BILL COPELAND’S HEALTH LAW INSIGHTS

In this issue, we will discuss joint venture arrangements that raise questions with regard to the federal anti-kickback statute. As I have discussed in previous newsletters, The Medicare/Medicaid Fraud and Abuse Anti-Kickback Statute (the "Statute") provides that the offer or payment, as well as the solicitation or receipt, of "any remuneration" in exchange for referrals of any good, facility, service, or item for which payment may be made in whole or in part under Medicare/Medicaid is prohibited.

The prohibited activity is a two way street, and both the payer and the receiver are equally culpable. The definition of remuneration, however, is a gray area. While the Statute provides that remuneration includes "any kickback, bribe or rebate," it does not define these terms. Further, there is a prohibition against remuneration "directly or indirectly, overtly or covertly, in cash or in kind."

Clearly, direct cash payments in exchange for referrals violate the Statute. What is less clear, however, is what constitutes "indirect payments."

To date, the courts have interpreted the Statute in a very expansive manner. If remuneration flows from one party to another and if referrals (or the opportunity to provide goods and services) flow back, the potential for criminal prosecution exists regardless of the presence of good business reasons for the venture.

If one is paying for referrals, directly or indirectly, overtly or covertly, the Statute has been violated. Changing the form of the payment will make it no less a violation.

Office of the Inspector General ("OIG") has been targeting joint ventures and/or arrangements since 1989. The first Special Fraud Alert on Joint Venture Arrangements was issued in 1989 and was republished in 1994.¹ I will discuss the details for that alert below. Also in 1989, in the preamble to the proposed safe harbors,² under the discussion of the equipment rental, personal service and sale of practice proposed safe harbors, arrangements where there is an incentive to refer are identified as suspect. In the 1991 final rule,³ promulgating the 10 original safe harbor provisions, there is further discussion.

In the final rule, the OIG discusses "part-time contractual arrangements and periodic access leases between health care providers" and indicates that they "are especially vulnerable to abuse because they are subject to modification based on changing referral patterns between the parties." The OIG provides the example of "an optometrist who pays ad hoc "rent" to an ophthalmologist for the time spent in the physician's office examining only referred patients," indicating that this "is impermissibly paying for the referrals."

In the 1989 Special Fraud Alert guidance, republished in 1994⁴, the OIG identifies several questionable features of suspect joint ventures "which separately or taken together may result in a business arrangement that violates the anti-kickback statute:

Investors

• Investors are chosen because they are in a position to make referrals.
• Physicians who are expected to make a large number of referrals may be offered a greater investment opportunity in the joint venture than those anticipated to make fewer referrals.
• Physician investors may be actively encouraged to make referrals to the joint venture, and may be encouraged to divest their ownership interest if they fail to sustain an "acceptable" level of referrals.
• The joint venture tracks its sources of referrals, and distributes this information to the investors.
• Investors may be required to divest their ownership interest if they cease to practice in the service area, for example, if they move, become disabled or retire.
• Investment interests may be nontransferable.

Business Structure

• The structure of some joint ventures may be suspect. For example, one of the parties may be an ongoing entity already engaged in a particular line of business. That party may act as the reference laboratory or DME supplier for the joint venture. In some of these cases, the joint venture can be best characterized as a "shell."
• In the case of a shell laboratory joint venture, for example:
• It conducts very little testing on the premises, even though it is Medicare certified.
• The reference laboratory may do the vast bulk of the testing at its central processing laboratory, even though it also serves as the "manager" of the shell laboratory.
• Despite the location of the actual testing, the local "shell" laboratory bills Medicare directly for these tests.
• In the case of a shell DME joint venture, for example:
• It owns very little of the DME or other capital equipment; rather the ongoing entity owns them.
• The ongoing entity is responsible for all day-to-day operations of the joint venture, such as delivery of the DME and billing.

Financing and Profit Distribution

• The amount of capital invested by the physician may be disproportionately small and the returns on investment may be disproportionately large when compared to a typical investment in a new business enterprise.
• Physician investors may invest only a nominal amount, such as $500 to $1500.
• Physician investors may be permitted to "borrow" the amount of the "investment" from the entity, and pay it back through deductions from profit distributions, thus eliminating even the need to contribute cash to the partnership.
• Investors may be paid extraordinary returns on the investment in comparison with the risk involved, often well over 50 to 100 percent per year.

When the original safe harbors were published in 1991⁵, all of these items were taken into account in the safe harbors dealing with investment interest, equipment and space rental, and personal services and management contracts. In addition, these elements were addressed in the practitioner recruitment safe harbor published in 1999.⁶

In April 2000, the OIG issued a Special Fraud Alert, "Rental of Space in Physician Offices by Persons or Entities to Which Physicians Refer."⁷ This alert addressed the situation where "suppliers that provide health care items or services rent space in the offices of physicians or other practitioners. Typically, most of the items or services provided in the rented space are for patients, referred or sent, either directly or indirectly, to the supplier by the physician-landlord. ... the rental payments may be disguised kickbacks to the physician-landlords to induce referrals. ... in many cases, suppliers, whose businesses depend on physicians' referrals, offer and pay "rents" -- either voluntarily or in response to physicians' requests --that are either unnecessary or in excess of the fair market value for the space to access the physicians' potential referrals."

The OIG indicates that the questionable features of suspect rental arrangements are reflected in three areas:

• appropriateness. Is the payment for rent appropriate?
• rental amounts. Rental amounts should be at fair market value, be fixed in advance and not take into account, directly or indirectly, the volume or value of referrals or other business generated between the parties. Fair market value rental payments should not exceed the amount paid for comparable property; and
• time and space considerations. Rental of space that is in excess of suppliers' needs creates a presumption that the payments may be a pretext for giving money to physicians for their referrals.

In April 2003, the OIG issued a Special Advisory Bulletin, "Contractual Joint Ventures." This bulletin focuses on questionable contractual arrangements where a health care provider in one line of business expands into a related health care business. This is accomplished by contracting with an existing provider of a related item or service to provide the new item or service to the health care provider's existing patient population. The Manager/Supplier not only manages the new line of business, it supplies inventory, employees, space, billing, and other services. Substantially the entire operation of the related line is contracted out to an otherwise potential competitor. In return, the health care provider receives the profits of the business as remuneration for its referrals.

The OIG contends that the arrangement violates the Anti-Kickback Statute and provides the following examples:

• A hospital establishes a subsidiary to provide DME. The new subsidiary enters into a contract with an existing DME company to operate the new subsidiary and to provide the new subsidiary with DME inventory. The existing DME company already provides DME services comparable to those provided by the new hospital DME subsidiary and bills insurers and patients for them.
• A DME company sells nebulizers to federal health care beneficiaries. A mail order pharmacy suggests that the DME company form its own mail order pharmacy to provide nebulizer drugs. Through a management agreement, the mail order pharmacy runs the DME company's pharmacy, providing personnel, equipment, and space. The existing mail order pharmacy also sells all nebulizer drugs to the DME company's pharmacy for its inventory.
• A group of nephrologists establishes a wholly-owned company to provide home dialysis supplies to their dialysis patients. The new company contracts with an existing supplier of home dialysis supplies to operate the new company and provide all goods and services to the new company.

In my practice, I have encountered the following examples of joint venture arrangements which, depending on the facts and circumstances, may or may not be in violation of the Statute:

• A hospital wants to establish a sleep diagnostic center. It contracts with a company that is in the business of owning and managing sleep diagnostic centers. The hospital provides the space, and the company provides the equipment, personnel, management, and billing. The hospital receives all the revenue from the center and pays the company a per service fee for its services.
• An orthopedic surgeon wants to establish a physical therapy and rehabilitation center as an adjunct to his practice. He subleases a portion of his office space to a licensed physical therapist. All supplies, equipment, utilities, including office support, telephone and facsimile, use of examination rooms, the front desk and support personnel are included in the sublease cost. The sublease will allow the physical therapist to function independently as an adjunct to the physician's practice.

According to the OIG, the common elements to these suspect contractual joint ventures are:

• Provider expands into a related line of business dependent upon referrels from existing business.
• It is organized as part of existing business or subsidiary.
• The new business serves primarily provider's existing patient base.

Provider neither operates the new business itself nor commits substantial financial, capital, or human resources to the venture.

• Substantially all business operations contracted out to manager.
• The Manager provides management services, equipment and supplies, personnel, billing support, and space.
• Billing is done in the name of the provider.
• Provider not really at risk.
• Manager is an established provider of the same services.
• Without the arrangement, manager could be competitor.
• Manager and provider share economic benefit of venture, manager through contracts, provider through residual profits.
• Payments to manager typically vary with value or volume of business generated.
• Provider's payments, the difference between the net revenue and expenses (including manager's fees) also vary based on referrals.

The OIG goes further to indicate that the indicia of a suspect contractual joint venture point to:

• new line of business,
• captive referral base,
• little or no business risk,
• manager is a would-be competitor,
• manager provides all the key services of the business,
• non-competition arrangement baring the manager from otherwise servicing provider's patients and baring provider from competition with the venture,
• practical effect is to provide the provider the opportunity to bill insurers and patients for business otherwise provided by the manager, and
• profits based on volume or value of referrals.

I believe it is extremely important to consider all these variables when doing the due diligence for a joint venture between providers in a position to refer to one another. While there has been little enforcement activity in this area, I believe it is because the enforcement authorities have been focusing on drug companies and other big fish in the pond such as DME power wheel chair providers. However, there is a limit to that activity, and with joint ventures between smaller providers becoming more prevalent, enforcement activity in this arena may substantially increase.

Next month, I will focus on arrangements between providers that have resulted in convictions, settlements, or civil monetary penalties. This will provide the opportunity to review actual enforcement activity and to discuss what the focal point of that activity has been.

¹ This Special Fraud Alert is available on the OIG's website at: http://oig.hhs.gov/fraud/docs/alertsandbulletins/121994.html
² 54 FR 3088.
³ 56 FR 35952.
⁴ 59 FR 65372.
⁵ 56 FR 35952.
⁶ 64 FR 63518.
⁷ This Special Fraud Alert is available on the OIG's website at: http://oig.hhs.gov/fraud/docs/alertsandbulletins/office%20space.htm
Copyright 2006 William Mack Copeland. You can reprint any part of this newsletter by providing the following acknowledgement: "Reprinted with permission. William Mack Copeland, www.wmcopeland.com."