Testing Federal Healthcare Laws: Risks In Genetic-Testing Programs

By Adam Braverman, Nathaniel Mendell, Katherine Driscoll, and Megan Baffaro

The False Claims Act (FCA) and the Anti-Kickback Statute (AKS) are two of the Department of Justice’s (DOJ) primary tools when it comes to fighting fraud. Originally enacted during the Civil War to target war profiteers, the FCA largely laid dormant until 1986, when Congress amended the statute to impose treble damages and increase whistleblower recoveries to upwards of 30%.

Today, the DOJ — relying largely upon whistleblowers — has deployed the FCA and the AKS to scrutinize numerous industries accepting government funds, chief among them the healthcare industry. Last year, the DOJ’s FCA enforcement statistics demonstrated a nearly 40% increase in whistleblower filings, with 558 FCA settlements and judgments exceeding $2.9 billion in recoveries. The healthcare industry accounted for roughly 58% of these settlements, totaling over $1.67 billion in recoveries. These statutes constitute a significant area of risk for healthcare companies, even those attempting to comply with regulatory requirements.

Genetic-testing programs in particular have come under fire as DOJ and the Department of Health & Human Services, Office of Inspector General (HHS-OIG) are homing in on AKS liability inherent in this model. As the industry grows, government intervention is sure to follow.

The Anti-Kickback Statute

The AKS prohibits the knowing and willful payment of any form of “remuneration” to induce patient referrals or generate business involving services payable by federal healthcare programs. Remuneration is defined broadly to include “anything of value.”

In short, unlike other industries, healthcare companies cannot pay for or otherwise induce business, as this may lead to overutilization of healthcare services, increased costs, and unfair competition. While there are some exceptions, known as statutory “safe harbors,” these apply only in limited circumstances. Companies must therefore remain wary of engaging in any activities that may be construed as inducing patients’ or physicians’ business.

The AKS ascribes liability to parties on both sides of a kickback transaction, and the penalties can be severe, including, significantly, exclusion from federally funded healthcare programs, a devastating consequence for healthcare companies. Furthermore, if a claim is found to be induced in violation of the AKS, it may also be rendered false under the FCA, imposing both civil and criminal penalties, including hefty damages.

This may come as a surprise to companies submitting such claims. Unlike other common targets of FCA enforcement, such as falsifying records, billing incorrectly, misusing funds, or providing medically unnecessary services, the underlying treatments may be otherwise proper. In fact, for many patients, genetic testing may be lifesaving. Nonetheless, the presence of illegal kickbacks may render any such claim “false” within the meaning of the FCA.

Sponsored Genetic-Testing Programs

The U.S. market for genetic testing has grown astronomically, increasing from $4.11 billion in 2019 to $11.71 billion in 2024. This expansion is projected to continue, with experts estimating exponential growth over the next five years. Genetic-testing companies have seen an influx of investments as artificial intelligence and scientific breakthroughs aid genetic-testing companies in their mission to diagnose, and ultimately treat, rare diseases.

When it comes to rare diseases, genetic testing can be the quickest or even the only way to reach a correct diagnosis. It is also prohibitively costly, and not always covered by insurance. Some companies provide genetic testing to patients at no cost, often in collaboration with genetic-testing labs. By shifting costs away from patients, these sponsored testing programs allow patients to receive genetic tests that are invaluable to finding a correct diagnosis.

While genetic testing offers promising possibilities for patients and the healthcare industry alike, increasing government enforcement action may stymie this growth. Recent guidance and subsequent settlements suggest that, without careful constraints, these free tests can constitute impermissible remuneration and are likely to draw government attention and sanction.

HHS-OIG Guidance

In April 2022, Advisory Opinion 22-06 (AO 22-06) sent a shockwave through the rare disease community and marked the first time HHS-OIG weighed in on the legality of sponsored genetic testing. HHS-OIG frequently issues advisory opinions regarding the application of fraud and abuse statutes to specific arrangements. Though not legally binding, advisory opinions reflect the agency’s view of a program’s legality. Companies often request an HHS-OIG opinion to alleviate concerns of possible enforcement action.

The arrangement addressed in AO 22-06 involved a biopharmaceutical company that offered free genetic tests that screen for a gene mutation associated with a heart disorder for which they manufacture drugs. The advisory opinion was favorable, finding this arrangement would generate prohibited remuneration but posed a sufficiently low risk of fraud and abuse because (1) several features of the arrangement to provide free genetic testing and counseling made it unlikely to lead to overutilization; (2) the arrangement is unlikely to skew clinical decision-making; and (3) there are safeguards in place to prevent use of the arrangement as a marketing or sales tool.

The agency’s latest guidance, Advisory Opinion 24-12 (AO 24-12), issued in December 2024, indicates that HHS-OIG and DOJ continue to scrutinize companies engaged in sponsored testing arrangements. In the arrangement reviewed in AO 24-12, the requestor manufactures a drug for an ultra-rare genetic kidney condition and has an arrangement with a genetic-testing lab to offer free genetic testing, genetic counseling, and disease-awareness education. The requestor covers the full cost of these services, without requiring prescription or recommendation of its products.

As it did in AO 22-06, HHS-OIG concluded that this arrangement implicates the AKS because the tests constitute remuneration that may induce patients to purchase (or healthcare providers (HCPs) to prescribe) the requestor’s drug. The opinion is nonetheless favorable because HHS-OIG found that (1) the arrangement includes sufficient safeguards that reduce the risk of overutilization or inappropriate utilization of testing; (2) the arrangement is unlikely to skew clinical decision-making; and (3) the remuneration provided carries a sufficiently low risk of fraud and abuse. These advisory opinions offer valuable insight into how companies ought to design and implement genetic-testing programs while steering clear of agency intervention.

Lessons From HHS-OIG Guidance

In these advisory opinions, HHS-OIG focuses on specific aspects of the arrangements that minimize the risk of improper inducements, which rare disease companies can use as goalposts in designing their own sponsored testing programs.

The following recommendations are drawn from aspects of these genetic-testing programs that HHS-OIG credited as lessening the risk of fraud and improper inducements. Structuring sponsored testing programs in compliance with these suggestions may help reduce the risk that programs will draw government scrutiny:

1. Programs should be designed to minimize the risk of overutilization or improper utilization of genetic testing by patients. This may include:
   1. Clear, objective criteria which patients must meet to be eligible for the test.
   2. Requiring the ordering physician to attest to the patient’s eligibility and the clinical appropriateness of the test for that patient.
   3. Genetic-testing results that indicate only whether a patient carries a genetic mutation, which does not in and of itself determine whether the patient has or will develop the disease and thus whether the patient may be prescribed a certain drug.
   4. Testing results narrowly tailored to rule out a condition rather than diagnose one.
       
2. Programs should be designed to avoid the possibility of skewing or influencing healthcare providers’ clinical decision-making. This may include:
   1. Providers ordering tests that are not required or recommended to prescribe or administer any products manufactured by the test sponsor.
   2. Distribution of materials or testing kits are not tied to a provider’s use of the arrangement or history of prescribing medications or other therapies.
   3. The tests available under the arrangement are commercially available and were not created solely for purposes of the arrangement.
       
3. Programs should be designed to minimize the risk of fraud, especially in terms of the payment structure for these tests and prohibiting the use of this arrangement as a marketing or sales tool. This may include the following:
   1. Test sponsors do not receive any individually identifiable patient information, including information identifying the healthcare professional ordering the test, enabling it to target marketing of the drug.
   2. The company’s sales force is prohibited from accessing any data received from the third-party vendors to use for sales or marketing activities.
   3. The company is prohibited from soliciting information from providers about whether they have ordered any genetic tests.
   4. Contracts with testing vendors that specify that the vendor may not bill any other third party for the testing, which reduces the risk of double billing.
   5. Fixed fees for test services which do not rely on the quantity of tests provided.
       
4. Additional best practices, based on HHS-OIG’s guidance, may include the following:
   1. If offering genetic counseling in addition to the testing, the counseling is optional, and counselors are prohibited from discussing specific therapeutic options, including the company’s drug.
   2. If offering educational information about genetic testing, the website contains no specific therapeutic options or branding information for the drug.

While specific best practices will vary based on each individual arrangement, following this general framework may minimize the threat of government enforcement.

Recent Enforcement Actions

DOJ and HHS-OIG have already demonstrated the willingness to halt arrangements falling outside these approved bounds. Since 2022, there have been several enforcement actions in this space. In November 2024, QOL Medical, LLC (QOL) and its CEO agreed to pay $47 million to resolve allegations that they provided free Carbon-13 breath-testing services in order to induce claims for the company’s therapy for a rare genetic condition.

According to the settlement agreement between QOL and DOJ, the company received test results from the analyzing lab, including the name of the HCP ordering the test, and distributed this information to its sales force for use in its marketing program. DOJ found this program created improper inducements to generate business for the company’s drug.

Emil Kakkis, CEO of Ultragenyx, a biopharmaceutical company that manufactures an FDA-approved drug to treat a rare inherited disorder, recently warned that patients will be most impacted by stricter oversight, as genetic testing often comes at the end of a lengthy, costly, and disheartening diagnosis process. Rigorous enforcement efforts targeting sponsorship programs may further delay this process and patients’ search for answers.

To best serve these patients, and continue efforts to identify and treat rare diseases, companies offering genetic-testing programs must remain vigilant and design sponsored testing arrangements with the risk of FCA or AKS liability in mind.

About The Authors:

Adam Braverman is a partner in Morrison Foerster’s Investigations + White Collar Defense Practice. He formerly served as an Associate Deputy Attorney General for the U.S. Department of Justice (DOJ) and as the U.S. Attorney for the Southern District of California.

 

 

Nathaniel Mendell is a partner in Morrison Foerster’s Investigations + White Collar Defense and Privacy + Data Security practice groups. He previously served as Acting U.S. Attorney for the District of Massachusetts.

 

 

Katherine Driscoll is a partner in Morrison Foerster’s Investigations + White Collar Defense Practice Group. She focuses on investigations, enforcement actions, and compliance, representing companies and senior business executives.

 

 

Megan Baffaro is an associate in Morrison Foerster’s Boston office and a member of the firm’s Litigation Group.