HealthLawProf Blog

Editor: Katharine Van Tassel
Case Western Reserve University School of Law

Tuesday, November 18, 2014

Guest Blogger Associate Dean and Professor of Law Joan H. Krause - United States v. Nayak: The Application of Honest Services Mail and Wire Fraud to the Health Care Industry (Part II)

KrauseIn a prior post, I discussed the Seventh Circuit’s decision in United States v. Nayak, one of the first major “honest services” mail and wire fraud cases to arise since the Supreme Court decided Skilling v. United States in 2010. In Skilling, the Court found clear Congressional intent to limit honest services prosecutions to “offenders who, in violation of a fiduciary duty, participated in bribery or kickback schemes.” (Skilling at 407, emphasis added) As I warned in a 2012 article, the Court’s focus on bribery and kickback activity within the context of a fiduciary duty might have wide-ranging consequences in the health care field given the nature of the physician-patient relationship.

The structure of honest services cases differs from that of more traditional forms of mail and wire fraud, which usually involve perpetrators who defraud victims of money or property. In contrast, these “intangible rights” cases eliminate the requirement that the victim suffer a financial loss to the perpetrator. Nonetheless, such fraud is actionable only when the perpetrator in fact owes a heightened duty to provide “honest services” to the victim. While Skilling grounded that duty in a fiduciary relationship, the majority offered little guidance as to which aspects of the relationship were most important. As Justice Scalia noted in his concurrence: “None of the ‘honest services’ cases . . . defined the nature and content of the fiduciary duty central to the ‘fraud’ offense. There was not even universal agreement concerning the source of the fiduciary obligation – whether it must be positive state or federal law . . . or merely general principles, such as the ‘obligations of loyalty and fidelity’ that inhere in the ‘employment relationship.’” (Skilling at 416-17)

The indeterminacy of the fiduciary requirement has particular relevance in the medical context. While the physician-patient relationship is commonly described as a fiduciary one, the characterization is far more complex than may first appear. The disparities in medical knowledge, as well as the inability of patients to access many services (such as prescription drugs) without physician involvement, give physicians a great deal of power over their patients – a characteristic fiduciary responsibility. Yet the relationship lacks other fiduciary hallmarks; the physician, for example, lacks the fiduciary’s traditional control over the beneficiary-patient’s money. Skilling offeredlittle guidance as to which of these characteristics is most relevant to the honest services duty.

Some (but not all) courts have considered the physician-patient relationship sufficient to give rise to honest services mail or wire fraud. In United States v. Neufeld, the government characterized a “consulting arrangement” between a physician and a home infusion company as payments made in return for the physician’s referral of his Medicaid patients with AIDS. Denying a motion to dismiss, the District Court agreed that the honest services theory required the existence of a fiduciary relationship between the perpetrator and victim. While the court found no such relationship between the physician and the Ohio Medicaid program, the relationship between the physician and his patients was sufficient: “If Dr. Neufeld solicited bribes or remuneration in return for referring his patients to Caremark, as it is alleged, then the health of his patients was certainly not his only concern. His patients deserved medical opinions and referrals unsullied by mixed motives.” (at 500)

The facts of Nayak raise a further permutation of the fiduciary issue. Nayak was the ownerof several ambulatory surgical centers, and sought to generate referrals by paying bribes and kickbacks to local physicians. Nayak initially argued that he did not in fact have any fiduciary relationship to the patients of the referring physicians. While the issue was not preserved for appeal, the Seventh Circuit nonetheless felt compelled to note: “The government slightly misstates the issue in this case when it argues that . . . Nayak’s scheme deprived patients of his surgery centers of the right to the honest services of their physicians. Actually the indictment alleged that Nayak’s scheme deprived the referring physicians’ patients of their right to the honest services of their physicians, not that Nayak deprived his own patients of their right to his honest services.” (n.1, emphasis in original)

Nayak appears to be one of the few reported health care cases in which a third party who did not have an independent fiduciary relationship to the patient-victims was prosecuted on the theory that the bribery and kickback scheme interfered with a different person’s fiduciary relationship with them. While neither the statute nor Skilling require a defendant to deprive the victim of the defendant’s own honest services, the majority of health care cases have arisen in contexts similar to Neufeld, where the defendant physician is also the individual who has the fiduciary duty. Yet outside of the health care context, there are cases involving allegations that defendants interfered with someone else’s duty to provide honest services to the victim, such as by paying bribes that interfered with the recipient’s duties to his employer.

Given the indeterminacy of the fiduciary duty requirement, and the large number of bribery and kickback schemes that arise in the health care context, the extension of honest services fraud to defendants who may not themselves have a fiduciary duty to patient-victims may have far-reaching implications. As a legal matter, the contours of the physician-patient relationship are governed in the first instance by state law – e.g., licensure statutes, medical malpractice, and the doctrine of informed consent – rather than by federal standards of fiduciary duty. A federal judge in a criminal mail or wire fraud case might well come to a conclusion regarding a physician’s – or, as in Nayak, an allied service provider’s – fiduciary duty that contravenes the substantive state law of disclosure or informed consent. While no serious federalism issues have yet arisen, cases such as Nayak suggest that the right fact situation may be out there to bring this conflict to fruition.

- Associate Dean and Professor of Law Joan H. Krause

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