OIG Takes an Unfavorable View of Proposed Pathology Laboratory/Physician Owned LLC Management Services Contract
In the Office of Inspector General (“OIG”) Advisory Opinion 11-15, dated October 11, 2011, the OIG analyzes an arrangement in which Requestor is a Delaware Limited Liability Company owned and managed by a physician (the “Owner/Manager”) which would enter into a management contract with an existing or to be formed Medicare-certified clinical anatomic pathology laboratory (the “Path Lab”). The OIG opined that the proposed arrangement could lead to prohibited remuneration under the anti-kickback statute.
The proposed arrangement would work as follows: The Requestor and the Path Lab would enter into a management contract, which would be for a term of at least 3 years. The Requestor would furnish the Path Lab the complete array of clinical laboratory pathology services for a fixed maximum number of hours each year, as well as utilities, furniture, fixtures, and the exclusive use of laboratory space and equipment. The Requestor would also provide the Path Lab marketing and billing services, and essential non-physician staff. In turn, the Path Lab would pay the Requestor a usage fee that would be calculated based on a percentage of the Path Lab’s income, fixed in advance for a term of 12 months, which generally would correspond to the volume of the Path Lab’s use of the Requestor’s services, personnel, and equipment. The Path Lab’s income could include payments from Federal health care programs for laboratory services provided to program beneficiaries.
The Owner/Manager would offer the opportunity to invest in the Requestor to additional physicians. The Requestor certified that the value of the investment interests in the Requestor that would be held by physician investors in a position to generate business for the Requestor through referrals of laboratory specimens to the Path Lab would exceed 40 percent. The Requestor further anticipates that substantially more than 40 percent of the Requestor’s gross revenue related to the furnishing of health care items and services would derive from business generated by its physician investors through referrals of laboratory specimens to the Path Lab. The Requestor certified that each of the New Physician Investors would have the option of referring specimens to the Path Lab but that there would be no implicit or explicit agreement or condition that a New Physician Investor make referrals to, or use the services of, the Requestor or the Path Lab.
The OIG found that the proposed arrangement could violate the anti-kickback statute, which makes it a criminal offense to knowingly and willfully to offer, pay, solicit, or receive any remuneration to induce or reward referrals of items or services reimbursed by a Federal health care program.
The OIG began by noting the similarities between the proposed arrangement and other joint venture arrangements which have been the subject of OIG guidance. In the past, the OIG has warned about arrangements in which a health care provider expands into clinical diagnostic laboratory services by contracting with an existing provider of laboratory services to operate a newly formed laboratory subsidiary on essentially a turn-key basis. The OIG viewed the proposed arrangement as the converse of the above-described arrangement. Instead of contracting with a provider to obtain laboratory services for which a physician-owned entity would bill Federal health care programs, the Requestor would contract to provide such services to an entity that would, in turn, bill Federal health care programs. Under both types of arrangements, however, the income of the physician-owned entity would vary with the volume or value of referrals from physician investors, which would make the anti-kickback statute relevant.
The Proposed Arrangement was therefore evaluated for compliance with any applicable safe harbor of the anti-kickback statute and for the potential for abuse. The OIG found that the following harbors were potentially applicable: the small entity investment safe harbor and the safe harbors for space rental, equipment rental, and for personal services and management contracts.
The OIG found that the small entity investment safe harbor could not be satisfied because more than 40% of the Requestor would be held by investors who would be in a position to generate business for the Requestor through referrals and more than 40% of the Requestor’s gross revenue relating to furnishing health care items and services would come from laboratory business generated by its physician investors. The OIG further found that the safe harbors for space rental, equipment rental and for personal services and management contracts could not be satisfied because the usage fees paid to the Requestor would not be set in advance, but would rather be calculated based on a percentage of the Path Lab’s income.
Finding that no safe harbor would apply to the proposed arrangement, the OIG then analyzed whether the proposed arrangement would pose more than a minimal risk of fraud and abuse. For the combination of the following reasons, the OIG concluded that the Proposed Arrangement would pose more than a minimal risk of fraud and abuse:
First, the fee structure of the proposed arrangement would effectively link the Requestor’s investors’ profit distributions to the laboratory business they send the Path Lab, posing considerable risks of overutilization of laboratory services, distorted medical decision-making, and increased costs to Federal health care programs;
Second, the more than 40 percent of the Requestor’s investment interests would be held by physician investors in a position to generate business for the Path Lab in the form of referrals of laboratory specimens and substantially more than 40 percent of Requestor’s gross revenue would come from business generated from the investors, which further increases the risks of overutilization, distorted medical decision-making, and increased program costs; and Third, the Proposed Arrangement appears to have no business purpose other than to permit the physician investors to profit from the business they generate for the Path Lab in the form of their laboratory specimen referrals.
For more information, please contact Adrienne Dresevic, Esq. or Carey F. Kalmowitz, Esq. at (248) 996-8510 or (212) 734-0128 or visit the fraud and abuse specialty page on the HLP website.