Overview: Commissioned Sales Reps in Wound Care
The provision of wound care involves various stakeholders, from the manufacturers and distributors (collectively, “Suppliers”) that supply the wound care products (such as skin grafts and other advanced dressings), to the salesforce that sells the products (“Salesforce”), to the physicians who order the products and administer them to patients (‘Providers”). Because of the substantial reimbursement paid for wound care services, the number of all of these stakeholders has grown dramatically over the past couple of years. Most regulatory compliance questions have been related to the conduct of the Providers, with a focus on medical necessity, documentation and coding practices. Very little compliance efforts have focused on the two other stakeholders: Suppliers and their Salesforce. This article addresses some of the regulatory issues arising from what are typically 1099 independent contractor relationships between Suppliers and their Salesforce.
In a typical arrangement, Suppliers pay their Salesforce as 1099 independent contractors a commission equal to a percentage of sales for each product a Provider orders from the Supplier. While not per se illegal, such commission-based 1099 arrangements can invite heightened scrutiny under the federal Anti-Kickback Statute (“AKS”). The concern is that an independent salesperson paid on commission might be essentially paid to “arrange for” or recommend purchases by their Provider contacts. If those products are reimbursable by Medicare, Medicaid, Tricare, or other federal health programs, the arrangement could be viewed as a form of paid referrals, raising serious legal risks. This article will also explain why these arrangements are risky, why traditional W-2 employment models are generally safer, and how companies should proceed cautiously with their Salesforce through robust compliance measures.
Anti-Kickback Statute Risks with Independent Contractor Salesforce
The federal AKS prohibits offering or paying any remuneration to induce or reward referrals of items or services covered by federal health care programs. Notably, the term “referral” is defined broadly – it includes not only referring a patient, but also “arranging for or recommending purchasing or ordering” any item or service paid for by a federal program. In the wound care context, when a sales agent convinces or incentivizes physicians to use a certain wound care product on their patients, that sales agent may be viewed as arranging for the purchase of a federally reimbursable item. If the agent is then paid a percentage commission based on those product sales, the government may view that as paying for referrals.
OIG Guidance
The Office of Inspector General (“OIG”) – the chief federal healthcare fraud watchdog – has repeatedly cautioned that commission arrangements with independent sales reps are inherently high-risk under the AKS. Unlike other industries where commission-based independent contractors are routine, in healthcare there is no general safe harbor for independent sales agents paid on a percentage commission basis. In fact, the OIG has long maintained that percentage-based payments to 1099 reps are “suspect” and likely violative of the AKS in many cases. The OIG has expressly stated that “percentage compensation arrangements are potentially abusive… because they provide financial incentives that may encourage overutilization of items and services and may increase program costs”. In other words, paying a sales rep per product sold can encourage them to push excessive or medically unnecessary use of a product, ultimately driving up costs to Medicare.
The risk is especially acute with commission-based pay, because the payment is directly tied to the volume or value of business generated. Compounding the concern, an independent contractor is less accountable and under less control of the Supplier than a W-2 employee would be. This lack of direct supervision can make abuses (such as improper inducements or misrepresentations to Providers) more likely to occur undetected. For all of these reasons, the government views commission-paid independent salespeople in healthcare as a compliance red flag.
W-2 Employees as a Safer Relationship
Hiring sales representatives as bona fide employees (W-2 status) and compensating them through salary, bonus, or commission, is generally easier to defend under an Anti-Kickback analysis. The AKS contains a statutory exception (and an implementing safe harbor) for payments to bona fide employees. In short, if the salesperson is a genuine employee (as defined by the IRS and common law), the company’s payments to that employee for generating business will not be treated as illegal kickbacks. This means a manufacturer can pay its in-house sales force commissions or bonuses for product sales, including sales linked to physician orders, without violating the AKS, so long as those salespeople are regular employees.
Because of this employee safe harbor, W-2 employment arrangements are generally less risky than 1099 independent contractor deals, as long as the Salesforce are bona fide employees, and not simply independent contractors who are called employees. The distinction between independent contractors and employees is critical, but beyond the scope of this article. In the original rulemaking, OIG acknowledged “many examples of abusive practices by sales personnel who are paid as independent contractors and who are not under appropriate supervision.” The agency advised that if companies desire to pay a salesperson based on the business they generate, “then to be exempt from prosecution, they should make these salespersons employees” and provide proper oversight.
What about independent contractors?
It is important to note that using a 1099 sales agent paid on commission is not automatically illegal. Rather, it falls outside a safe harbor, meaning it must be analyzed on a case-by-case basis under the AKS’s intent-based test. In theory, an independent contractor arrangement could be structured to comply with the separate Personal Services and Management Contracts safe harbor. However, that safe harbor imposes strict conditions – including a written one-year contract and payment that is fixed in advance, fair market value, and not based on volume or value of referrals. A typical open-ended commission (e.g. 10% of sales) fails these conditions because the total payment varies with the volume of business. Thus, most commission-based rep agreements cannot fit the safe harbor for contractors. They are left to be evaluated under the general AKS standard, which prohibits payments intended to induce referrals. Given the clear financial incentive to induce purchasing in any commission scheme, it can be very challenging to defend such an arrangement if scrutinized. However, stakeholders that adhere to strict compliance guidelines are likely safer than those that do not.
Proceeding Cautiously with 1099 Sales Relationships
Business realities sometimes dictate using independent distributors, agents, or marketing firms to reach wound care specialists. If a manufacturer or distributor in the wound care sector decides to engage 1099 commissioned salespeople, it should do so only with extreme caution and robust compliance safeguards. Here are some best practices and considerations to help mitigate Anti-Kickback risks in these arrangements:
- Implement Formal Contracts & AKS Safe Practices: Any independent sales representative or distributor agreement should be in writing and vetted by legal counsel. Include clear provisions requiring compliance with the AKS and other health care laws. Structuring the payment as a fixed fee or salary (rather than a pure percentage of sales) can help reduce risk – for example, a monthly consulting retainer that does not fluctuate with each referral. If a percentage must be used, consider capping it or incorporating performance metrics that are not solely tied to federally reimbursed business. At minimum, avoid any payment formula that explicitly rewards higher Medicare patient volume.
- Robust Policies, Training, and Certification: Commissioned salespeople must be educated and regularly trained on Anti-Kickback compliance. The company should develop Standard Operating Procedures (“SOPs”) and a code of conduct that strictly prohibit offering or accepting any kickbacks. All independent reps should be required to complete compliance training and certify their understanding of AKS rules (for example, acknowledging that they will not offer anything of value to induce a physician to use the product). Salesforce companies (third-party sales organizations) likewise should maintain written SOPs and training programs for their teams, emphasizing that no one may improperly influence physician decision-making. OIG’s longstanding concern is that independent agents have more leeway – so the company must instill a strong compliance culture despite the lack of direct employment.
- No Inducements or Undue Influence on Providers: Manufacturers and their sales agents should scrupulously avoid any tactics that could be viewed as inducing physicians to choose their wound care product in exchange for compensation or perks. Absolutely no gifts, kickbacks, rebates, or under-the-table payments to referring physicians can be tolerated. Even well-intentioned gestures (expensive business meals, lavish entertainment, offering “consulting” fees to high-prescribing doctors, etc.) can raise red flags if they appear tied to securing product orders. The sales team’s interactions with Providers should focus on the product’s merits – clinical data, proper usage, patient benefits – not financial incentives. No undue pressure should be applied on wound care specialists to use a particular product. The goal is to avoid even the appearance that referrals (product orders) are being “paid for” through the commission arrangement.
- Supervision and Monitoring: To the extent possible, companies should treat independent reps similarly to employees for compliance purposes. This means establishing a mechanism for management oversight of the reps’ activities. Regularly review sales patterns for any signs of irregularities (e.g. sudden spikes in Medicare utilization of the product driven by one rep’s physicians). Conduct audits or ride-alongs to ensure reps are promoting appropriately. If the salesforce is employed by a third-party distributor or marketing firm, ensure that entity is likewise monitoring its team. Promptly address any complaints or reports of a rep offering improper inducements. The contract should allow termination of the relationship if any compliance violations are discovered. By actively supervising, the company can exert some “appropriate supervision” even over non-employee agents, aligning with OIG’s advice to supervise sales personnel closely.
Conclusion: Weighing the Risks and Staying Compliant
In summary, while engaging independent 1099 sales representatives to drive wound care product sales is not outright forbidden, it presents a significant compliance risk under the AKS. Suppliers, their Salesforce, and Providers involved in these relationships should recognize that a commission-based payment to an outside rep for arranging physician orders looks very much like a paid referral, and regulators have consistently viewed it as such. The safer approach is to bring sales personnel in-house under W-2 employment whenever feasible, taking advantage of the AKS safe harbor for bona fide employees. If independent contractors must be used, all parties should proceed diligently and thoughtfully: structure agreements to avoid volume-based pay wherever possible, and institute rigorous safeguards – written policies, training, and oversight – to prevent any inducements or unethical conduct. By doing so, companies can substantially reduce the risk of AKS violations, allowing them to focus on providing quality wound care products and services to patients without running afoul of the law.
Contact the attorneys at Frier Levitt if you have any questions about wound care compliance.
Co-Managing Partner
