How Healthcare IT Firms Can Limit Risks of Foreign Partnerships

Overview:

U.S. health care I.T. firms run numerous legal risks when contracting or entering a partnership with entities outside the United States. Many foreign firms engage in business practices that violate U.S. federal and state laws. Consequently, foreign contracts, partnerships, or licensing agreements can result in civil and criminal penalties for U.S. firms due to the actions of their foreign partners and employees.

U.S. federal law penalizes bribing foreign officials under the Foreign Corrupt Practices Act (FCPA). It also protects the integrity of public records with the Sarbanes-Oxley Act. In addition, although no U.S. federal statute prohibits bribery of private parties in international commercial contracts, specific federal healthcare laws can apply if any entity has received funds from a U.S. federal benefits program.

Thirty-seven states have enacted state law statutes imposing criminal and civil penalties for commercial bribery. Also, U.S. courts can void agreements obtained by bribery under fraudulent contract theories based on equitable principles.

Due to the myriad federal and state law penalties that can apply to foreign business, healthcare I.T. firms need stringent internal anti-corruption controls to operate outside the United States.

Federal Law Issues

1.) Foreign Corrupt Practices Act

Congress enacted the Foreign Corrupt Practices Act (FCPA) in 1977 following revelations that many U.S. corporations had made questionable payments to foreign officials to win contracts. In 2010, the Securities and Exchange Commission (S.E.C.) created a specialized unit to prosecute violations of the FCPA. Though prosecutions are few, the cases often involve multi-million dollar penalties and extensive media coverage.

The FCPA prohibits natural persons or firms from providing any benefit to a foreign government official in return for business. These benefits can be direct or indirect and include anything possessing significant value. The FCPA imposes both civil and criminal penalties.

The FCPA also includes accounting provisions for firms that have issued publicly traded securities, primarily intended to prevent these entities from hiding bribes.

Though the FCPA requires that defendants know that payments are intended to bribe foreign officials, the FCPA can also impose penalties on publicly held firms that fail to create adequate internal controls to protect the integrity of public records. While the FCPA does not require privately-held firms to build the internal controls mandated for publicly-held firms, many insurance companies will charge significantly higher rates to firms that lack such controls.

The FCPA does include an affirmative defense for payments to foreign officials intended to induce them to perform routine functions that fall within their job responsibilities (such as installing a phone or issuing permits). However, no defendant has successfully used this provision in any FCPA action.

Harris Inc. and Jun Ping Zhang

The S.E.C.'s action against Harris Inc. executive Jun Ping Zhang (Ping) highlights the risks of developing foreign business for U.S. healthcare I.T. firms. Ping was the C.E.O. of Hunan CareFx, a Chinese subsidiary of I.T. firm CareFx. Harris Inc. acquired CareFx in 2011, with Ping becoming a Vice President for Harris.

Unknown to Harris, Ping's sales staff routinely bribed Chinese government officials to win electronic health records contracts. As a result, between April 2011 and April 2012, Hunan CareFx made $200,000 to $1 million in improper payments to Chinese officials to win $9.6 million in contracts with state-owned entities. Ping hid this practice from Harris through falsified expense reports before the 2011 acquisition, but Harris' internal controls discovered this activity three months after taking over CareFx.

Harris self-reported the violations to the S.E.C. As a result, the S.E.C. imposed $46,000 in penalties on Jun Ping Zhang but chose not to prosecute Harris even though their records included Ping's false reports. The S.E.C. made this decision due to Harris' stringent self-policing and exemplary cooperation with the S.E.C.

The Jun Ping Zhang case demonstrates healthcare I.T. firms can incur extensive legal exposure due to foreign operations. CareFx sales staff considered bribes necessary to do business in China and hid their actions from Harris even after the acquisition. However, Harris' extensive internal controls and diligent self-policing prevented multi-million dollar penalties.

2.) 18 U.S.C. 666(2)

This title applies to theft or bribery concerning programs receiving Federal funds.

Section 666a(2) makes criminal any agreement to give anything of value with the intent to reward an agent of an organization in connection with a transaction involving more than $5,000. In addition, the organization involved must receive more than $10,000 in Federal benefits. Penalties include fines and up to 10 years in prison.

This statute can apply to contracts with a foreign healthcare provider if they make claims to any U.S. Federal healthcare program. This stricture would include Medicare, Medicaid, and Veterans Administration (V.A.) benefits. Foreign hospitals that provide V.A. benefits to local employees of U.S. military bases meet this requirement.

 

Of course, Medicare and Medicaid do not accept claims from foreign hospitals for treating Medicare/Medicaid beneficiaries unless they occur under emergency circumstances. Whether these claims would satisfy the $10,000 federal benefits requirement is an uncertain legal question. 

In Fischer v. United States 529 U.S. 667 (2000), the Supreme Court ruled that a municipal agency responsible for operating two community hospitals received $10,000 in federal funds due to Medicare claims. The court, however, made clear that the broad regulations faced by hospitals to qualify for the Medicare system were a crucial element in their ruling.

Since a foreign healthcare provider does not have to submit to U.S. Federal regulations to get paid for treating a Medicare/Medicaid beneficiary, there's a strong argument Fischer does not apply. Federal courts could rule that such an entity did not "receive" federal funds for purposes of 18 US 666. 

In these exigent circumstances, the foreign provider acts as a third-party contractee and does not have to comply with Medicare regulations to deliver covered services. If this interpretation proves correct in subsequent case law, it would mean that foreign healthcare providers could supply emergency services to Medicare/Medicaid patients without tripping 18 USC 666.

In short, a U.S. health care I.T. firm that bribes a foreign hospital could fall afoul of 18 USC 666 if the hospital supplies more than $10,000 in emergency services to Medicare/Medicaid patients.

3.) Health care "Anti-kickback" Statute

Under 42 U.S.C. 1320a-7(b)(1),(2), the Federal government imposes criminal penalties for any person who knowingly and willfully offers, pays, solicits, or receives any remuneration in return for (1) referring an individual to a person for the furnishing or arranging for the furnishing of any item or service payable in whole or in part under a federal health care program; or (2) purchasing, leasing, ordering, any good, facility, service, or item payable under a federal health care program.

Inducing another party to perform (1) or (2) is also a crime.

A US firm that bribed a foreign provider would run afoul of the anti-kickback statute if the provider claimed payment under the HITECH Act (42 USC 300-1791). However, foreign providers are not eligible for this program, with the possible exception of foreign V.A. hospitals.

State Law Issues

1.) State Law Commercial Bribery Statutes

As mentioned in the Overview, 37 states have commercial bribery statutes concerning public sector contracts.

While these statutes will not apply to a foreign contract where the goods and services remain within that foreign state, long-arm jurisdiction might apply if the foreign provider supplies services to individuals covered by state-qualified health insurance contracts.

For example, the California Penal Code sec. 641.3 provides that "any employee who solicits, accepts or agrees to accept money for anything of value from a person...corruptly and without the knowledge or consent of the employer in return for using or agreeing to use his or her position for the benefit of that other person, and any person who offers or gives an employee money or anything of value...is guilty of commercial bribery."

The key here is that criminal penalties require that the payments occur without the knowledge or consent of the employer. Consequently, a U.S. healthcare I.T. firm must make sure any relationship with a foreign licensee or partner, including any involvement with management, is disclosed to the foreign entity's board.

2.) Commercial Bribery Contract Law Issues

States that do not prohibit private-sector bribery may still provide remedies under equitable theories that apply to the contracting process. In short, courts can rescind contracts if their enforcement violates public policy.

Inducing a bribe-taker to violate their private duty to their employer can cause a contract to become unenforceable on public policy grounds if challenged in court. In addition, long-arm jurisdiction could apply if a foreign healthcare provider treats patients covered by state-regulated insurance contracts.

However, informing all parties about potential conflicts of interest (including commissions) should prevent criminal culpability.

Conclusion:

Healthcare I.T. firms can establish foreign licensing agreements and partnerships without creating any insurmountable legal problems under the following conditions:

1. the foreign partners or licensees involved do not provide services to U.S. Medicare or Medicaid patients, and,
2. the foreign parties disclose any relationship with a U.S. I.T. firm to their principal