Reported / Citable
Background
Boston Heart Diagnostics (BHD), a laboratory testing company, entered into a partnership in March 2015 with Little River Health Care, a rural critical-access hospital in Texas. The partnership ostensibly aimed to minimize overhead and maximize profits by leveraging Little River’s favorable Medicare cost-based reimbursement rates. However, BHD executives—including CEO Susan Hertzberg, VP of Sales Matthew Theiler, and sales representatives David Kraus and Thomas Hardaway—orchestrated an elaborate scheme to pay kickbacks to physicians in exchange for patient referrals.
The defendants used Management Service Organizations (MSOs) as pass-through entities to recruit physicians to affiliate with Little River and refer patients for blood testing. While MSOs can lawfully provide marketing and administrative services for a fee, these MSOs were actually compensating physicians based on referral volumes—conduct prohibited by the Anti-Kickback Statute. The scheme proved extraordinarily lucrative: BHD’s annualized revenue from the partnership ballooned from $4.4 million in June 2015 to $20.8 million by September 2015, with reimbursement rates doubling from approximately $400 to $942 per test.
Internal warnings of compliance violations were disregarded. BHD’s VP of Hospitals expressed concerns about the “marketing arm” model, and a whistleblower later detailed AKS violations, characterizing the partnerships as “a Compliancy Disaster.” Despite these red flags, BHD expanded the model to other Texas hospitals. A grand jury indicted 18 defendants in January 2022; five proceeded to trial in October 2023, with a jury returning guilty verdicts in November 2023.
The Court’s Holding
The Fifth Circuit affirmed the convictions on all counts. Applying the highly deferential standard for sufficiency-of-evidence challenges, the court held that a rational jury could infer each defendant knowingly and willfully joined the conspiracy to pay kickbacks in violation of 42 U.S.C. § 1320a-7b(b). The government was required to prove: (1) an agreement to pursue an unlawful objective, (2) the defendant’s knowledge of the objective and voluntary joining, and (3) an overt act in furtherance. The court emphasized that direct evidence of conspiracy is unnecessary; circumstantial evidence suffices, including position of authority, healthcare industry experience, awareness of suspiciously high profit margins, proximity to fraudulent activities, engagement in concealment, and financial incentive.
As to Hertzberg specifically, the evidence was particularly compelling. She was an experienced healthcare CEO who had personally reported a competitor lab to DOJ in 2011 for using marketing entities to improperly induce physician referrals at inflated test costs—nearly identical to the Little River scheme. The jury heard she received financial reports showing explosive, anomalous growth centered on a rural 30-bed hospital that soon comprised one-quarter of BHD’s projected national revenue. Hertzberg knew that average reimbursement per test from Little River ($900–$1,200) was two to three times higher than BHD’s standard ($370), and that specialty physicians unrelated to BHD’s cardiovascular focus (neurologists, psychiatrists) were suddenly ordering high volumes of advanced lipid tests through MSO recruitment. When a whistleblower raised AKS concerns, Hertzberg questioned why so many people were copied on his email and arranged his transfer away from hospital business rather than escalating concerns to authorities.
The court also rejected Hardaway’s argument that the jury should have received a “good faith” instruction, holding that good-faith beliefs could be argued under existing knowledge and willfulness instructions. On the jury-note issue—where the court delayed disclosure of a second note describing one juror’s refusal to remain open-minded and threat to hang the jury—the court found no plain error warranting reversal, though it acknowledged the court should have responded to the second note immediately.
Key Takeaways
- Healthcare executives and employees cannot avoid AKS liability by claiming they relied on legal analysis or believed their conduct was lawful when they ignored clear warning signs and suspicious indicators of kickback schemes.
- Circumstantial evidence—including awareness of abnormal profit margins, involvement in structuring arrangements that provide no legitimate services, knowledge of regulatory violations, and concealment activities—is sufficient to support conspiracy convictions even without direct evidence.
- MSOs that claim to provide legitimate marketing services but actually funnel compensation to physicians based on referral volumes constitute kickback schemes, regardless of contractual language suggesting otherwise.
- Senior management’s failure to respond appropriately to internal compliance concerns and whistleblower complaints, particularly by shielding problematic practices rather than investigating or reporting them, supports inference of guilty knowledge and participation.
Why It Matters
This decision reinforces that the Anti-Kickback Statute applies with full force to sophisticated healthcare schemes, regardless of operational complexity or corporate structuring. The Fifth Circuit’s affirmance signals that courts will not lightly accept arguments that high profits, rapid growth, or involvement of specialized entities (like MSOs) insulate executives from criminal liability when the underlying economic incentives for referral-generation are transparent. For healthcare organizations, the decision underscores that AKS compliance requires more than formal policies or hired compliance officers working in isolation; it demands substantive investigation of abnormal business metrics and good-faith response to employee concerns.
The opinion carries implications for industry use of MSOs and intermediary structures. The court’s focus on the *actual function* of these entities—whether they generate referrals through improper compensation rather than legitimate marketing services—rather than their formal labels, means healthcare providers cannot evade scrutiny through creative structuring. Finally, the reversal of the jury-note harmless-error analysis and the affirmance despite procedural issues signals that Fifth Circuit review in criminal healthcare cases remains highly deferential to jury verdicts when the evidentiary record supports inferences of guilt.