between the solicitation or receipt of remuneration and the
actual referral of program-related business.  Moreover, the section has
an intent element, and evidence of an agreement to refer would satisfy
the statutory standard of an intentional connection between the
remuneration and the referral.  But we fail to see how an agreement is
necessary in order to establish that connection.  For example, if a
physician made a referral to a supplier and then asked the supplier for
a kickback of part of the supplier's profit from that referral, the
physician would certainly be soliciting payment in return for the
referral, even if he did not promise to make further referrals or have a
preexisting understanding with the supplier at the time the referral was
made.

The ALJ apparently adopted the Respondents' position that "in return
for" implies a quid pro quo (which means "something for something").  By
itself, this is not an unreasonable reading if it means that the
remuneration is being solicited or received as a quid pro quo for the
referral.  "In return for" does imply a connection between the
remuneration and the referral.  We do not, however, think it is
reasonable to infer that this connection must take the form of an
agreement precluding provider choice. 30/

Even in a typical kickback situation, a provider may merely have an
expectation (based on past practice) that he will receive payment for a
referral.  He has not agreed to refer, nor is the supplier bound to make
the kickback, but if the provider refers with the intent to receive a
kickback and then receives a kickback, the kickback is no less "in
return for" the referral simply because there was no preexisting
agreement precluding provider choice.

  2.  "Remuneration" does not imply an agreement or
  guarantee.

Like section 1128B(b)(2), section 1128B(b)(1) contains the term
"remuneration," which the ALJ found required an agreement.  As we
discussed above, this reading (1) is not derived from the ordinary
meanings of that term; (2) ignores the clear intent manifested in the
language and structure of the section as a whole; (3) is based on a
misapplication of principles of statutory construction, and, in any
event, misinterprets the terms "kickback," "bribe," and "rebate;" and
(4) is inconsistent with the legislative history and purpose of the
amendment adding the term "remuneration."  (See our discussion in
sections V.C.2. and 3. above.)

Also implicit in the ALJ's application of the concept of "remuneration"
here is the idea that the I.G. had to prove that payments flowed from
SKBL to the Respondents.  This requirement clearly frustrates
Congressional intent to focus on the substance rather than on the form
of the transaction.  We agree with the ALJ that a showing of benefit
does not conclusively establish that prohibited acts were committed.
But, if the sum of the benefits received by a party are excessive
compared to the sum of the legitimate benefits conferred and if
referrals are occurring, it is reasonable to infer that the excess
benefits were received in return for the referrals.

Finally, the ALJ found that the I.G. did not prove that the Respondents
agreed to refer to SKBL since the management agreement did not
"guarantee SKBL a flow of business" from the Respondent laboratories.
First, we do not think even an agreement to refer necessitates a
guaranteed flow of business.  Even in an easily recognizable kickback
scheme, the physician does not guarantee a stream of referrals.

Second, it appears to us that the substance of the transaction resulted
in a virtual guarantee to SKBL of referral of any tests the Respondent
laboratories were not equipped to perform.  If the management agreements
gave SKBL control over any tests referred to a reference laboratory
(which could result in higher reimbursement), then, under the agreement,
the Respondent laboratories had given up their choice of using a
reference laboratory other than SKBL. 31/


VII.  Legal Analysis of the Remedy Issue

The third major issue here is whether Respondents Hanlester, PPCL, Omni,
and Placer should have been excluded based on the conduct of their agent
Ms. Hitchcock.  The I.G. argued that the ALJ erred in deciding that no
exclusion should be imposed even though he found a violation of section
1128B(b)(2) based on the conduct of Ms. Hitchcock.

Below, we first summarize the ALJ's analysis of the remedy issue.  We
then address the I.G.'s arguments that (1) the ALJ failed to give
sufficient effect to deterrence as a purpose of an exclusion; (2) the
ALJ failed to give sufficient weight to the fact that section
1128B(b)(2) is a criminal statute and that Congress has in section
1128(a) of the Act mandated a minimum five-year period of exclusion for
convictions under section 1128B(b)(2); (3) the ALJ erred in requiring
proof of actual harm to the programs; and (4) an exclusion should be
imposed regardless of whether Ms. Hitchcock had severed her relationship
with Respondents.

Our analysis of these arguments assumes a finding of a violation based
solely on the conduct of Ms. Hitchcock.  We conclude that the ALJ should
reevaluate whether an exclusion should be imposed on Respondents
Hanlester Network, PPCL, Omni, and Placer, regardless of whether he
finds that these Respondents violated the statute through acts other
than those the ALJ found were solely attributable to Ms. Hitchcock.

 A.  The ALJ's Analysis

In analyzing the remedy to be imposed, based on the violation he found,
the ALJ pointed out the remedial purpose of the exclusion remedy,
describing that purpose as allowing the Secretary to suspend his
contractual relationship with those providers who are dishonest or
untrustworthy.  The ALJ recognized deterrence as an ancillary benefit of
exclusion, but stated that the primary purpose was remedial, rather than
to punish or deter.

The ALJ agreed as a general proposition that inferences as to a party's
trustworthiness can be drawn from the nature of the conduct they have
committed.  In most circumstances, he said, misconduct in the nature of
a program-related crime infers untrustworthiness.  He further said that
the fact that Congress has mandated a five-year exclusion for those
convicted of a program-related crime should be used as guidance on what
would be a reasonable exclusion for those found to have engaged in
conduct in the nature of a program-related crime.  ALJ Decision at
93-94.

The ALJ also applied as guidelines the factors listed in 42 C.F.R.
1003.106(b).  He described these regulations as enumerating "factors
which should be considered in deciding whether to impose an exclusion,
and in deciding how long an exclusion should be."  Id. at 95.

The ALJ concluded from applying these "criteria and guidelines" to the
facts (as he had found them) that "no remedial purpose would be served
by imposing exclusions against Hanlester, PPCL, Omni, and Placer."  Id.
Essentially, his points in support of this conclusion were that --

o  The basis for a finding of violation was solely attributable to the
acts of Ms. Hitchcock, and the problems with her agency ended when
Hanlester and Ms. Hitchcock parted company.  Id.

o  The evidence shows that the Respondents did not manifest a
"propensity for hiring untrustworthy agents and employees," nor were
they "indifferent to the consequences of their agents' acts."  Id. at
95-96.

o       Ms. Hitchcock's conduct was contrary to Respondents' intent and
their policy.  The Respondents manifest little culpability, and none has
a history of prior offenses.  Id. at 96.

o       While the potential for harm to the Medicare and Medicaid
programs is one of the principal reasons Congress enacted section 1128B,
there is no evidence to prove such harm actually resulted from the
limited partners' participation in Respondents PPCL, Omni, and Placer.
Id. at 96-97

 B.  Our Analysis

We note at the outset that ordinarily we accord deference to an ALJ's
judgment on the length of an exclusion to be imposed since this judgment
requires weighing the evidence presented and, often, includes evaluating
credibility of witnesses.  The I.G.'s exceptions here, however, raise
questions concerning whether the ALJ applied proper legal standards in
determining the remedy and whether the ALJ appropriately included or
omitted certain factors in determining that no exclusion was warranted.

First, we reject the I.G.'s position that the ALJ erred by not imposing
an exclusion for purposes of deterrence where the ALJ found that no
remedial purpose would be served by an exclusion.  The ALJ's reasoning
was based on the Supreme Court's statement, in United States v. Halper,
490 U.S. 435, 448 (1989), that a "civil sanction that cannot fairly be
said solely to serve a remedial purpose, but rather can be explained
only as also serving either retributive or deterrent purposes, is
punishment . . . ."  While Halper involved the question of double
jeopardy and that question does not arise here since there is no
criminal conviction, the ALJ's determination that no exclusion should be
imposed solely for the purpose of deterrence is reasonable.  It is not,
as the I.G. alleged, "directly at odds" with the ALJ's previous
recognition that deterrence is one purpose of the statute.  See I.G. Br.
at 97.  We note that passage of the broader statutory provision was
regarded as a deterrent, separate from the actual imposition of any
exclusion.  See S. Rep. No. 453, 95th Cong., 1st Sess. 11 (1977).
Moreover, to the extent the I.G.'s position is that the ALJ was required
to impose an exclusion solely for deterrent purposes, this position is
inconsistent with the statute, which makes imposition of an exclusion
permissive, rather than mandatory.

We also think the I.G. placed too much weight on the fact that section
1128B(b) is a criminal statute and that five-year exclusions are
mandated for program-related crimes.  The standard of proof is different
for a criminal conviction than for civil liability.  Moreover, if
Congress had intended a five-year exclusion to apply in all section
1128(b)(7) cases, it would not have made such exclusions permissive.

On the other hand, it is not clear to us that the ALJ gave sufficient
weight to the fact that Congress obviously thought that the misconduct
proscribed by section 1128B(b) was a serious offense.  While the ALJ
stated that he was considering this fact and that, in most
circumstances, misconduct in the nature of a program-related crime
infers untrustworthiness, his analysis appears at odds with these
statements.

The ALJ stated that Ms. Hitchcock's conduct was contrary to Respondents'
intent.  Yet, the Respondents here (Hanlester, PPCL, Omni, and Placer)
are the very Respondents whom the ALJ found had the requisite intent,
"[b]y virtue of the acts of their agent," necessary for finding a
violation.  FFCLs 220 and 222.  Moreover, the ALJ gave great weight to
his finding that the I.G. did not prove any actual harm.  Yet, the
statute proscribes offers of illegal remuneration, so Congress must have
thought the conduct proscribed in section 1128B(b)(2) was serious
regardless of whether actual harm resulted.  The degree of
untrustworthiness is evidenced by the degree to which a respondent is
willing to place the programs in jeopardy, even if a scheme is
ultimately unsuccessful.

The lack of actual harm, if proved, would be a relevant mitigating
factor to be considered, but it should be weighed against the scope of
the potential for harm.  Here, Ms. Hitchcock's conduct was not an
isolated incident but apparently affected her presentation to many of
those physicians who invested as limited partners.  Moreover, since lack
of actual harm acts as a mitigating factor, the burden of proof is
properly placed on the Respondents, rather than on the I.G.

Finally, we agree with the I.G. that the ALJ gave too much weight to the
fact that Ms. Hitchcock resigned her position with Hanlester Network.
While relevant, the effect of her resignation must be viewed in light of
other considerations.  Unlike the conduct of an employee of a large
corporation who engages in illegal conduct solely for his/her own ends,
Ms. Hitchcock's conduct affected the whole structure of the partnership
laboratories to the extent that participating physicians invested based
on her representations.  The programs are still in jeopardy so long as
any of these physicians remain in the partnership with the understanding
they derived from Ms. Hitchcock's presentation.  Absent evidence that
the Respondents acted to undo the effects of the representations she
made, the potential for harm to the programs still exists.

Also, we consider it a relevant factor that the Hanlester Network
provided a compensation package for Ms. Hitchcock which included
payments based on the number of referrals.  Ms. Hitchcock thus had a
financial incentive to make the representations she made as agent for
the Hanlester Network and the partnership laboratories, and some
potential for harm to the programs would remain even if another
marketing director were hired, so long as the compensation structure is
the same.

Thus, even if we had agreed with the ALJ on what constitutes a violation
of section 1128B(b), we would remand for a reevaluation of the remedy.


VIII.  Applying Our Conclusions -- Guidance to the ALJ on Remand

While we agree with the I.G. that the ALJ erred in interpreting section
1128B, we consider it appropriate in this case to remand to the ALJ for
further action, consistent with our decision.  In this section, we first
explain what is required in applying our conclusions and why we decline
to evaluate here whether the I.G. proved violations and whether
exclusions are appropriate.  We then discuss some of the factors which
the ALJ should consider on remand in applying sections 1128B(b)(2) and
(b)(1) here.

 A.  Remand Is Appropriate

Distinguishing acts described in the statute from other acts requires
examining all the circumstances surrounding a transaction or
relationship in order to ascertain the parties' intentions.  No one
aspect of the circumstances, such as the absence of an agreement, is
singled out in the statute as decisive of whether the offeror intended
to induce referrals or whether remuneration was sought in return for
referrals.  Therefore, it is not possible to avoid the task of
thoroughly evaluating all relevant circumstances of the transactions at
issue here.  However, the legislative history, the case law, and the
remainder of the Medicaid and Medicare law provide direction as to the
targets at which the provisions were aimed.  From these, we can derive
guidance as to what factors suggest the acts Congress sought to
proscribe.

Our role is not to issue policy guidelines specifying the factors which
would be suspect in all conceivable future transactions.  Rather, we
merely provide guidance below on some factors the ALJ should consider on
remand in the context of applying the statute to the specific
arrangements at issue.  That guidance does not constitute a
comprehensive listing of all evidence relevant to determining the intent
of the parties or of all the inferences which could reasonably be drawn
from such evidence.  The ALJ already made findings pertaining to some of
these considerations, but did not draw inferences from them regarding
the parties' intent because of his view of the legal standard.  In other
areas, he made no findings (possibly because his view of the legal
standard made all factors except for the condition of an agreement
precluding provider choice irrelevant or possibly because the record did
not support findings).

The duty of making all relevant findings and drawing appropriate
inferences from them is properly committed to the ALJ in the first
instance.  As the Respondents noted, the ALJ has the advantage of
familiarity with "a thoroughly developed and extensive factual record"
which will enable him to avoid deciding "in a vacuum or in the
abstract."  Hanlester Br. at 3.  The ALJ is in the best position to make
any further findings required by our decision, determining the relative
weight of the various, possibly conflicting, evidence of the
Respondents' intent and assessing the credibility of the witnesses. 32/

Therefore, we decline to substitute FFCLs evaluating whether the I.G.
proved violations or whether exclusions are appropriate.  Instead, we
remand to the ALJ to make such amended or additional findings as may be
necessary in light of this Decision.

 B.  Factors for Section 1128B(b)(2)

The ALJ should reevaluate the record and his findings on whether the
Respondents violated section 1128B(b)(2) in light of the following:

o  It is not a necessary element of a violation of section 1128B(b)(2)
that the offer or payment be conditioned on an agreement to refer.
Rather, the question is whether the Respondents knowingly and willfully
offered or paid remuneration with the intent of exercising influence
over the reason or judgment of the physicians in an effort to cause them
to refer.

o  Remuneration offered or paid which exceeds the reasonable value of
any services openly provided or of any investment made is likely
intended as inducement for referrals.  Some of the courts applying the
statute have inferred intent from the excessiveness of the remuneration.
See Lipkis at 1449 (payments for "handling" fees that far exceed the
value of the services can be inferred to be remuneration for referrals).
33/  The ALJ expressed concern that this standard would discourage too
many potential ventures because of the difficulty of judging, on an
on-going basis and without set guidelines, whether the compensation was
excessive.  "Few would risk the prospect of exclusion . . . I suspect
that most simply would opt not to engage in any business transaction
which might be construed to be illegal."  ALJ Decision at 79.  However,
the legislative history cited above demonstrates that Congress'
experience suggested otherwise.  Health care ventures that violated
existing laws or were designed precisely to seek loopholes in those laws
were described repeatedly in testimony and reports as widespread and
common.  Therefore, the mere fact that a particular arrangement is
common cannot be properly considered because it would reduce the
effectiveness of Congress' decision to alter substantially many common
practices in the health care industry precisely because Congress found
so many providers so willing to skirt the edge of the law.

o  The ALJ found that the limited partners received a rate of return
which did not exceed what is typically paid by health care limited
partnerships.  FFCL 200.  If the I.G. proved that the payments to
limited partners were excessive in terms of the risks involved and the
return of alternative investments in general, however, this would
indicate that the excess value could act as an inducement.  Limiting the
comparison to other health care limited partnerships may legitimize a
prohibited arrangement simply because that type of arrangement is
common.

o  Inferences regarding intent may be drawn from the structure of the
venture:  whether the venture is limited to potential referral sources;
whether the partners are precluded or discouraged from using alternative
laboratories; whether the investments were sought to meet the capital
needs of the venture; whether the venture met a need for services; and
whether the structure was designed to permit the physicians to evade
restrictions on their profiting from tests they order by taking
advantage of the reference laboratory exception.

o  Inferences may be drawn from the degree of nexus between the
remuneration and the referrals.  Clearly, a scheme in which payments (or
the shares which generate payments) are proportional to referrals offers
the most direct incentive to physicians to refer or overutilize.  Even
where payments (or ownership shares) are not divided with regard to
actual referral patterns, the smaller the number of partners, the
greater the impact each physician's referrals will have on his return
and the greater the incentive to refer.  (As noted above, however, the
legislative record included both flat and proportional arrangements, so
lack of proportionality should not be given too much weight.)

o  It is relevant whether the arrangement was likely to lead physicians
to select one laboratory over another or to overutilize laboratory
services because of the incentives provided.  See H.R. Rep. No. 393
(Part II) at 48 (1977), reprinted in 1977 U.S. Code Cong. & Ad. News at
3050.  In other words, it is relevant whether the value offered was
sufficient to interfere with the physician's judgment based on
legitimate considerations, such as cost, quality, and necessity of the
services. 34/

o  While actual harm to the program is not required as a basis for an
exclusion, evidence showing resulting overutilization or reduced quality
of services to recipients/beneficiaries is relevant on whether the
incentive offered was sufficient to induce referrals.

 C.  Factors for Section 1128B(b)(1)

In applying section 1128B(b)(1) to the Respondents, the ALJ should
reevaluate the record and his findings, in light of the following:

o  The compensation received and duties performed by each of the
individual Respondents is relevant to whether any of the compensation
was received in return for arranging for referrals of program-related
business.

o  It is not a necessary element of section 1128B(b)(1) that the
Respondents agreed to make referrals to SKBL or guaranteed a flow of
business to SKBL.

o  It is a relevant factor here whether, as manager of the Respondent
laboratories, SKBL could control whether the Respondent laboratories
would refer tests to or order tests from SKBL laboratories as reference
laboratories (for which higher rates presumably were available).

o  The fact that a transaction may have a legitimate business purpose
does not mean that the transaction as a whole does not run afoul of the
law.  See, e.g., Greber, and Kats.  While this may be some evidence of
intent, it is not determinative.

o  The relationship as a whole between SKBL and the Respondents must be
evaluated to determine whether the sum of the benefits the Respondents
received from SKBL were excessive compared to the sum of the legitimate
benefits they conferred on SKBL.  As the I.G. noted, SKBL advanced money
to the Respondents based on expected rather than actual revenues.  The
value of the use of the money to the Respondents during the period
before it was due is one benefit to be considered.


         CONCLUSION

The I.G. filed exceptions to FFCLs 202, 204, 217, 218, 219, 221, 223,
226, and 227.  Consequently, we affirm and adopt the ALJ's findings of
fact and conclusions of law which were not subject to the I.G.'s
exceptions.  We vacate all the FFCLs which were subject to the I.G.'s
exceptions, but decline to adopt the language of the I.G.'s proposed
FFCLs 1-10.

We modify the decision to add the following conclusions consistent with
our determinations concerning the legal standard:

AP 1.   An individual or entity commits acts described in section
1128B(b)(1) of the Act by knowingly or willfully soliciting or receiving
any remuneration in return for the referral of program-related business.

AP 2.   An individual or entity commits acts described in section
1128B(b)(2) of the Act by knowingly and willfully offering or paying any
remuneration to induce the referral of program-related business.  An
offer or payment may violate section 1128B(b)(2) even if it is not
conditioned on an agreement to refer.

AP 3.   The phrase "to induce" in section 1128B(b)(2) connotes an intent
to exercise influence over the reason or judgment of another in an
effort to cause the referral of program-related business.

AP 4.   The phrase "any remuneration" in sections 1128B(b)(1) and (2)
covers offering or paying anything of value in any form or manner
whatsoever.  The direction in which money payments flow in a transaction
is not determinative of whether remuneration has been paid.

AP 5.   While the phrase "in return for" in section 1128B(b)(1) connotes
a connection between the solicitation or receipt of remuneration and the
referral of program-related business, this phrase does not necessarily
imply that the solicitation or receipt of remuneration must be
conditioned on an agreement to refer or on any guaranteed flow of
business.

AP 6.   The mere fact that an exclusion under section 1128(b)(7) is
based on a determination that a respondent has committed acts described
in section 1128B(b) (which may also be the basis for a criminal
prosecution) does not mean that a five-year exclusion should be imposed.

AP 7.   The I.G. failed to prove actual harm, which could act as an
aggravating factor in determining the length of an exclusion.  Lack of
actual harm would be a mitigating factor, and, therefore, the burden of
proving the lack of actual harm is on the Respondents.

Five of these modified FFCLs substitute for vacated FFCLs 217, 218, and
219.  As the I.G. requested, we added two FFCLs on the legal standard to
be applied in determining whether a permissive exclusion is necessary
once a party is found to have violated the statute.

We remand the case to the ALJ for reconsideration of the conclusions
stated in FFCLs 202, 204, 221, 223, 226, and 227, consistent with the
analysis in this decision.

We note that FFCLs 202 and 204 contain conclusions related to the
overall conclusion stated in FFCL 221 that the Respondents did not
violate section 1128B(b)(1) of the Act.  We conclude that FFCLs 202 and
204 are  mixed conclusions of fact and law which are vulnerable because
of the ALJ's error with regard to the meaning of the term "any
remuneration" in section 1128B(b).  Thus, we vacate those conclusions.

We decline to modify the decision to add FFCLs concluding that the
Respondents committed acts described in section 1128B or imposing
permissive exclusions.  Whether to reach such conclusions is the
province of the ALJ on remand.

We decline to adopt an FFCL proposed by the I.G. stating the "one
purpose" rule adopted in the Greber and Kats decisions (I.G.'s proposed
FFCL 3).  We do not consider such an FFCL to be necessary since the rule
is not in dispute here.  We also decline to adopt an FFCL proposed by
the I.G. concerning the inference to be drawn when the amount of
remuneration received substantially exceeds the fair market value of any
services provided (I.G. proposed FFCL 7).  As discussed above, excessive
remuneration is only one of the factors to be examined by the ALJ, who
will determine its significance.  Thus, we do not consider it necessary
to single out this one factor in a modified FFCL.

We expect the ALJ's further determinations to involve new findings of
fact as well as a reexamination of the significance of the findings of
fact previously made.  Furthermore, we recognize that in his decision on
remand the ALJ may wish to reorder and/or renumber the FFCLs, including
the FFCLs stated above.

 


     _______________________________
     Judith A. Ballard

 


     ________________________________
     Theodore J. Roumel U.S. Public
     Health Service

 


     ________________________________
     Cecilia Sparks Ford Presiding
     Panel Member


1.  "State health care program" is defined by section 1128(h) of the Act
to cover several types of federally-financed programs, including
Medicaid.  We use the generic term "Medicaid" to refer to all State
health care programs.

2.  This background is derived from the ALJ Decision.  It is not a
substitute for the detailed FFCLs, but is provided solely to explain the
factual context for our decision.  See ALJ Decision at 5-31.

3.  The ALJ found that the I.G. failed to prove that either Mr. Tasha or
Mr. Welsh made the kind of representations which Ms. Hitchcock made and
which the ALJ found violated the Act.

4.  Throughout this decision, we omit the ALJ's citations to the Act,
regulations, other FFCLs, or the record before him from our restatement
of his FFCLs.

5.  Pub. L. No. 95-142, section 4 (1977).

6.  See H.R. Rep. No. 393, Part II, 95th Cong., 1st Sess. 53 (1977),
reprinted in 1977 U.S. Code Cong. & Ad. News 3056; S. Rep. No. 453, 95th
Cong. 1st Sess. 12 (1977).  This change resulted from a perceived need
to clarify the terms "kickback," "bribe," and "rebate."  Joint Hearing
at 31-32.  Such clarification, it was hoped, would prevent different
forms of "transferral payments" from giving kickbacks "an air of
legitimacy even though the parties involved intend to circumvent the
law."  Id. at 37.  The meaning of these terms had also been placed in
doubt by conflicting interpretations in the courts.  Compare United
States v. Porter, 591 F.2d 1048, 1054 (5th Cir. 1979) ("kickback" means
"secret return to an earlier possessor of part of a sum received") with
United States v. Zacher, 586 F.2d 912, 914-16 (2d Cir. 1978) (all three
terms "involve a corrupt payment" in violation of providers' obligations
to use federal funds as intended) and United States v. Hancock, 604 F.2d
999, 1001-02 (7th Cir. 1979) (per curiam), cert. denied, 444 U.S. 991
(1979) ("kickback" means a percentage payment to someone who controls a
source of income).

7.  The phrase "knowingly and willfully" was added in 1980 by the
Omnibus Reconciliation Act of 1980, Pub. L. No. 96-499, section 917
(1980).  The purpose was to avoid prosecution of persons "whose conduct,
while improper, was inadvertent" and to "assure that only persons who
knowingly and willfully engage in the proscribed conduct" would be
punished.  H.R. Rep. No. 1167, 96th Cong., 2d Sess. 59 (1980), reprinted
in 1980 U.S. Code Cong. & Ad. News 5526, 5572.

8.  The identical prohibition appeared at section 1877(b) of the Act
with respect to Medicare and at section 1909(b) of the Act with respect
to Medicaid.  Throughout this decision, we use "program-related
business" as shorthand for the language in the statute concerning those
items, services, etc., for which payment is made under Medicare or
Medicaid.  Also we use "referral" as shorthand for purchases, leases,
etc. of covered items or services.

9.  The committee report explains that the Secretary is thereby
authorized to impose an exclusion without "obtaining a criminal penalty
or obtaining a criminal conviction.  It is the Committee's intent that
the burden of proof requirements . . . would be those customarily
applicable to administrative proceedings."  S. Rep. No. 109, 100th
Cong., 1st Sess. 10 (1987), reprinted in 1987 U.S. Code Cong. & Ad. News
682, 690.

10.  Throughout this decision, we use the expression "agreement
precluding provider choice" to summarize the requirement imposed by the
ALJ as reflected in his analysis discussed above.  In FFCL 219 the ALJ
used the phrase "payment conditioned on the offeree agreeing to refer."
His discussion treats an agreement precluding provider choice as
equivalent to a guarantee of a flow of referrals, to a requirement of
referrals as a condition for payment, to an offer to purchase referrals,
to an agreement to refer business, or to the provision of a quid pro
quo, and further assumes the agreement concept to be determinative of
the existence of unethical or corrupt conduct.  See, e.g., ALJ Decision
at 62, 69-72, 74, 82, and 83.  These concepts are not interchangeable,
and the use of the word "agreement," which has its own ambiguities and
which appears nowhere in the statute, only magnifies the confusion.

11.  For example, the ALJ referred to promotional drug samples and
hospital recruitment lunches as potentially suspect.  ALJ Decision at 77
and n.18.

12.  Following the language "to induce such person" in section
1128B(b)(2), there are two paragraphs.  Paragraph (A) states "to refer
an individual to a person for the furnishing or arranging for the
furnishing of any [program-related business]."  Paragraph (B) states "to
purchase, lease, order, or arrange for or recommend purchasing, leasing
or ordering any [program-related business].  The ALJ conclusorily stated
that the plain meaning of paragraph (B) is that "payments to induce
agreements to refer business are unlawful."  ALJ Decision at 69.  The
activities covered by paragraph (B) (which are used to obtain items,
services, etc., paid for by Medicare and Medicaid) often involve but do
not necessarily require agreements.  It is clearly unreasonable to infer
from the mere fact that some of the types of commercial arrangements
listed may involve agreements that Congress intended to make illegal
only payments to induce agreements to refer.

13.  The Supreme Court has also pointed out that, while criminal
statutes must provide adequate notice of the conduct which is subject to
its penalties, the language of statutes is rarely capable of
mathematical precision.  "Consequently, no more than a reasonable degree
of certainty can be demanded.  Nor is it unfair to require that one who
deliberately goes perilously close to an area of proscribed conduct
shall take the risk that he may cross the line."  Boyce Motor Lines,
Inc. v. United States, 342 U.S. 337, 340 (1952).  In structuring these
joint ventures and crafting the private placement memoranda, the
Respondents may well have tailored their arrangements to maximize their
financial returns, despite knowing that they were at least close to an
area proscribed by federal law.

14.  The five exceptions may be paraphrased as (1) discounts passed on
to the program, (2) bona fide employment relationships, (3) certain
shared purchasing arrangements, (4) certain waivers of copayment under
Part B of Medicare, and (5) regulatory safe harbors.  Section
1128B(b)(3) of the Act, as amended by Pub. L. No. 101-508, section
4161(a)(4) (1990).  The Secretary was directed to issue regulations
specifying practices that would not be subject to prosecution (i.e.,
"Safe Harbors").  Pub. L. No. 100-93, section 14 (1987).  Proposed
regulations were issued for comment in January 1989.  54 Fed. Reg. 3088
(1989).  Final regulations were published during the pendency of this
appeal.  56 Fed. Reg. 35952 (July 29, 1991).

15.  The court in Bay State quoted this language with approval and then
rejected the reverse argument that no remuneration occurred if the
payment was reasonable in relation to the professional services rendered
because the payment must have been to compensate those services rather
than to induce referrals.  Id. at 29-30.

16.  This construction is particularly appropriate for the term
"including" in a portion of the Social Security Act, since section
1101(b) of the Act states that this term "when used in a definition . .
. shall not be deemed to exclude other things otherwise within the
meaning of the term defined."  Section 1101(b) thus provides further
support for our conclusions.

17.  The ALJ pointed to dicta in Bay State where the court stated that
Congress meant crimes under sections 1128B(b)(1) and (2) to have the
same elements for payor and payee.  See ALJ Decision at 68, n.13 (citing
Bay State at 34).  As the I.G. noted, the court's quotation of parallel
statutory language stopped short of the differentiating language which
immediately followed.  I.G. Br. at 51, n.26.  The ALJ's reliance on
dicta is further undercut when the dicta is read in context.  The issue
of whether the elements of a violation of (b)(2) included the payment of
remuneration in return for referrals did not arise in Bay State.
Consequently, the dicta cited is pertinent only to the extent (b)(1) and
(b)(2) contain the same elements but does not support disregarding any
differences in language.

18.  To illustrate that there are legitimate reasons for an asymmetrical
reading, the I.G. looked to analogous provisions of the principal
federal bribery statute, 18 U.S.C. 201(b)(1) and (2).  The bribery
statute is split into two parallel provisions with language similar to
the anti-kickback statute.  As the I.G. noted, Congress rejected a
proposed revision to the bribery statute which would have merged the
separate sections into one provision requiring proof of an "intention,
agreement or arrangement to purchase or sell an official's conduct"
whereas "under the existing law there need be only an intention to
influence or induce conduct."  I.G. Reply Br. at 9-10 (citing National
Commission on Reform of Federal Criminal Laws, Working Papers, Comment
on Official Bribery [references and emphasis omitted]).

19.  See, e.g., Senate Special Comm. on Aging, Kickbacks Among Medicaid
Providers, S. Rep. No. 320, 95th Cong., 1st Sess. (1977) (Kickbacks
Report); Medicare-Medicaid Antifraud and Abuse Amendments:  Joint
Hearing on H.R. 3 Before the Subcomm. on Health, Comm. on Ways and
Means, and the Subcomm. on Health and the Environment, Comm. on
Interstate and Foreign Commerce, 95th Cong., 1st Sess. (1977) (Joint
Hearing); Medicaid and Medicare Frauds:  Hearing Before the Subcomm. on
Long-Term Care of the Special Comm. on Aging, 94th Cong., 2d Sess.
(1976-1977) (Senate Fraud Hearing); Subcomm. on Long-Term Care of the
Special Comm. on Aging, Fraud and Abuse Among Clinical Laboratories, S.
Rep. No. 944, 94th Cong., 2d Sess. (1976) (Clinical Lab Fraud Report).

20.  Perhaps the ALJ read this statement as referring only to disguised
kickbacks.  The history as a whole, however, indicates that "kickback"
here was simply a shorthand reference to proscribed inducements.

21.  The ALJ analyzed these cases -- United States v. Duz-Mor Diagnostic
Laboratory, Inc., 650 F.2d 223 (9th Cir. 1981); United States v.
Universal Trade and Industries, Inc., 695 F.2d 1151 (9th Cir. 1983);
Greber, supra; United States v. Stewart Clinical Laboratory, Inc., 652
F.2d 804 (9th Cir. 1981); United States v. Lipkis, 770 F.2d 1447 (9th
Cir. 1985); United States v. Kats, 871 F.2d 105 (9th Cir. 1989).

22.  First, every referral made by a limited partner would incrementally
increase his payment, so at least some part of the payments of referring
partners was "conditioned on" his referrals.  Bay State holds that
inducement is illegal even if it is only one of several purposes of
payment so long as it is not merely incidental.  Id. at 30; see also
Greber.  Second, most of the referrals to the laboratories in fact came
from limited partners, and these referrals generated most of the
revenues resulting in the payments to the partners.  FFCLs 191 and 193.
Thus, the payments depended on the referrals, even though each partner's
receipts were not necessarily mathematically proportional to his
referrals.  Third, limited partners were told that referrals from
limited partners were essential to the venture's ability to make
payments and their absence would be a "blueprint for failure."  FFCLs 42
and 44.  Thus, it may be inferred that the limited partners were aware
of the potential impact of their referral decisions on their future
income.  That not all limited partners made referrals does not prove
that no violation occurred.  See FFCL 139.  It is not necessary that a
payment succeed in inducing a referral for it to have been intended to
serve that end.

23.  The illegal arrangements considered were:  (1) a scheme whereby 15%
of the value of referred business would be returned to the referring
party (Duz-Mor); (2) schemes where the amount returned to the referring
party was ostensibly based on a related service provided by that party
(e.g., Greber -- "consulting fee" paid to the referring physician for
interpretation of test results; Lipkis -- 20% kickback from a medical
laboratory to physicians for certain services such as "collection of
specimens, spinning down blood"); (3) a scheme whereby free laboratory
work would be provided for a physician's private patients in exchange
for the referral of his program-related business (Stewart); and (4) more
complex transactions involving illegal gain received through an
ownership or management interest (e.g., Kats -- payments received due to
a 25% interest in a clinic which received 50% kickbacks on the value of
referred laboratory work; Universal Trade -- a medical laboratory and
its administrative director, through a separate corporation, opened a
medical lab in a clinic and returned to the clinic's administrator/owner
a percentage of the net receipts and of the gross receipts as an
administrative "salary" associated with no duties).

24.  In support of the proposition that section 1128B(b)(2) requires a
quid pro quo, the Respondents cited  McCormick v. United States, 500
U.S.  , 111 S.Ct. 1807 (1991).  There, an elected official was
originally convicted of extorting payments in violation of the Hobbs
Act.  Reversing the lower court, the Supreme Court held that receipt of
political contributions may be vulnerable under the Hobbs Act as having
been taken "under color of official right, but only if the payments are
made in return for an explicit promise or undertaking by the official to
perform or not to perform an official act."  Id. at 1816.

McCormick has no relevance here.  McCormick plainly focused on a statute
whose language ("obtaining property . . . under color of official
right"), elements, and purpose are altogether different from section
1128B(b) of the Act.  The gist of the decision is that it is not
reasonable to infer that extortion was intended simply because a
legislator voted for legislation that benefitted his constituents after
receiving a political contribution knowing that the contributors
expected him to support the legislation.  The Court stated:

 [T]o hold that legislators commit the federal crime of extortion
 when they act for the benefit of constituents, . . . shortly
 before or after campaign contributions are solicited and
 received from those beneficiaries, is an unrealistic assessment
 of what Congress could have meant by making it a crime to obtain
 property from another, with his consent, "under color of
 official right."  To hold otherwise would open to prosecution
 not only conduct that has long been thought to be well within
 the law but also conduct that in a very real sense is
 unavoidable so long as election campaigns are financed by
 private contributions.

111 S.Ct. at 1816.

The Court specifically did not consider application of the Hobbs Act to
payments made to nonelected officials or to payments made to elected
officials that are properly determined not to be campaign contributions.
Id. at 1814.

25.  The ALJ apparently felt he was restricted to the facts of these
cases in order not to "apply the Act in a manner which exceeds the reach
established by federal courts in criminal cases," so as not to create a
divergent administrative interpretation.  ALJ Decision at 66.  It is
proper that "the same rules of construction [apply] as would be applied
by a federal court in a criminal enforcement proceeding."  Id. at 65.
However, applying the same rules of construction does not imply awaiting
a federal court application to identical facts before considering an
administrative remedy.  Nothing in the statute, the cases, or the
legislative history remotely suggests that, in adding an administrative
remedy, Congress intended to tie the hands of the enforcement agency
until each factual scenario was presented to a federal court.  In fact,
the legislative history indicated that the intention was that an
administrative remedy be available "without the necessity of . . .
obtaining a criminal penalty or obtaining a criminal conviction."  S.
Rep. 109, 100th Cong., 1st Sess. 10 (1987), reprinted in 1987 U.S. Code
Cong. & Ad. News 682, 690.

26.  The preamble to the final regulations is explicit on this point:

 This regulation does not expand the scope of activities that the
 statute prohibits.  The statute itself describes the scope of
 illegal activities.  The legality of a particular business
 arrangement must be determined by comparing the particular facts
 to the proscriptions of the statute.

56 Fed. Reg. at 35954.

27.  We note that the preamble to the final Safe Harbors regulations
does contain some statements in general accord with what we have
concluded is the proper meaning of the statute.  We do not rely on this
preamble in any way since it also could not constitute timely notice.

28.  We also reject the use to which the ALJ put the Stark Bill,
concluding that "Congress would have had no need to enact such
legislation if section 1128B(b) already prohibited such arrangements."
ALJ Decision at 65.  The Stark Bill will prohibit as of 1992 all
program-related referrals to clinical laboratories in which the
referring physicians have an ownership interest or from which they
receive compensation.  The ALJ read this enactment to be directed at
arrangements which merely encourage referrals, unlike his restriction of
1128B(b) to agreements precluding provider choice.  However, in fact,
Congress' later enactment serves to eliminate the element of intent and
the burden of proving that intent.  The legislative history indicates
that this enactment making these forms of physician self-referral per se
illegal is the culmination of the very frustration expressed earlier by
Congressional committees with the efforts to find or create loopholes to
defeat enforcement of section 1128B(b) in this field.  See 135 Cong.
Rec. H240 (February 9, 1989) (Statement of Rep. Stark).

29.  Regarding the requisite intent, the ALJ said:

 The test for intent was established in the Kats and Greber
 decisions as being the intent to do something prohibited by the
 Act.  It is not necessary under this test to establish that a
 party had a specific intent to violate the Act, nor is it
 necessary to establish that the sole or even the primary purpose
 of the party charged with the violation was to engage in
 prohibited conduct.  It will suffice to show that one purpose of
 a party was to engage in conduct prohibited by the Act.

ALJ Decision at 80.  This statement regarding intent is not at issue.

30.  In defining quid pro quo, Black's states:

     Used in law for the giving [of] one valuable thing for another.  It
     is nothing more than the mutual consideration which passes between
     the parties to a contract and which renders it valid and binding.

At 1123.  Perhaps the ALJ inferred from this that a binding agreement
was required.  If so, it is a tenuous inference at best.  We see nothing
in the choice of the words "in return for" or in the legislative history
of the provision which indicates that Congress intended "in return for"
to have the same gloss which Black's puts on the phrase quid pro quo.
Moreover, even if Congress did intend to suggest the passing of mutual
consideration between parties, this does not necessarily imply a
preexisting agreement precluding provider choice.  A contract may be an
executed one "where the transaction is completed at the moment that the
arrangement is made, as where an article is sold and delivered, and
payment therefor is made on the spot . . ." (Id. at 323) or a unilateral
one "in which one party makes an express engagement or undertakes a
performance, without receiving in return any express engagement or
promise of performance from the other" (Id. at 325).  Neither of these
types of contracts involves an "agreement" in the sense the ALJ appears
to be using that term.

31.  We note that, prior to 1984, physicians billed Medicare directly
for tests they performed or ordered from independent clinical
laboratories.  Apparently, in an effort to establish and maintain a
stream of business, some laboratories would offer discounts to doctors.
However, the physicians could bill the beneficiaries and Medicare for
the undiscounted cost of the test.

The Deficit Reduction Act of 1984, Pub. L. No. 98-369 (1984) (DEFRA),
established a direct billing requirement, i.e., Medicare would not pay
doctors who did not perform or supervise laboratory work for which
reimbursement was sought.  Medicare would pay only the laboratory
actually performing the work.  DEFRA also changed the payment
methodology for clinical laboratory tests to the lesser of the actual
charge or a fee schedule payment rate.  However, DEFRA also contained a
reference lab exception.  This exception allowed an independent clinical
laboratory to bill Medicare for tests which it did not perform, but sent
out to a reference laboratory.

The practical effect of the exception was that large volume laboratories
could offer discounts to small laboratories (instead of doctors).  In
turn, the small laboratories could bill the higher fee schedule amount
to Medicare.

32.  The ALJ stated that, if the I.G. were correct about the legal
standard, "then Respondents violated the Act by offering payments to
physicians in the form of returns on . . . partnership investments and
by urging those physicians to refer business . . . ."  ALJ Decision at
61.  However, this assertion represented a hypothetical assessment,
since the ALJ actually rejected the I.G.'s argument.  Therefore,
contrary to what the I.G. asked, we do not direct a finding that the
Respondents violated the Act.

33.  We note that it is relevant but not required that payments be
excessive in comparison to the services or other value received.  As
noted in Bay State, the opportunity to earn money, even if not
disproportionate to the service provided, can serve as a remuneration if
a non-incidental purpose of the payment is to induce referrals.  Id. at
29.

34.  In analyzing the Greber decision, one commenter articulated the
objectives of the statute as:  (1) "eradicating the practice of
physicians choosing a laboratory based on the size of the kickbacks
received" and (2) combatting "financial incentives [paid to] physicians
for ordering" unnecessary services.  Prenetta, United States v. Greber:
A New Era in Medicare Fraud Enforcement?, 3 Journal of Contemporary
Health Law and Policy 309, 319 (1987).  For this reason, de minimis or
very remote forms of remuneration, such as drug samples or recruitment
lunches, may not be subject to prosecution, as the ALJ worried.  If the
remuneration offered is unlikely to affect physician referral decisions,
it is probably not intended to induce referrals, absent clear evidence
to the