Court Rejects “Swapping” Claims, Rejects Claim That “Below Cost” Discounting Violates the Anti-Kickback Statute

Posted by Scott Stein and Brenna Jenny

The Southern District of Ohio recently granted defendants’ motion to dismiss in a FCA case based on alleged violations of the Anti-Kickback Statute (“AKS”) through “swapping.” Swapping allegations can take a variety of forms; here, relator claimed that defendant Mobilex (a provider of mobile, on-site x-ray services to Skilled Nursing Facilities (“SNFs”) and long-term care facilities) deeply discounted its services for Part A beneficiaries while charging higher rates to services for Part B beneficiaries. Because Mobilex’s clients are reimbursed on a per diem basis for the x-rays provided to Part A beneficiaries, the facilities allegedly received remuneration in the form of pocketing the extra discount on Part A services. This remuneration, according to relator, was intended to induce facilities to refer to Mobilex the opportunity to provide x-rays to Part B residents as well, at non-discounted prices.

After more than two years of seeking extensions of time, the United States declined to intervene. The relator moved forward, premising his swapping theory on the argument that Mobilex priced its Part A services below cost. Relator insisted the only appropriate measure of cost was “fully loaded costs,” which includes not only variable expenses, but fixed costs and overhead. There was no direct evidence of an intent to induce referrals through discounted prices. Instead, relator argued that Mobilex was deliberately ignorant to the fact that its Part A services were priced below cost.

In rejecting the relator’s theory of liability, the court relied heavily on an opinion we previously described here, in which a relator’s efforts to box a court into rigidly defining a single standard for calculating whether discounts are “below cost” fell equally flat. First, the court refused to find that Mobilex “knowingly” violated the AKS, ruling that even “arbitrary prices set ‘with intentional disregard for costs’ do not establish inducement” under the AKS. Slip Op. at 10. Second, relator failed even more fundamentally to show that Mobilex’s discounting violated the AKS. Relator had little response to Mobilex’s explanation that its prices were above Fair Market Value (“FMV”), other than to criticize FMV as a metric for analyzing discounts. Although relator cited as dispositive several Health and Human Services, Office of Inspector General (“OIG”) Advisory Opinions describing below cost discounts (often equated to below fully loaded costs) as “suspect,” the court reiterated that, under Supreme Court precedent, agency opinion letters are not entitled to deference, and furthermore, whether OIG further investigates “suspect” discounting practices does not render them per se illegal. The court concluded not only is a “fully loaded costs” analysis not required to determine whether discounting practices violate the AKS, but obligating such an approach would lead to absurd results, e.g., a corporate entity’s headquarters could alter overhead costs only tangentially related to the services at issue, which could nonetheless rework a contract’s fully loaded costs, significantly impacting the calculus of whether ongoing discount arrangements were legal.

Case law regarding the types of discounting practices that will be deemed to have violated the AKS has been sparse, and the OIG’s guidance has been consistently limited. This opinion adds support for the approach that where there is evidence a business’s costs meet at least one rational standard, such as FMV, a plaintiff should not be able to argue that the failure to meet a different standard establishes a violation of the AKS.

A copy of the court’s decision can be found here.