Fraud Risks Facing Recovery Residences: A Guide for Owners & Managers

I. Recovery Residence Compliance Risks -- Illegal Referral Payments and Patient Brokering Concerns:

Recovery residences serve as an essential component in the drug and alcohol recovery process.  Unlike substance use treatment centers, an individual’s tenure living in a recovery residence is not covered by governmental or private insurance. In fact, most individuals pay for their time in a recovery residence primarily through out-of-pocket resident fees, typically structured as weekly or monthly rent-like payments, rather than through comprehensive insurance coverage. According to the Substance Abuse and Mental Health Services Administration (SAMHSA), although recovery housing is associated with improved outcomes,^[3] financing remains a major barrier to sustainability, and operators often rely on resident payments as a core revenue source because many recovery-residence costs are not routinely reimbursed by traditional health coverage. As a result, residents commonly piece together payments from personal income, employment wages, family support, savings, or other limited assistance, with some recovery residences supplementing resident fees through grants, philanthropy, or public funding streams when available.

Importantly, although most recovery residences do not directly provide or bill for insurance for clinical services, residents of recovery residences often have health care needs that must be met, ranging from primary care evaluations to recurring urine drug testing. To meet these medical needs, many recovery residences have a licensed Physician associated with the facility as the Medical Director to address residents’ medical needs and order periodic urine drug screening to verify an individual’s sobriety and compliance with the rules. Specimens collected are typically sent to a preferred laboratory for analysis, and if associated with an insured patient, the tests are then billed to the payor.

In light of the fact that the lodging and meal expenses in recovery residences are not covered by most federal, state, and private health plans, it isn’t uncommon for recovery residences to establish business relationships with substance use counselors and other medical professionals.  This is where recovery residence owners, managers, and associates can trip up. Depending on the facts, the solicitation, receipt, offer, or payment of anything of value in exchange for the referral of business may constitute a violation of various federal or state anti-kickback statutes.

A. Possible Liability Under the Federal Anti-Kickback Statute.

The federal Anti-Kickback Statute makes it a crime to knowingly and willfully offer, pay, solicit, or receive remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to purposefully induce or reward referrals of items or services payable by a federal health care program. Simply put, it is against the law to pay or provide anything of value to induce referrals or business related to a federal health care program. The federal Anti-Kickback Statute has been in place (in one form or another) since 1972.^[4]

Both the party offering a kickback and the intended recipient can be held criminally liable under the Anti-Kickback Statute. Any person convicted of violating this statute could face an array of penalties, including up to 10 years in prison and a $100,000 fine. Moreover, if convicted of this crime, a party is automatically excluded from participating in federal health care programs, including Medicare and Medicaid.

The federal Anti-Kickback Statute applies to federal health benefit programs.^[5] In light of both health care provider concerns and the statute’s broad scope, Congress has since enacted a dozen statutory “exceptions” to the Anti-Kickback Statute. Additionally, it has authorized the Department of Health and Human Services (HHS) to designate “safe harbors,” which effectively carve out certain business practices that would otherwise violate the federal Anti-Kickback Statute. As of May 2026, a total of 12 statutory exceptions and 37 regulatory safe harbors have been established. Although the specific business arrangements associated with these safe harbors may technically violate the law, it has been determined that these practices do not pose a significant risk of harm to federal health care programs, provided certain requirements are met. Importantly, in order for the protection of a safe harbor to apply:

“. . . an arrangement must fit squarely in the safe harbor. Failure to comply with a safe harbor provision does not mean that an arrangement is per se illegal. Compliance with safe harbors is voluntary, and arrangements that do not comply with a safe harbor must be analyzed on a case-by-case basis for compliance with the anti-kickback statute.”^[6]

As you can imagine, when examining a specific business arrangement, it is not uncommon to find that one or more of the ongoing or proposed practices do not neatly fit within the four corners of a safe harbor.^[7] As discussed above, the failure to fully meet all aspects of a safe harbor does not necessarily mean the business arrangement is illegal. Nevertheless, the further business arrangements deviate from the safe harbor, the greater the risk that it may violate the federal Anti-Kickback Statute.

B. Expanded Liability Under the “Eliminating Kickbacks in Recovery Act” (EKRA).

In October 2018, the “SUPPORT for Patients and Communities Act” (SUPPORT Act) was enacted. One provision of the SUPPORT Act with far-reaching consequences is set out in Subtitle J, known as the “Eliminating Kickbacks in Recovery Act” (EKRA). This bipartisan legislation was intended to address fraudulent and abusive business practices by unscrupulous substance use disorder treatment providers in this segment of the market. It has effectively expanded existing anti-kickback measures to better cover schemes involving private insurance. While the aim of this widespread expansion of enforcement is to combat opioid and other substance abuse, the implications of EKRA’s provisions are far-reaching.

EKRA was specifically designed to address patient brokering^[8] and other kickback schemes involving private payor claims. Under EKRA, the maximum penalties for illegal remuneration paid by “Recovery Homes,” “Clinical Treatment Facilities,” or “Laboratories” in an effort to induce referrals can result in penalties of $200,000 and 10 years' imprisonment per occurrence. Under EKRA, an offense is defined as follows:

The definition of each term is significant to the applicability of this provision:

• Recovery Home: “A shared living environment that is, or purports to be, free from alcohol and illicit drug use and centered on peer support and connection to services that promote sustained recovery from substance use disorders.”
• Clinical Treatment Facility: “A medical setting, other than a hospital, that provides detoxification, risk reduction, outpatient treatment and care, residential treatment, or rehabilitation for substance use, pursuant to licensure or certification under State law.”

The definitions of “Recovery Home” and “Clinical Treatment Center” make sense in the context of this bill’s intentions. However, the definition of “Laboratory” was not included, but rather cited the definition of a laboratory laid out in 42 U.S.C. §263a(a):

• Laboratory: “As used in this section, the term “laboratory” or “clinical laboratory” means a facility for the biological, microbiological, serological, chemical, immuno-hematological, hematological, biophysical, cytological, pathological, or other examination of materials derived from the human body for the purpose of providing information for the diagnosis, prevention, or treatment of any disease or impairment of, or the assessment of the health of, human beings.”

Unlike the definitions of the terms “Recovery Home” and “Clinical Treatment Facility,” the definition of “Laboratory” is not confined to the provision of opioid or substance-use related matters. As a result, all health care providers, not merely recovery homes and clinical treatment facilities, who utilize laboratory services need to ensure that their business relationships with laboratories do not violate EKRA.

C. All-Payor Kickback and Anti-Solicitation Statutes Enacted at the State Level.

Notably, many states have also passed legislation criminalizing improper kickbacks and patient solicitation. For instance, the state of Texas has passed an exceptionally broad anti-solicitation statute.^[9] Texas’ statute applies to any payor, including private payors. As Tex. Occ. Code 102.001(a): provides:

“A person commits an offense if the person knowingly offers to pay or agrees to accept, directly or indirectly, overtly or covertly, any remuneration in cash or in kind to or from another for securing or soliciting a patient or patronage for or from a person licensed, certified, or registered by a state health care regulatory agency.” ^[10]

Similarly, Massachusetts has enacted similar legislation. Under M.G.L.c. 175H, §3, it is a felony to solicit or receive any remuneration, directly or indirectly:

"for purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, or ordering of any good, facility, service, or item for which payment is or may be made in whole or in part by a health care insurer." ^[11]

D. Establishment of the West Coast Health Care Fraud Strike Force.

In April 2026, the Department of Justice’s National Fraud Enforcement Division announced that it had established a new multi-district initiative comprised of health care fraud prosecutors from the U.S. Attorney’s Offices out of the District of Arizona, the District of Nevada, and the Northern District of California. The West Coast Health Care Fraud Strike Force (Strike Force) was built, in part, on the government’s “dismantling of Medicaid, sober home, and wound care fraud schemes in the District of Arizona.” ^[12] The establishment of this Strike Force has again brought recovery residences and sober fraud into focus and has further increased scrutiny of these entities by both federal and state prosecutors across the country.

E. Recent Prosecutions of Recovery Resident Owners, Managers, and Associates.

Over the past decade, federal prosecutors have increased their enforcement interest in recovery residences and their business associates. Unfortunately, a few bad actors have garnered the focus of both law enforcement and Congress. As part of a nationwide takedown of individuals and entities accused of health care fraud, Brian Rabbit, Acting Assistant Attorney General for the DOJ’s Criminal Division, commented on “Sober Home” schemes. As Asst. Attorney General Rabbit stated:

“. . . defendants are alleged to have preyed upon addicted patients, recruiting them from their hometowns, where they have support networks, and shipping them off to far-away states where they are placed into these so-called ‘sober homes.’ Once there, these vulnerable patients are often provided with drugs that undercut their ability to recover from the addiction they are trying to kick, and they are often shuffled from facility to facility to boost headcount and maximize billing, instead of being given the care they so desperately need.”^[13]

In some of the more troubling cases, patients were also referred to other healthcare providers who, in return for kickbacks, billed federal, state, and private payors for medically unnecessary tests, medications, and services. Several prosecutions of sober home owners, managers, or associates are set out below.

Kentucky. The owner of a Kentucky sober home pleaded guilty to soliciting kickbacks from an individual in exchange for the referral of urine drug testing to various drug testing labs. The urine drug tests referred in exchange for unlawful kickbacks caused Medicare and Medicaid to pay more than $2.5 million for the testing. The defendant’s sober home also allegedly billed Medicaid for peer support services that were not provided by a licensed peer support specialist. The defendant owner was sentenced to 5 years in prison.

Kentucky. This case involved an individual who served as a “peer support specialist” at a Kentucky sober home. At trial, the evidence allegedly showed that the defendant received approximately $62,000 in illegal kickbacks for ordering urine drug testing that cost Medicare and Kentucky Medicaid more than $2.5 million. The government argued that the urine drug testing (1) was not ordered by a treating medical provider, (2) the results of the testing were not reviewed by a treating medical provider. The government alleged that more than 9,000 urine drug tests were ordered under the stolen identification number, and a forged signature of a Nurse Practitioner was used to order the testing. Sentencing is still pending.

Massachusetts. In this case, the founder and the day-to-day manager of numerous recovery residences in Massachusetts were charged with several criminal counts for their involvement in four fraud schemes. Two of these frauds included: (1) The founder, manager, and a sober home client allegedly entered into a conspiracy to defraud a New York-based family trust that was paying for the client’s room and board at a sober home. The family trust was overcharged up to $12,500 a month. “Refund” checks were then given to the client; (2) The founder personally, and through straw purchasers, purchased three residences to use as sober homes. The founder and the manager allegedly submitted false information and fraudulent documentation claiming that the properties were intended for use as primary residences, when they were actually intended for use as sober homes. The founder of the sober homes has been sentenced to 6 years in prison, ordered to pay more than $1.8 million, and forfeited more than $1.5 million to the government. The day-to-day manager was sentenced to 30 months in prison.

Arizona. First uncovered in May 2023, over the past three years, the Attorney General’s Office for the State of Arizona has been steadily peeling back layer upon layer of fraud that were improperly billed to Arizona’s Medicaid program, known as the “Arizona Health Care Cost Containment System” (AHCCCS), for behavioral health services that were never provided. Fraudulent conduct involving sober homes was merely one of the fraud schemes being investigated by state regulators and prosecutors. Upon review, investigators found that criminal enterprises were operating unlicensed sober living homes and were recruiting Native Americans from tribal communities across the Southwest, transporting them to unlicensed homes, and then billing Arizona Medicaid for services that were never rendered.^[14]

Florida. In this case, a licensed Florida physician who served as Medical Director for more than 50 addiction treatment centers and sober homes was charged with health care fraud and wire fraud in an alleged $681 million fraud scheme. Earlier this year, the physician defendant was sentenced to 20 years in prison. The government alleged that the defendant authorized more than 136 “standing orders” for hundreds of millions of dollars in medically unnecessary urinalysis tests (UAs), which were billed by testing laboratories that sometimes paid kickbacks to the sober homes or addiction treatment facilities. In exchange for his signature on these standing orders, he required the facilities to have their patients treated by his practice and his staff, allowing him to bill for fraudulent treatments. The government further alleged that the physician improperly prescribed controlled substances, including large quantities of buprenorphine/Suboxone, frequently exceeding the number of patients he was legally authorized to treat.

F. Recent Prosecutions of Substance Use Disorder Treatment Center Owners and Managers.

Any discussion of recovery residence compliance risks should include a review of enforcement actions taken against substance use disorder treatment centers. Unfortunately, many of the prosecutions brought against recovery residence owners and managers have arisen out of their improper kickback arrangements with owners and staff at substance use treatment centers. For example:

Massachusetts. In this case, the government intervened in a False Claims Act whistleblower case filed against two drug abuse treatment centers that allegedly paid kickbacks to induce sober home proprietors to refer patients to their treatment facilities. As the Complaint alleged, defendants allegedly induced substance abuse recovery patients to enroll in and attend the defendants’ Partial Hospitalization Program (PHP), an outpatient, intensive, substance use disorder treatment program, by paying for, and offering to pay for, sober housing in violation of the Anti-Kickback Statute. The defendants knew that many of the patients that the defendants housed in sober homes were insured by federal and state healthcare programs that paid for the defendants' PHP services, and the defendants knew that many of these patients could not pay the daily rate for sober housing, absent the defendants' payments on their behalf. The defendants contracted with sober homes operating near the defendants' PHP The contracts set out how much the defendants would pay the sober homeowners and operators to house substance use recovery patients on the condition that the patients regularly attend the defendants' PHP.

Arizona. In this case, the government has indicted an individual and charged him with conspiracy to defraud the United States and receiving and paying kickbacks in connection with a substance abuse treatment scheme. As alleged in the indictment, the defendant owned a company that purportedly provided housing to individuals enrolled in health plans funded by Arizona’s Medicaid program. The defendant allegedly received approximately $739,000 in illegal kickbacks to refer individuals to an outpatient treatment center that provided substance abuse and behavioral health treatment to Arizona Medicaid-insured patients. The government alleges that this resulted in improper payments of approximately $1.58 million from Arizona Medicaid to the outpatient treatment center.

G. Eliminating Kickbacks in Recovery Act (EKRA) Prosecutions.

California. In this case, the owner of a marketing company was indicted for allegedly referring patients with commercial health insurance to substance use disorder treatment facilities. Underlying this indictment was a comprehensive system of improper inducements and payoffs. The government has alleged that recruiters paid patients to receive substance abuse treatment. The marketing company allegedly paid the recruiters based on the value or volume of referrals generated. The substance use disorder treatment center paid the owner of the marketing company for referrals it received.

California. In this case, the CEO of multiple substance use disorder treatment facilities and sober homes was indicted for allegedly paying for marketing services where the payments were based on the value or volume of referrals.