98-11: OIG Explores Group Purchasing Organization (GPO) Safe Harbor

OIG Advisory Opinion 98-11, issued September 14, 1998, examined whether a proposed purchasing arrangement involving a trade association, its nursing home members, and an electrical utility consultant constituted prohibited remuneration under the antikickback statute, 42 U.S.C. § 1320a-7b(b). The OIG concluded that the arrangement to obtain the best possible price for electricity services was protected in part by the group purchasing organization safe harbor and otherwise not subject to sanctions based on the specific facts of the arrangement.

Under the proposed arrangement, a nursing home trade association would enter into a contract with an electric utility consultant to obtain electricity brokerage and consulting services for its nursing home members in a state with a deregulated electric utility industry. The arrangement would involve two fees: (i) the consultant would receive 17 percent of the cost savings it achieved for each nursing home and (ii) the trade association would receive 11 percent of the fees received by the consultant from each nursing home. None of the nursing homes would be required to use the consultant's services. If a nursing home decided to use the consultant's services, it would enter into a separate three year contract with the consultant. If no costs savings were realized, the nursing home could cancel the contract after one year.

The antikickback statute "prohibits payments made purposefully to induce referrals of business payable by a federal health care program." Safe harbors have been established to protect certain arrangements that would otherwise constitute technical violations of the antikickback statute. To qualify for safe harbor protection, an arrangements must satisfy all of the conditions of the safe harbor.

In the context of the pending arrangement, safe harbor protection has been afforded to certain payments by vendors of goods and services to a group purchasing organization (GPO). 42 C.F.R. § 1001.952(j). The regulations define a GPO as an entity authorized to act as a purchasing agent for a group of individuals or entities (i) who furnish services for which payment may be made in whole or in part by a federal health care program and (ii) who are neither wholly owned by the GPO nor a subsidiary of a parent corporation that wholly owns the GPO. The GPO safe harbor specifically requires:

There must be a written agreement between the GPO and each individual or entity for whom items or services are furnished.
The agreement must either (a) state that the fee paid to the GPO will be 3 percent or less of the purchase price of the goods or services provided or (b) state the actual amount or maximum amount of the fee whether calculated as a fixed sum or a fixed percentage of the value of the purchases.
The GPO must disclose the amount received from each vendor to health care providers at least annually and to the government upon request.

In evaluating the pending arrangement, the OIG evaluated the two fee arrangements separately. First, the OIG considered the fee paid by the utility consultant to the trade association. Based on the facts of the arrangement, the OIG concluded that it fit squarely within the GPO safe harbor. Second, the OIG considered the fee paid by the individual nursing homes to the utility consultant. As an initial matter, the OIG concluded that the fee does not qualify for safe harbor protection because the GPO safe harbor does not protect any remuneration between the vendor and the members of the GPO. Nevertheless, the OIG concluded that the pending arrangement presents minimal risk of fraud or abuse, because neither party is likely to be a referral source and the consultant's fee is based solely on electricity cost savings which are reflected on the nursing home's cost report and thereby passed on to the federal health care programs.

For providers, the real lesson of Advisory Opinion 98-11 is that the antikickback statute has a tremendously broad reach. Here, the OIG indicated that a fairly innocuous effort by a group of nursing homes to obtain cheaper electrical power in a state with a deregulated electricity market must be analyzed under the antikickback statute. While no violation was found in this particular arrangement, the advisory opinion teaches providers to look for potential kickbacks whenever items or services will end up on a cost report submitted to a federal health care program.

Advisory Opinion 98-11 sets forth the same general limitations as those included in the OIG's earlier advisory opinions, as discussed below.