The quest for increased profits from medical practice is not a new phenomenon, and it certainly predates the oft-cited decreases in reimbursement brought about by managed care. Indeed, some say that the fee-for-service paradigm of US health care is fraught with the potentially conflicting interests of patient care and enhanced income for providing more services. These conflicts have reared their ugly heads in attempts by physicians to profit even from services that they have neither traditionally provided nor been trained to provide, not to mention profiting from services that others provide. Services perceived as "ancillary" have been prime targets. Regulators and legislators have recognized the potential and the reality of such situations, and have promulgated means to curtail them, starting with antikickback laws; followed by limitations on physician sales of the medications they prescribe; then measures against similar attempts to internalize laboratory services; prohibition of investment in outside imaging facilities; and finally imposition of a moratorium on physician investment in specialty hospitals. All represent federal efforts to curtail conflicts of interest on the parts of physicians with regard to ancillary services. Yet, the relentless pursuit of self-referral as a risk-free means of enhancing physician income continues to generate novel ways to accomplish the goal. The article by attorneys Travis and Hoffman describes yet another such approach and regulatory response. A discussion of the effects of self-referral is beyond the scope of this introduction. There are numerous excellent discussions of the self-referral issue in the literature. Suffice it to say that self-referral in imaging is now universally accepted as leading to excessive increases in utilization of services at a time when the ability of private and public payors to sustain further meteoric growth is unlikely. Explosive increases in imaging costs have paralleled the growth in the involvement of nonradiologists, although radiologists have experienced stagnant growth in some imaging modalities. This situation has led to efforts by the American College of Radiology to constructively deal with the issue. Private payors (eg, BCBS of Western PA) and state governments (eg, Maryland) have instituted measures of varying complexity to deal with the issue of self-referral. The recent recommendations by the Medicare Payment Advisory Commission address numerous aspects of self-referral, including dealing with one aspect of leasing loopholes. The OIG advisory analyzed here by the attorneys deals with another. The obvious conclusion from actions of these governmental agencies is that the days of such circumventions of the intent of existing laws are numbered.

—Alan D. Kaye, MD Advanced Radiology Consultants Bridgeport, Conn

You are a partner in a successful radiology practice. One day, you learn that the large cardiology group in town—which happens to be one of your practice's primary referral sources—intends to expand into the imaging business. You and your partners quickly meet to discuss the matter. Your choices seem limited. If you do nothing, your practice will most certainly lose a large referral base, and have to undertake an uncertain struggle to replace what is guaranteed to be a substantial loss of revenue. So you consider your options.

You are well aware of the complex rules and regulations that govern health care practitioner referrals, particularly when the referrals relate to Medicare, Medicaid, or other federally funded health care patients. Yet, you know that many radiology groups have entered into turnkey-type arrangements, whereby the radiology group leases its space, equipment, and staff, as well as its technical and professional services, to existing or potential referral sources. The group purchasing the turnkey services bills in its name and retains the profits from the services. The radiologists receive payments (presumably at fair market value) for their space, equipment, and services.

It sounds like a promising option for your practice, but one of your partners poses the question: Is it legal?

The answer : In many cases, it will not be.

According to a recent far-reaching opinion of the Office of Inspector General (OIG) of the United States Department of Health and Human Services, such arrangements may be considered to be "suspect contractual joint ventures" that violate the federal antikickback statute (the "AKS")—even if each part of the transaction fits squarely within the applicable "safe harbors" under the AKS. This is so because, in certain situations, the OIG views the opportunity afforded to the group purchasing the turnkey services—like the cardiology group in our example—to bill and retain profits as illicit remuneration under the AKS that cannot fit within any safe harbor under the law.

THE FEDERAL ANTIKICKBACK STATUTE

As most health care practitioners know by now, the federal antikickback statute is a very broad law. The AKS makes it a crime to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce or reward referrals that are paid for (in whole or in part) by a federal health care program, such as Medicare or Medicaid. When the AKS is violated, both sides of an illegal "kickback" transaction are liable.

Violation of the AKS is a felony criminal offense, punishable by up to 5 years in jail and/or a maximum fine of $25,000. ¹ A conviction under the AKS will lead to automatic exclusion from participation in all federal health care programs—including Medicare and Medicaid. ² Moreover, the OIG has the ability to administratively pursue exclusion and/or civil monetary penalties when parties engage in prohibited kickback transactions. ³

Because of the enormous breadth of the AKS, the OIG has issued a variety of "safe harbor" regulations. ⁴ If each specific condition of all applicable "safe harbors" relevant to a transaction is met, the parties involved in the deal will be safe from prosecution and sanctions for violating the AKS. If each specific condition of all applicable safe harbors is not met, the deal is not automatically deemed "illegal," but instead will be reviewed on a case-by-case basis. In the view of some courts—and, perhaps more important, of the OIG—if one purpose of a transaction is to obtain money for a referral of services or to induce referrals, the AKS will have been violated, even if there are other, entirely legitimate business reasons for the transaction. ⁵

THE OIG'S CONCERNS

The OIG's recent Advisory Opinion (AO) 04-17—which concluded that a proposed arrangement whereby a clinical laboratory would set up laboratories in certain physician group practices would violate the AKS—has generated much discussion in the health care community. ⁶ It is, however, really nothing new. The OIG has long warned providers about certain joint venture-type arrangements involving those in a position to refer business that is paid for by federal health care programs—particularly when one party to the venture generates all or most of the business. Indeed, in 2003, those concerns became so acute that the OIG issued a Special Advisory Bulletin (SAB) dealing specifically with Contractual Joint Ventures. ⁷ The SAB specified a number of criteria, which, according to the OIG, are commonly found in suspect contractual joint ventures, including:

• Entering a New Line of Business. Typically, in suspect contractual ventures, one party (the "Provider") seeks to expand into a health care service that it can offer to its existing patients.
• Use of a Captive Referral Base. The newly created line of business serves mainly the Provider's existing patient base (or patients under its control or influence), and the Provider generally does not intend or attempt to expand the business to serve new customers.
• Little or No Bona Fide Business Risk. The Provider's main contribution to the venture is referrals. The Provider typically makes little or no financial or other investment in the business, instead delegating the entire operation to the other party (the Manager/Supplier). Through the arrangement, the Provider is able to retain the profits generated from its captive referral base.
• Status of the Manager/Supplier. (M/S) The M/S is an existing or would-be competitor of the Provider's new line of business. The M/S typically provides the identical services in its own right and bills insurers and patients for them in its own name.
• Services Provided by the Manager/Supplier. The M/S generally provides all, or many, of the following essential services: i) day-to-day management; ii) billing services; iii) equipment; iv) personnel and related services; v) office space; vi) training; and vii) health care items, supplies, and services.
• Remuneration. Viewed as a whole, the effect of the venture is to allow the Provider an opportunity to bill for business otherwise provided by the M/S. ⁸

ADVISORY OPINION 04-17

AO 04-17 is a real-world example of the OIG's concerns about joint ventures with referral sources.

In AO 04-17, the party requesting the AO (the Requestor) was a clinical laboratory that proposed to set up pathology laboratory services to physician group practices specializing in urology, gastroenterology, or dermatology (the Physician Groups)—that is, prime referral sources. While the Requestor was not itself a provider or supplier of health care services, nor did it participate in any federal health care programs, it was part of a group of affiliated entities that included a licensed, Medicare-certified anatomic pathology laboratory and a laboratory staffing company, each of which was wholly owned and controlled by a single parent corporation. In fact, the Physician Groups with whom the Requestor was proposing to do business were already referring some of their pathology work to the Requestor's affiliated laboratory. For purposes of its analysis, the OIG disregarded the corporate formalities and considered the Requestor and its affiliated entities as one and the same.

The Requestor sought to enter into a series of contracts with Physician Groups who wished to have their "own" pathology laboratories (MD Labs). True to the concerns outlined by the OIG in the SAB, the Requestor would provide all necessary management and administrative services; equipment leasing; premises subleasing; technical, professional, and supervisory pathology services; and, if asked, billing services for each Physician Group. The Physician Groups would bill patients and their insurance companies (including Medicare) for the pathology services furnished in the MD Laboratories. In turn, the Physician Groups would pay the Requestor various fees. ⁹

In the OIG's view, this arrangement fit squarely into the suspect indicia it had outlined in the SAB. The Physician Groups were attempting to expand into a new line of business (pathology services) in order to service their existing patient populations by contracting with an existing provider/potential competitor. Yet, in the OIG's view, the Physician Groups would do virtually nothing—except profit from the arrangement. Not only would the Requestor manage the new line of business, but it would supply everything necessary for its operation: space, personnel, professional services, etc. The only things the Physician Groups would be required to do were to maintain their qualifications, credentials, and group status; provide access to certain records; and provide billing information. That is, the Physician Groups would be responsible for little more than ensuring that the billing could be done in their names. Indeed, the OIG noted that the Physician Groups would assume "no or very little real business risk" since, under the proposed arrangements, they would be committing virtually nothing in the way of financial, capital, or human resources to the MD Laboratories.

Put simply, in the OIG's view, the Physician Groups would contract out the entire operation of "their" new pathology business—to an existing competitor and referral recipient—in return for the opportunity to bill and ability to retain the profits from their pathology referrals that they had previously been unable to retain.

The OIG also considered it troublesome that: (i) the Requestor (through its affiliated laboratory) was a provider in its own right and could have simply billed insurers and patients in its own name and retained all of the reimbursement, instead of going into business with a potential competitor/referral source (the Physician Groups); (ii) the payment to the Requestor would vary with the number of referrals from the Physician Groups—as would the amount of revenues the Physician Groups would be enabled to keep; and (iii) the Physician Groups and the Requestor would "share in the economic benefit" of the MD Laboratories.

Significantly, even the fact that each individual component of the transaction could possibly fit within the applicable AKS safe harbors—for space and equipment rental, and for personal services and management contracts—was not sufficient to sway the OIG. While those safe harbors could conceivably protect the specific amounts paid by the Physician Groups for the space and equipment rented and the services rendered, there would be no protection, in the OIG's view, for the Physician Groups' ability to retain a profit from the pathology services.

In sum, the OIG viewed the proposed arrangement as nothing more than a way for the Requestor, the pathology laboratory, to indirectly pay its referral sources, the Physician Groups, a share of the profits from the Physician Groups' pathology referrals, something that clearly could not be done directly under the AKS.

CONCLUSION

The OIG's concern about suspect contractual joint ventures is nothing new. AO 04-17 simply provided the OIG with the opportunity to apply its concerns to a real world setting. The message is clear: simply "safe harboring" each distinct part of a turnkey arrangement may not be enough. If the government looks behind the transaction, and views the arrangement in its entirety as little more than a way to indirectly share in federal health care program profits in a manner that could not be done directly under the AKS—that is, as a "sham"—it may very well take action. Providers, including our hypothetical radiology group, would be wise to be guided accordingly. ¹⁰

AO 04-17 has clear application to the radiology world. It calls into serious question "table-time" agreements, turnkey leases, and other common arrangements whereby radiology services are made available to physician groups so they can bill their patients for ancillary services historically referred out to laboratories and imaging facilities. As multi-specialty groups, neurologists, urologists, cardiologists, and others seek to expand into the imaging business, any arrangement between radiologists and such groups must be carefully analyzed to ensure legal compliance. Otherwise, the OIG seems ready to step in and prosecute.

Norton L. Travis, JD, is senior partner and chairman in the Great Neck, NY office of Garfunkel, Wild & Travis, PC, a specialty health care law firm with offices in NY and NJ.

Peter M. Hoffmann, JD, is partner in the Great Neck, NY office of Garfunkel, Wild & Travis, PC, a specialty health care law firm with offices in NY and NJ.

References:

1. See 42 USC § 1320a-7b(b).
2. See, eg, 42 USC § 1320a-7(a).
3. See 42 USC § § 1320a-7(b)(7); 1320a-7a(a)(7).
4. See 42 CFR § 1001.952.
5. See, eg, OIG Advisory Opinion 04-17 (issued December 10, 2004; posted on the OIG's web site on December 17, 2004) at page 4; United States v Kats, 871 F2d 105, 108 (9th Cir 1989).
6. Advisory Opinion 04-17 is available on the OIG's web site at www.oig.hhs.gov/fraud/docs/advisoryopinions/2004/ao0417.pdf.
7. The OIG's Special Advisory Bulletin on Contractual Joint Ventures is available on the OIG's web site at www.oig.hhs.gov/fraud/docs/alertsandbulletins/042303SABJointVentures.pdf. The OIG previously issued a Special Fraud Alert on Joint Venture Arrangements in 1989. That Special Alert is also available on the OIG's web site at www.oig.hhs.gov/fraud/docs/alertsandbulletins/121994.html.
8. See SAB on Contractual Joint Ventures (April 2003) at pages 5-6. Other indicia of suspect contractual joint ventures, including provisions relating to exclusivity of the arrangement, are also discussed in the SAB. Indeed, the OIG notes that there is no exhaustive list of factors that is determinative as to whether an arrangement will be viewed as suspect.
9. The fees included: (a) a flat monthly fee, which was set by taking into account historical utilization data, and which would include the fee for pathologist services; (b) a per-specimen fee; and (c) if applicable, a fee for billing and collection services equal to 5 % of the total net MD Lab revenue.
10. While this article focuses on the federal antikickback statute, providers must of course be cognizant of the myriad other rules and regulations governing referral relationships, including the federal "Stark" law and pertinent state laws. See 42 USC §1395nn; 42 CFR Part 411 (Subpart J).