By: Martin Merritt, esq.
Past President, Texas Health Lawyers Association
Past Chair, DBA Health Law Section
martin@martinmerritt.com
“Please Tell Me you Didn’t. . . How to Keep Clients Out of the Jailhouse, Poorhouse and Lawyers Out of the Nuthouse” -Blog
As you can tell, I love talking about health law & litigation issues, and general wellbeing, if you have any health law questions or better yet, need to refer a case, just call or drop me an email and I will happily talk.
“Tall Poppy Syndrome.” Mark Schena owned and operated a small CLIA lab in California. (He’s also an idiot.) Schena hatched a scheme to pay marketers on a percentage basis, whom he instructed to target non-allergy specialists (including chiropractors and naturopathy practitioners), apparently because they could be more easily deceived by false and deceptive claims about Schena’s $5,000 – $10,000 allergy blood tests.
The reason I say he is an “idiot,” in part, is because he tried to get away with this to the tune of $77 million in billing. He billed more per patient that anyone in the country. This is what is known as “tripping the algorithm.” He ran 120 tests per patient, because that was the maximum amount his machines could run on any one patient sample.
For those of you unfamiliar with healthcare fraud, the general idea is that providers do not want to stand out above their peers, for fear of “tripping the algorithm” and catching “tall poppy syndrome.” (A phrase dating back to Roman times, meaning that the ones that stand out the tallest get their heads lopped off first.)
It’s a simple concept: In healthcare, you gotta constantly “read the room” to know where you stand. (Which seems to have been lost on this idiot.)
But also, he’s an idiot because Congress passed a statute in 2018, seemingly making percentage-based payments to marketers in the CLIA lab space. . . (oh, how did Congress put it?) Oh yeah. . . “a felony.”
Not surprisingly (at least to everybody, but Schena) the tallest poppy in the country was convicted and sentenced to 96 months in prison. I don’t know why he appealed (other than the case was argued in argued in Hawaii, which sounds like fun before you go to prison). He left a paper trial, after all, proving he’s an “idiot.” And a whole bunch of fellow conspirators testified, “he’s an idiot.” But, appeal, he did.
And now, the tallest poppy in the country, generated the first federal circuit court opinion on the meaning of the EKRA statute, issued July 11, 2025, in U.S v. Schena. (You can Google it.)
EKRA. In 2018, Congress passed the Elimination of Kickbacks in Recovery Act (“EKRA”) 18 USC §220, a criminal statute, to combat fraud and abuse with respect to referrals to a “recovery home, clinical treatment facility or laboratory.” This goes along with the existing federal AKS. You might say, applying these two laws, especially with respect to payments to marketers, is what keeps me in business. (It’s complicated.)
Although the title would indicate the EKRA law applies to kickbacks involving patients “in recovery homes” and treatment facilities, the word “laboratory” is not so limited. To the contrary, the word “laboratory” is specifically defined in para. (e) to include any CLIA laboratory (not just those serving patients “in recovery.”) This is the same with the federal AKS.
As a refresher, the original federal-payer Anti-Kickback statute which the 9th Cir. relied upon for context, (the “federal payer-AKS”), 42 USC 1320a-7b only applies to government payers. The 2018 EKRA statute extended the concept to payments to marketers, where the patient is covered by private insurances or “commercial” plans. (EKRA is for private-payer plans, the federal-payer AKS is for government plans.)
EKRA also applies to payments to doctors, but we didn’t have those facts present in this case. So this is really just as “marketer payments” case.
Under the federal-payer AKS safe harbors, you can pay W-2 employees any way you wish. However, independent contractors and marketing companies (as opposed to bona fide employees) usually must meet all the elements of the “personal services” safe harbor, which I explained in a 2014 Physicians Practice Article (Just Google, “Anti-Kickback Pitfall to Avoid: Sales Force Compensation,” it will pop right up.)
Notably the federal-payer AKS safe harbor requires: (1) the “aggregate compensation” must be set in advance (2) under a contract for at least a year, meaning the rate can’t vary during the year (3) the rate must be at “fair market value,” and (4) must use a method which doesn’t take into account success, or the value of the sales generated. This all but eliminates percentage based compensation.
EKRA’s more limited safe harbors, eliminate the distinction between bona fide employees and 1099 contractors (but only in commercial or private payer cases.) Both of these statutory sets of safe harbors essentially eliminate the availability of the safe harbor, if the payment to marketing personnel vary with success.
But (if you have followed this far) failure to meet the safe harbor doesn’t mean the payment is illegal, however. The government still must prove “illegality.” The safe harbor is an available affirmative defense to any claim of illegality. An “affirmative defense,” essentially is a legal concept which argues, “even if everything the plaintiff or government says is true, it still can’t win.” (“The statute of limitations has run”, for example.) Thus, if there is a safe harbor, it doesn’t matter that the conduct could otherwise implicate the Kickback statute.
And thus, the foundational question is becomes, “when is the payment illegal under EKRA?” Which is the subject of the Ninth Circuit opinion in Schena.
Schena’s holding. Borrowing from 5th Circuit federal-payer AKS opinions, the Schena court first observed that merely paying marketers on a “percentage” basis is not per-se illegal. This comes as a surprise to many observers. The Court reasoned, relying upon 5th Circuit precedent, that there must be something more, such as undue influence, deceptive marketing or some wrongful element of the marketing effort. Otherwise, ordinary “truthful” advertising would potentially be illegal.
I have often said this about federal-payer AKS marketing cases. There are First Amendment Commercial Free Speech issues involved, should the government attempt an industry-wide ban on the content of commercial speech, for example, paying someone to go say nice, truthful things about your lawful healthcare company, the content of which is neither false nor misleading. (See Virginia Board of Pharmacy, a 1976 seminal US Supreme Court Commercial Free Speech).
And for this reason, the government in both EKRA and federal-payer AKS cases, always alleges that the payment to marketers led to something amounting to “fraud” (medically unnecessary prescribing) or some other morally reprehensible referral (such as paying to steer legitimate, medically necessary referrals to the “highest bidder.”)
You might say that under the Schena analysis, EKRA doesn’t add anything substantive to “illegality” under the existing healthcare fraud statute, 18 USC 1347 (thou shalt not defraud a health insurance company.) Other than, perhaps a claim that the EKRA violation provided the “motive” for the salesperson to encourage fraudulent referrals.
And the element of garden variety “fraud” is what we have in spades in the Schena case. While truthful advertising might have been legal, Schena seems to have left a paper trail of activities in which he induced “improper referrals” under EKRA, by paying marketers to deceive naïve practitioners into making referrals for $77 million in useless, expensive allergy tests referred by practitioners who were deliberately targeted because they were not allergy specialists who would know better.
As a result, the Ninth Circuit had little difficulty concluding that Shena’s percentage-based payments to marketers violated EKRA, although percentage-based payments alone, would not have violated EKRA. It was the payment to induce improper referrals which is illegal under EKRA.