Providers Beware of Suspect Joint Ventures

As the Healthcare Reform initiatives drive providers to think outside the box and evaluate new sources of revenue or integration models, the Office of Inspector General (“OIG”) last week shut down one potential proposal that many providers may have considered. Specifically, the OIG found in an Advisory Opinion that a management company assisting a provider in establishing a new service line could potentially violate the Anti-Kickback Statute and that the government could enforce penalties for such violation. The Anti-Kickback Statute generally prohibits anyone from knowingly or willfully providing any form of remuneration to another individual to induce the purchasing, ordering or referral of services that are billed to state and federal healthcare programs. Interestingly enough, in this proposal, the parties attempted to exclude state and federal beneficiaries to avoid any such violation, but the OIG took a broad approach when examining the proposed arrangement.

The facts and circumstances detailed in the Advisory Opinion involved a laboratory company that would establish a new wholly owned subsidiary company to contract with physician practices. The new company would provide the facility space and laboratory management services, including if desired, the lease of personnel, equipment and licenses to the laboratory company’s business proprietary practices. The intent was for the new company to serve as a manager for a physician practice to establish a laboratory for the physician to use for his or her patients. The physicians that contracted with the new laboratory company were required to agree not to perform any laboratory services for Medicare and Medicaid beneficiaries in the new laboratory and instead to refer these patients out of the physician practice. It appears that by excluding the Medicare and Medicaid patients, the providers and the laboratory management company were attempting to avoid any potential violations of the Patient Self-Referral Statute, commonly known as Stark II (“Stark”) and to avoid billing any state or federal healthcare programs; thus, avoiding the Anti-Kickback Statute prohibitions.

However, the OIG found that the proposed arrangement could be a suspect venture by carving out Medicare and Medicaid patients from the arrangement. The OIG implied that the physicians could be induced to refer Medicare and Medicaid patients to the parent laboratory company because of their affiliation with the management company, even though they would not be providing any services to Medicare and Medicaid patients through the laboratory managed by the management company. The OIG also found that the physicians had little to no business risk in the arrangement as the management company could be providing turn-key services. Therefore, the OIG opined that the parent laboratory would offer the physician groups remuneration in the form of a new lucrative opportunity to expand into a new service line with little or no business risk. Based upon this reasoning, the OIG found that the arrangement could violate the Anti-Kickback Statute. By taking a broader view, the OIG inferred that to the extent providers engage any management companies, or evaluate new service lines, that the providers should not only consider Stark and Anti-Kickback, but they should also consider what the OIG considers suspect contractual joint ventures.

In 2003, the OIG published a Special Advisory Bulletin outlining what it considers criteria of a suspect joint venture that may violate state and federal laws. As part of the guidance, the OIG provided an illustrative list of the “suspect criteria” identified as follows:

1. The provider is engaging in a new line of business that can be provided to his or her existing patients;
2. The new service will primarily serve existing patients and does not expand into a new market of patients;
3. There is little to no bona-fide risk of losing the investment through the arrangement and the provider is merely supplying referrals for patients;
4. The proposed partner or manager would normally compete with the provider to provide this service and could bill for the service on its own as a provider, if the parties did not enter into the arrangement;
5. The partner or management company provides all of the needed services in a turn-key fashion; thus, requiring little to no involvement of provider;
6. The profitability of the new arrangement is related to the referrals generated by the provider; and
7. The arrangement is exclusive so the provider must partner with this one entity or management company only.

Therefore, as providers evaluate potential strategic options to increase revenues or expand service lines, any and all arrangements should consider not only the Stark and Anti-Kickback Statutes, but also the criteria the OIG considers to be “suspect”. While healthcare reform and the federal regulations are cutting reimbursement and pushing providers to evaluate new methods of delivering healthcare services, the government enforcement activities are actively monitoring arrangements. The OIG is taking a broad and skeptical view of arrangements that it believes either contain suspect criteria or on a broader spectrum may directly or indirectly involve an inducement to refer beneficiaries to state and federal healthcare programs. Providers should be aware of the OIG’s focus and carefully consider all of the government’s guidance to avoid additional scrutiny.

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