Health Law Advisory Bulletin
Advisory Opinion 04-17:
The OIG Continues to Scrutinize Joint Ventures
By John
P. Krave and Robert
G. Homchick
[January 2005]
INTRODUCTION
Joint ventures, particularly those involving either
hospitals or physicians are increasingly common in the health care
industry. Joint ventures serve a number of legitimate purposes and
often assist in aligning incentives, enhancing patient access, and
increasing capacity. While market-place dynamics are encouraging
the development of a wide array of ventures, government regulators
have been less supportive of the trend.
Government scrutiny of joint ventures over the past few years has
resulted in various cautionary messages to industry. The limited
safe harbor protection for joint ventures under the Anti-kickback
statute, the prohibitions of the Stark Law on physician ownership
of certain types of providers along with fraud alerts and Advisory
Opinions have established a series of prohibitions and suggested
numerous risk factors associated with provider joint ventures. Advisory
Opinion 04-17, recently issued by the Office of Inspector General
(the OIG) of the Department of Health and Human Services, continues
this cautionary tact. This guidance from the government suggests
that it would be prudent for potential participants to carefully
consider the regulatory issues at the onset of any joint venture
negotiations.
Advisory Opinion 04-17
In late 2004, the OIG issued Advisory Opinion 04-17
(the “Opinion”) that reiterates the OIG’s previous
concerns about so called “contractual joint ventures.”
The Opinion analyzes a laboratory services venture in which participating
physician groups refer patients while commonly controlled suppliers
provide “turn key” management and clinical services.
The OIG reacted negatively to the proposal, concluding that the
arrangement might violate the Federal Anti-kickback law because
it enabled the physician groups to profit from referrals to the
new labs.
Although the OIG’s conclusion is not entirely
surprising, the Opinion suggests a disturbing limitation on the
safe harbors under the Anti-kickback statute. The OIG determined
that the arrangement under review (the “Proposed Arrangement”)
might be illegal even if its component contracts reflected fair
market terms and otherwise satisfy the requirements of the Anti-kickback
regulatory safe harbors. Refusing to focus solely on the terms of
each constituent contract, the government analyzed the “totality”
of the Proposed Arrangement, and concluded it was “designed
to permit the [lay management company] to do indirectly what it
cannot do directly; that is pay the Physician Groups a share of
profits from their laboratory referrals.”
The party that requested the Opinion (the “Manager”)
was a company that sought to provide pathology laboratory services
to physician groups specializing in urology, dermatology, or gastroenterology
(the “Physician Groups”). The Manager would provide
all services required for each Physician Group to operate its own
pathology laboratory (the “Lab”) at an off-site location.
The Physician Group, or the Manager on behalf of the Physician Group,
would bill patients and public and private third-party payors (including
Medicare) for pathology services furnished in the Lab.
The Manager, which was not itself a Medicare or Medicaid
provider, proposed to provide its services through affiliated entities
(the “Affiliated Entities”), which included a licensed,
Medicare-certified anatomic pathology laboratory and a staffing
company. A common parent corporation jointly owned the Manager and
the Affiliated Companies. The Manager and each Physician Group were
to enter into four contracts: (1) a Management Agreement, which
encompassed equipment leases and, if requested, billing services;
(2) a Sub-Lease Agreement for space to be occupied by the Lab at
a site removed from the Physician Group’s offices; (3) a Technical
Personnel Agreement; and (4) a Pathology Services Agreement under
which the Manager would provide a pathologist to render professional
and supervisory services on a part-time basis as necessary to operate
the Lab. Notably, the terms of each of these component contracts
would qualify for protection under established safe harbors to the
federal anti-kickback law (Social Security Act §1128B(b).)
Each Physician Group would compensate the Manager
in a flat monthly fee (the “Monthly Fee”) intended to
compensate the Manager for the pathologist’s part-time services.
The Physician Group and Manager would determine the amount of the
Monthly Fee by reference to historical utilization data. The Physician
Group would also pay a per-specimen charge and a fee for any billing
and collection services rendered by the Manager.
The Manager planned to establish up to five independent Labs in
a single building, with no shared use of space or equipment. Each
Physician Group would lease its own space on a full-time basis,
and would make exclusive use of the premises. The pathologists and
technical personnel would rotate among the Labs, provide only services
on behalf of a single Physician Group at a time, and use only that
Group’s space and equipment for performance of services on
the Group’s behalf.
The OIG analyzed the Proposed Arrangement under the
federal Anti-kickback law, which prohibits the payment of remuneration
to induce or reward referrals of items or services payable by a
Federal health care program, including Medicare or Medicaid. The
Opinion cites cases interpreting the federal Anti-kickback law to
prohibit any arrangement where even one purpose is
to provide compensation for the referral of goods or services to
be paid for by a federal program. The OIG also made reference to
its 2003 Special Advisory Bulletin on contractual Joint Ventures.
The Special Advisory Bulletin emphasized the risks of an arrangement
in which a health care provider contracts with a manager/supplier
(which might otherwise be a potential competitor) to establish a
related line of business and receives the profits resulting from
the provider’s referral of Medicare and Medicaid beneficiaries
to the new enterprise.
The Opinion indicates that the Proposed Arrangement is akin to the
ventures the OIG criticized in the Special Advisory Bulletin. In
refusing to protect the Proposed Arrangement, the OIG cited several
reasons:
- The Manager and the Affiliated Entities provide “turn
key” services under circumstances that suggest to the OIG
that they should be viewed as a single entity. The entities are
commonly controlled and share a single corporate purpose. As a
result, the Manager, though its affiliates, would be in position
to provide pathology services in its own right in competition
with the contracting Physician Groups, billing insurers and patients
in its own name and retaining all reimbursement. According to
the OIG, the only credible business purpose for the involvement
of the Physician Groups in the new lab ventures was the referral
of patients.
- The Physician Groups would be expanding into a related line
of business (i.e., pathology), but would be contracting out substantially
all of their operations to Manager, a potential competitor for
this business. In the OIG's view, this meant that the only significant
role for the Physician Groups would be to provide patient referrals
to the Manager.
- As characterized by the government, the Physician Groups were
assuming very little financial risk under the arrangement. The
Groups would have control over the volume of business they would
send to the Lab. They could, presumably, ensure that they generated
sufficient Lab business to meet or exceed the Monthly Fee. The
“per specimen” and billing fees also resulted in no
financial risk because they, too, were based on actual utilization.
- Each Physician Group would share the economic benefit of its
Lab with the Manager.
Advisory Opinion 04-17 should provoke a careful scrutiny of any
planned or ongoing arrangements between a provider and an organization
that facilitates the provider’s entry into a new line of business
to which the provider will refer patients. While caution is advised,
it is important to note that no trial or appellate court has yet
considered whether the OIG is correct in concluding that the Proposed
Arrangement or a similar venture may be illegal under the Federal
Anti-kickback law. Indeed, the Opinion has been criticized as a
clear circumvention of the protections afforded by the regulatory
safe harbors to the anti-kickback statute. If each component of
the Proposed Arrangement fits within a safe harbor, the mere presence
of an underlying profit motive should not nullify the protection
afforded to those who have structured their arrangements to meet
the safe harbor criteria. Should an arrangement such t as that described
in the Opinion be challenged by the government, a defendant may
be able to successfully argue that because the component contracts
fall within established safe harbors, the venture cannot be deemed
to violate the anti-kickback statute. In addition, compliance with
the safe harbors demonstrates that the parties did not “knowingly”
violate the Anti-kickback law as required by the Court of Appeals
decision in Hanlester Networks v. Shalala.
Although there are strong legal arguments to be made, challenging
the OIG's position is risky and the government's leverage in any
prosecution is always enormous. For the time being, parties should
be aware that in the government's view a turn key management agreement
that provides for fair market value payments for the services and
meets the other safe harbor criteria is not necessarily legal, particularly
if the physicians have no significant operational role and their
profits from the venture are traceable to their referral of federal
patients.
To address the OIG's concerns, parties contemplating ventures akin
to that described in the Advisory Opinion should consider incorporating
elements of physician financial risk, possibly through exposure
for inventory, supplies, and leased equipment, or by limiting the
manager’s involvement to the provision of technical and professional
personnel. Physician control over critical operational decisions,
such as the level of staffing and the establishment of charges,
might also be helpful to persuade the government as to the genuineness
of the arrangement. The involvement of multiple independent managers
for different aspects of the enterprise may also be helpful, provided
the resulting venture amounts to something beyond a more circuitous
version of the Proposed Arrangement.
If you are contemplating joint venture opportunities,
Davis Wright Tremaine LLP has attorneys who are knowledgeable in
this complex area of health law.
Thomas
E. Jeffry, Los Angeles, (213) 633-6882, TomJeffry@dwt.com
Paul
T. Smith, San Francisco, (415) 276-6532, PaulSmith@dwt.com
Ingrid
Brydolf, Portland, (503) 276-5804, IngridBrydolf@dwt.com
Brent
R. Eller, Seattle, (206) 628-7786, BrentEller@dwt.com
This Advisory is a publication of the
Health Law Department of Davis Wright Tremaine LLP. Our purpose
in publishing this Advisory is to inform our clients and friends
of recent developments in health law. It is not intended, nor should
it be used, as a substitute for specific legal advice as legal counsel
may only be given in response to inquiries regarding particular
situations.
Copyright © 2005, Davis Wright Tremaine
LLP.
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