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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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