Are Kickbacks Illegal Under Federal and State Law?

A kickback is a payment made to an individual as a reward for referring business or influencing a decision that benefits the payer. These arrangements often carry a secretive connotation, where the payment is intended to improperly sway the recipient’s judgment. The legality of such a payment depends on the specific context, the industry involved, and the laws that govern the transaction. In sectors like healthcare and government contracting, the rules are exceptionally strict due to the involvement of taxpayer funds and public trust, while in private settings, legality is often determined by an employee’s duty to their employer.

The Federal Anti-Kickback Statute

The primary federal law governing kickbacks in the healthcare industry is the Anti-Kickback Statute (AKS). This criminal law prohibits knowingly and willfully offering, paying, soliciting, or receiving any remuneration to induce or reward patient referrals or business involving any item or service payable by federal healthcare programs, such as Medicare and Medicaid. The law’s purpose is to prevent medical decisions from being corrupted by financial incentives, which could lead to unnecessary treatments, increased costs, and lower quality of care.

The term remuneration is defined broadly to include anything of value, not just cash payments. Examples include free or discounted rent for office space, expensive meals and travel, and excessive compensation for consulting roles. The statute applies to both the person paying the kickback and the one receiving it.

An example of an AKS violation is a medical device manufacturer paying a surgeon a fee for each time they use the device on a Medicare patient. Another instance could involve a pharmaceutical company offering a physician lavish gifts to encourage the prescription of its drugs. Even routinely waiving patient copayments can be seen as an inducement for a patient to choose a particular provider. If even one purpose of the payment is to influence referrals, it can violate the statute.

Prohibitions in Government Contracting

Beyond healthcare, federal law also prohibits kickbacks in government contracting to ensure fairness and protect taxpayer money. The Anti-Kickback Act of 1986 applies to a broad range of government contracts, making it illegal to provide, attempt to provide, solicit, or accept any kickback. This includes payments between prime contractors and their subcontractors.

The act’s goal is to prevent inflated costs and ensure contracts are awarded based on merit. A kickback under this law includes any money, fee, gift, or thing of value provided to improperly obtain or reward favorable treatment. The law covers both attempted and completed kickbacks.

For instance, a smaller company paying a manager at a prime contractor to be chosen for subcontracting work is an illegal kickback. Both the payer and the recipient could face legal consequences. For criminal sanctions to apply, the law requires that individuals knowingly and willfully engage in the prohibited conduct.

Commercial Bribery and State Laws

When federal funds are not involved, kickback schemes can be illegal under state laws, often prosecuted as commercial bribery. These laws address corrupt practices in the private sector, focusing on the breach of an employee’s duty of loyalty to their employer. Commercial bribery occurs when an employee accepts something of value from a third party, without the employer’s consent, to be influenced in their business conduct. While specifics vary by state, these laws protect a business from being defrauded by its own employees.

A common example involves a purchasing manager for a private company who accepts a personal payment from a vendor. In exchange, the manager directs all of the company’s supply orders to that vendor. This is illegal because the decision is based on personal gain rather than the employer’s best interests. Federal mail and wire fraud laws can sometimes be used if the scheme involves interstate communications.

Permissible Payments and Safe Harbors

While anti-kickback laws are broad, they are not intended to prohibit legitimate business arrangements. To provide clarity, the government has established specific safe harbors for the federal Anti-Kickback Statute (AKS). These safe harbors describe payment practices that are not prosecuted as offenses because they are unlikely to result in the harms the law was designed to prevent. An arrangement must fit squarely within all requirements of a safe harbor to be protected.

One of the most common safe harbors is for bona fide employment relationships. The AKS exempts payments made by an employer to a bona fide employee for their work in providing covered items or services. This allows healthcare entities to pay their employees without violating the law, as long as the employment relationship is legitimate.

Other safe harbors exist for discounts, personal services agreements, and equipment rentals. The discount safe harbor protects price reductions offered to providers, as long as the discount is properly disclosed and reflected in the costs claimed to federal healthcare programs. For personal services and rental agreements to be protected, they must meet several conditions.

• Be set out in a written contract with a term of at least one year.
• Specify the exact services or property covered.
• Ensure the compensation is set in advance at fair market value.

Penalties for Violations

Engaging in illegal kickback schemes carries severe criminal, civil, and administrative penalties, and both the payer and recipient can be held liable. Criminal penalties for violating the federal Anti-Kickback Statute are significant. A conviction is a felony that can result in fines of up to $100,000 per violation and a prison sentence of up to ten years.

In addition to criminal prosecution, individuals and entities face substantial civil sanctions. Under the Civil Monetary Penalties Law, violators can be fined up to $50,000 for each kickback, plus three times the amount of the remuneration involved. A claim submitted to a federal program that resulted from a kickback is also considered a false claim under the False Claims Act.

This can lead to additional penalties of up to three times the government’s damages, plus a per-claim penalty that for 2025 falls between $14,308 and $28,619. One of the most damaging administrative penalties is exclusion from participation in federal healthcare programs. This can effectively end the careers of healthcare providers and the operations of healthcare businesses.