On April 23, 2003, the Office of Inspector General (OIG) issued a Special Advisory Bulletin warning health care providers that certain ancillary services arrangements in the health care industry may subject the parties to criminal and civil penalties under the federal anti-kickback statute, despite efforts to qualify for safe harbor protection.
The Bulletin characterizes as "suspect" contractual arrangements that effectively create a joint venture shell as a means of disguising illegal kickbacks. Such joint ventures are undertaken between health care entities in a position to refer existing patients for ancillary services and suppliers of those ancillary services. This includes, but is not limited to, durable medical equipment (DME), physical therapy, diagnostic imaging, clinical laboratory and radiation therapy. The Bulletin may also be interpreted to apply to certain health care provider arrangements with management companies.
The OIG questions contractual arrangements through which a health care entity in one line of business (the owner) purports to add a new ancillary health care service to its operations, but does so only by contracting with an existing supplier of that ancillary service (the supplier/manager) in a "contractual joint venture," through which the supplier/manager effectively undertakes the entire operation of the new line of business for the owner. The supplier/manager receives payment through its service contracts, and the owner retains the residual profits.
The OIG lists characteristics that, taken together or separately, may indicate a prohibited arrangement:
- New Line of Business. The owner seeks to expand into a line of ancillary services that can be provided to its existing patient base.
- Captive Referral Base. The new line of business predominantly or exclusively services the owner’s existing patient base; the owner does not intend to expand the business to serve other patients.
- Limited Business Risk for Owner. The owner’s primary contribution to the new business is referrals. It assumes little or no bona fide business risk.
- Supplier/Manager is Potential Competitor. The supplier/manager would otherwise have been a competitor for referrals for the services offered by the new service line.
- Scope of Supplier/Manager Services. The supplier/manager provides what appears to be a "turnkey" operation, including day-to-day management, billing, equipment, personnel, office space, equipment, supplies and inventory.
- Remuneration Tied to Volume or Value. The practical effect of the arrangement is to provide the owner the ability to collect revenue for services provided by the supplier/manager. The amount of remuneration to the owner typically varies with the value or volume of business generated for the venture by the owner.
- Exclusivity. The contract may include a non-compete clause to preclude the owner from furnishing the new services to any patients other than the owner’s.
Examples Provided by the OIG
The OIG provides three specific examples of the offending arrangements:
- A hospital creates a subsidiary to furnish durable medical equipment, but contracts with an existing DME supplier that could otherwise have furnished and billed directly for the equipment, to operate the subsidiary.
- A DME supplier enters into the mail order pharmacy business to furnish drugs to the DME supplier’s nebulizer patients, but does so by contracting out all functions to an existing mail order pharmacy.
- A nephrology group creates an entity to furnish home dialysis supplies to its patients, but contracts out all functions to an existing home dialysis supplier.
In the Bulletin, the OIG revisits a subject covered by its 1989 Special Fraud Alert on Joint Ventures. While the 1989 Special Fraud Alert noted in passing that a joint venture might be formed through a contractual arrangement, the Special Fraud Alert focused on newly formed equity joint ventures and the OIG’s concern regarding "shell" entities. The OIG Bulletin now focuses on the so-called "contractual joint venture arrangements," which the OIG believes to have been proliferating and to be suspect under the anti-kickback statute.
Unfortunately, in the Bulletin the OIG describes the indicia of suspect joint ventures as "illustrative, not exhaustive," and states that the Bulletin is not intended to describe the entire universe of suspect contractual joint ventures. Moreover, the OIG advises that even arrangements involving the delegation of less than "substantially all" services, or the delegation to a party not in a position to bill in its own name for the services, may "raise concerns" "depending on the circumstances." The Bulletin is broadly drafted and could be read to question the propriety of many long-established types of arrangements in the health care industry, including "under arrangements" agreements by providers with outside suppliers, which are contemplated by the Medicare statute itself. Certain arrangements may need to be revised and others may need to be discontinued in light of the interpretations and positions expressed in the Bulletin.
While owners and suppliers/managers should be aware of all of the suspect factors listed above, "lack of business risk" is likely to be the most critical. Unfortunately, the Bulletin does not provide specific guidance regarding the level of business risk or operational involvement the owner should have in order to avoid anti-kickback scrutiny or the level of anti-kickback concern associated with ventures that have some, but not all, of the above-referenced characteristics. Participants in management and supply contracts may wish to distinguish their arrangements from those the OIG believes may adversely affect government health care programs by documenting that they do not "distort medical decision making, cause overutilization, increase costs, [or] result in unfair competition."
While the Bulletin does not imply that all types of ancillary arrangements are necessarily per se violations of the anti-kickback law, it does put the industry on notice that the OIG is now focusing to a greater extent on these types of relationships as suspect arrangements. Accordingly, participants in existing or contemplated contractual management and service arrangements are well advised to review these ventures in light of this new OIG guidance.