LifeMD (LFMD) Risk Analysis

The U.S. healthcare industry is heavily regulated and closely scrutinized by federal, state and local governments. Comprehensive statutes and regulations govern the manner in which we provide and bill for services and collect reimbursement from governmental programs and private payors; our contractual relationships with LifeMD PC, other third-party providers, vendors, and customers; our marketing activities; and other aspects of our operations. Of particular importance are: Federal False Claims Act and Civil Monetary Penalties Law There are multiple federal laws covering the submission of inaccurate or fraudulent claims for reimbursement and errors or misrepresentations on cost reports by hospitals and other health care providers. The coding, billing and reporting obligations of Medicare providers are extensive, complex and highly technical. In some cases, errors and omissions by billing and reporting personnel may result in liability under one of the federal False Claims Act or similar laws, exposing a health care provider to civil and criminal monetary penalties, as well as exclusion from participation in the Medicare and Medicaid programs. The federal False Claims Act prohibits (1) knowingly submitting a false or fraudulent claim for payment to the United States; (2) knowingly making, using or causing to be made or used a false record or statement to obtain payment from the United States; or (3) engaging in a conspiracy to defraud the federal government by getting a false or fraudulent claim allowed or paid. This statute is violated if a person acts with actual knowledge, or in deliberate ignorance or reckless disregard of the falsity of the claim. Penalties under the False Claims Act include fines (subject to annual escalations based on the Consumer Price Index) per violation, plus treble damages, potentially resulting in penalties aggregating millions of dollars for ongoing claims submission errors. Anyone who knowingly makes a false statement or representation in any claim to the Medicare or Medicaid programs may be subject to criminal penalties, including fines and imprisonment. The False Claims Act includes "whistleblower" provisions under which a person who believes that someone is violating the False Claims Act can file a sealed complaint against the alleged violator in the name of the United States government. The nature of the allegations is not revealed to the target during the time the United States Justice Department investigates the complaint and determines whether to join in the suit. If the Justice Department decides not to join in the suit, the original whistleblower nonetheless can proceed. If the case is successful, the whistleblower is entitled to between 15% and 30% of the proceeds of any fines or damages paid. Although the False Claims Act has been in effect for many years, in recent years there has been a significant increase in the number of whistleblower allegations filed under the False Claims Act, a large number of which involve the health care and pharmaceutical industries. In 2009, former President Obama signed into law the Fraud Enforcement Recovery Act which authorized increased funding for fraud investigation and prosecution, and expanded the scope of the False Claims Act to impose liability for false claims with more remote connections to the federal government. In addition, the Civil Monetary Penalties Law under the Social Security Act (the "CMP Law") provides for the imposition of civil money penalties against an entity that engages in activities including, but not limited to, (a) knowingly presenting or causing to be presented, a claim for services not provided as claimed or which is otherwise false or fraudulent in any way; (b) knowingly giving or causing to be given false or misleading information reasonably expected to influence the decision to discharge a patient; (c) offering or giving remuneration to any beneficiary of a federal health care program likely to influence the receipt of reimbursable items or services; (d) arranging for reimbursable services with an entity which is excluded from participation from a federal health care program; (e) knowingly or willfully soliciting or receiving remuneration for a referral of a federal health care program beneficiary; (f) using a payment intended for a federal health care program beneficiary for another use; (g) the practice or pattern of presenting a claim for an item or service on a reimbursement code that the person knows or should know will result in greater payment than appropriate, i.e., upcoding; and (h) engaging in a practice of submitting claims for payment for medically unnecessary services. Penalties under the CMP Law include fines per item or service claimed under Medicare, Medicaid, or any other federal health care program by an excluded individual or additional fines for a violation of the anti-kickback statute. Penalties are subject to annual escalation based on the Consumer Price Index. The threats of large monetary penalties and exclusion from participation in Medicare, Medicaid and other federal health care programs, and the significant costs of mounting a defense, create serious pressures on providers who are targets of false claims actions or investigations to settle. Therefore, an action under the False Claims Act or the CMP Law could have an adverse financial impact on LifeMD and its affiliates, regardless of the merits of the case. Additionally, on June 1, 2023, the Supreme Court in United States ex rel. Schutte v. SuperValu Inc. unanimously held that liability under the False Claims Act depends upon a defendant's subjective belief (rather than what an objectively reasonable person may have known or believed). As a result, any False Claims Act litigation related to LifeMD will be more complex and will likely incur higher administrative costs. Stark The federal Ethics in Patient Referrals Act (known as the "Stark Law") prohibits a physician who has a financial relationship, or whose immediate family member has a financial relationship, with an entity that provides certain designated health services from referring Medicare or Medicaid patients to that entity for the provision of such designated health services, with limited exceptions. The Stark Law designated health services include outpatient prescription drugs and clinical laboratory services. The Stark Law also prohibits an entity that receives a prohibited referral from filing a claim or billing for the services arising out of that prohibited referral. Unlike the Anti-Kickback Law, the Stark Law is not an intent based statute. No wrongful intent or culpable conduct is required for violation of the Stark Law. When a financial relationship exists between an entity and a physician, the arrangement must meet the necessary elements of a Stark Law exception in order for a referral to be made for designated health services to that entity and for that entity to bill for those designated health services generated by the referral. Sanctions under the Stark law include denial and refund of payments, civil monetary penalties for each claim for a service arising out of the prohibited referral, a civil penalty against parties that enter into a scheme to circumvent the Stark Law's prohibition, and exclusions from the Medicare and Medicaid programs. Civil monetary penalties are subject to annual escalations based on the Consumer Price Index. Also, because the Stark law is a Medicare payment rule, claims prohibited by the Stark law may also be the predicate for liability under the False Claims Act. Although the Stark Law is a federal prohibition, a number of states have passed similar statutes pursuant to which similar types of prohibitions are made applicable to all other health plans or third-party payors. Because of the complexity of the Stark Law and the evolving nature of quality improvement and cost-reduction efforts, there can be no assurances that LifeMD and its affiliates will not be found to have violated the Stark Law or the state law equivalent. If such violation were found to have occurred, any sanctions imposed could have a material adverse effect upon the future operations and financial condition of LifeMD and its affiliates. Additionally, amendments to regulations promulgated under the Stark Law may require LifeMD to amend or terminate certain arrangements with physicians to comply with new regulatory requirements. Anti-Kickback The federal Medicare/Medicaid Anti-Fraud and Abuse Amendments to the Social Security Act (known as the "Anti-Kickback Law") prohibit the knowing and willful offer, payment or receipt of remuneration in exchange for or as an inducement to make or influence a referral of a patient, or furnishing of any goods or services that may be reimbursed under federal health benefit programs. The scope of the Anti-Kickback Law is very broad, and it potentially implicates many practices and arrangements common in the health care industry, including space and equipment leases, personal services contracts, purchase of physician practices, joint ventures, and relationships with vendors. Violation of the Anti-Kickback Law is a felony and may result in imprisonment of up to ten years, statutory fines per violation, and exclusion from the federal health care programs, as well as other state healthcare programs. In addition, civil monetary penalties may include fines for each act (subject to annual escalations based on the Consumer Price Index), damages of not more than three times the remuneration offered, paid, solicited, or received, and/or exclusion from participation in Medicare and Medicaid, and may be imposed on individuals or entities that commit acts prohibited by the Anti-Kickback Law. The Patient Protection and Affordable Care Act amended the intent requirement to provide that a person need not have actual knowledge of the Anti-Kickback law or specific intent to commit a kickback violation, to violate the statute. In addition to the federal Anti-Kickback Statute, many states have anti-kickback and/or fee-splitting statutes designed to prohibit inducements or improper remuneration for the referral of patients. Federal statutory exceptions and "safe harbor" regulations describe certain arrangements that will not be deemed to violate the Anti-Kickback Law. However, the exceptions and safe harbors are narrow and do not cover a wide range of economic relationships that many physicians and other health care providers historically have considered to be legitimate business arrangements not prohibited by the Anti-Kickback Law. Because the exceptions and safe harbor regulations do not purport to describe comprehensively all lawful or unlawful economic arrangements or other relationships between health care providers and referral sources, it is uncertain whether physicians and other health care providers that have these arrangements or relationships may need to alter them in order to ensure compliance with the Anti-Kickback Law. Failure to comply with an exception or safe harbor does not mean an arrangement necessarily violates the Anti-Kickback Law. However, failure to do so may increase the likelihood of a regulatory challenge or the potential for investigation. Because the safe harbor exceptions are narrowly drawn and the case law interpreting the Anti-Kickback Law is sparse, there can be no assurances that LifeMD or its affiliates will not be found to be in violation of the Anti-Kickback Law. If such a violation were found, any sanctions imposed could have a material adverse effect upon the future operations and financial condition of LifeMD and its affiliates. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act. Fraud Provisions of HIPAA The criminal healthcare fraud provisions of HIPAA, and related rules that prohibit knowingly and willfully executing a scheme or artifice to defraud any healthcare benefit program or falsifying, concealing, or covering up a material fact or making any material false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items, or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. Achieving and sustaining compliance with these laws may prove costly. Failure to comply with these laws and other laws can result in civil and criminal penalties such as fines, damages, overpayment, recoupment, imprisonment. The risk of our being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are sometimes open to a variety of interpretations. Our failure to accurately anticipate the application of these laws and regulations to our business or any other failure to comply with regulatory requirements could create liability for us and negatively affect our business. Any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management's attention from the operation of our business and result in adverse publicity. Dealing with investigations can be time- and resource-consuming and can divert management's attention from the business. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business. In addition, because of the potential for large monetary exposure under the federal False Claims Act, which provides for treble damages and penalties of $5,000 to $10,000 per false claim or statement, which is further adjusted for inflation, healthcare providers often resolve allegations without admissions of liability for significant and material amounts to avoid the uncertainty of treble damages that may be awarded in litigation proceedings. Such settlements often contain additional compliance and reporting requirements as part of a consent decree, settlement agreement, or corporate integrity agreement. Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources to investigating healthcare providers' compliance with the healthcare reimbursement rules and fraud and abuse laws. The laws, regulations, and standards governing the provision of healthcare services may change significantly in the future. We cannot assure you that any new or changed healthcare laws, regulations, or standards will not materially adversely affect our business. We cannot assure you that a review of our business by judicial, law enforcement, regulatory, or accreditation authorities will not result in a determination that could adversely affect our operations.