The OIG issued a Special Advisory Bulletin on April 23, 2003 (the "Bulletin") aimed at what the OIG termed "suspect contractual joint ventures." See 68 Fed. Reg. 23,148 (Apr. 30, 2003). The OIG defines these ventures as those which exhibit certain characteristics not uncommon in today's health care environment: a referral stream controlled by the provider initiating the joint venture; the use of a wholly owned subsidiary of the provider to bill and collect for the supplies or services provided to these patients; and an outsourcing management arrangement designed to shift designated business responsibilities to the manager. In a nutshell, the OIG takes the view that the contractual arrangement with the manager (usually an existing health care entity) implicates, and may well violate, the federal antikickback statute. The OIG's position is difficult to justify logically and legally, and leaves numerous unanswered questions for providers participating in contractual joint ventures as well as for those conducting business through wholly owned subsidiaries.

The current Bulletin purports to be the matching "bookend" to a Special Fraud Alert first issued in 1989 and republished in 1994 aimed primarily at joint ventures involving the creation of a new legal entity (the "Alert"). See 59 Fed. Reg. 65,372, 65,373 (Dec. 19, 1994). There, the OIG was concerned that participation in the venture and resultant profit distributions were, in reality, disguised payments to physicians for the referral of their patients to the entity, which would then bill federal health care programs for services provided. That Alert listed several indicia of what were considered suspect joint ventures, including the choice of physician investors, the formula for awarding equity interests, the tracking and encouragement of referrals, the required divesture of equity interests by non-referring physicians, the amount of the investment and related provisions for investor buy in, and disproportionately large returns on investment.

The Bulletin targets a second type of joint venture, described therein as a "contractual joint venture," i.e., one that doesn't create a separate legal entity. The OIG describes this type of suspect venture as one involving a provider's attempt to provide a new service to the provider's existing (and assumedly captive) patient population. Rather than provide the service through its existing legal entity, the provider creates a wholly owned subsidiary to provide and bill for the service (which, unlike the joint ventures described in the Alert, does not involve the sale of equity interests to other parties). Further, the OIG posits that the provider will outsource virtually all operational functions, and thus, will take very little risk for the successful operation of the new business. The OIG characterizes this arrangement as the use of a "shell" entity and "subcontracting agreements." The agency further assumes that the manager may well be a competitor of the provider, and absent the joint venture and assumed covenants not to compete, would ordinarily be in a position to compete for the provider's patients. After paying the manager to run the business, the provider receives profit distributions from its wholly owned subsidiary. The OIG contends that, in reality, the provider is receiving prohibited payments for the referral of its own patients.

The Bulletin provides examples of how such an arrangement might work. In one example, the OIG describes a hospital's creation of a wholly owned subsidiary to provide DME. That subsidiary then contracts with an existing DME supplier to operate the subsidiary and supply it. The subsidiary bills and collects for the products supplied to patients. In a second example, the OIG describes a nephrology group establishing a wholly owned subsidiary to supply home dialysis supplies to the physician group's patients. As in the first example, the subsidiary outsources the operation of the supply company to an existing supplier. In the third example, an existing DME company creates its own mail order pharmacy to sell nebulizers, and hires an existing mail order pharmacy to provide necessary personnel, space, equipment, and inventory for the new venture. Significantly, the Bulletin suggests that the analysis and concerns are not limited to these three fact patterns.

The Bulletin fails to explain key assumptions and conclusions. For example, the Bulletin assumes that competing entities will not compete for the provider's patients and will willingly accept a management fee set at a value less than what could be earned had the competitor itself provided and billed for the item or service. Obviously, this will not always be the case; indeed, the OIG is presented with a more serious antikickback concern if the manager were to be "overpaid" in an effort to attract referrals of the manager's patients. Ironically, the Bulletin is concerned with the converse - that the payments to the manager might be discounted (and in the OIG's view perhaps not eligible for the discount safe harbor), thereby increasing the profit of the subsidiary and the profit distribution to the parent entity.

At the heart of the Bulletin is the OIG's concern that any profit distribution paid by the subsidiary to the provider parent constitutes a payment for the referral of the parent's patients to its wholly owned subsidiary, and thus constitutes a violation of the antikickback statute. This is an aggressive position for the OIG, which had previously opined that payments within divisions of a single legal entity were not to be considered payments for referrals. See 56 Fed. Reg. 35,952, 35,983 (Jul. 29, 1991); 64 Fed. Reg. 63,518, 63,520 (Nov. 19, 1999). So too, in the academic medical center context, the OIG had previously considered that payments among individual, but mission-related components of an academic medical center would not be considered problematic. See OIG Advisory Opinion 00-6 (Sept. 29, 2000).

The Bulletin's position is problematic for a number of reasons. First, it ignores accounting reality and the likelihood that in the examples given, the financial statements of the parent provider and the subsidiary would be consolidated, effectively integrating the two entities financially. So too, under other relevant legal theories, a parent and its wholly owned subsidiary can be considered a single economic entity. Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984). The OIG may well have difficulty in enforcement actions convincing a court that the profit distribution to the parent is actually a payment for referrals within the reach of the antikickback statute.

Troubling also are the unanswered questions raised by the Bulletin. If the dividend payment to the parent is problematic in the joint venture context described by the OIG, is it equally problematic in the case where the subsidiary is created and no competing manager is involved? The latter is a very common structure in today's multi-corporate health systems and integrated delivery systems. It is unlikely that the OIG intended to condemn these arrangements, yet the agency has failed to explain why one situation is of concern, but the more benign, garden variety parent/subsidiary relationship is not. Providers are left to resolve this lingering uncertainty for themselves.

Likewise uncertain - even assuming for now the correctness of the OIG's position - is how much outsourcing will place providers using subsidiaries in the same category as the above-described suspect joint ventures. Put another way, how many of the operational responsibilities must be retained by the subsidiary to insulate the venture?

Providers and managers will be forced to blindly guess what functions to maintain or outsource in the hope that they can steer clear of the vague reach of the Bulletin, instead of structuring the venture on the basis of sound economics and on considerations of which entity can most efficiently perform the task at issue. The Bulletin's conclusion that "[a]rrangements involving the delegation of fewer than substantially all services ...may also raise concerns under the anti-kickback statute, depending on the circumstances" raises more questions than it answers.

Ultimately the Bulletin fails to advise providers why these contractual joint ventures are suspect. A clue to the OIG's rationale might be found in earlier the OIG pronouncements analyzing payments among affiliated corporations, including parent-subsidiary relationships. Although the OIG was initially tempted to create a safe harbor for these payments, 56 Fed. Reg. 35,952, 35,983 (Jul. 29, 1991), it ultimately refused to do so, noting that:

[A]rrangements involving wholly-owned subsidiaries may present opportunities for the payment of improper financial incentives that result in over-utilization of services and increased program costs and that may adversely affect quality of care and patient freedom of choice....

64 Fed. Reg. 63,518, 63,520 (Nov. 19, 1999). The OIG went on to note that this was of particular concern in the context of a hospital's referrals to its wholly owned home health agency. Id. We suggest that if these concerns are in fact the target of the Bulletin, it would have been better to address such concerns directly through enhanced operational requirements, as opposed to a misplaced reliance on the antikickback statute, an approach which leaves providers guessing as to the legality of their existing or future ventures. For example, section 1861(ee) of the Social Security Act, as amended, and various implementing regulations and Medicare program instructions effectively preclude Medicare-participating hospitals from steering discharged patients to their wholly owned home care subsidiaries. In any case, in light of the Bulletin, we suggest that a review of any contractual arrangements similar to those described in the Bulletin would be a sound and prudent component of a provider's ongoing compliance program.