Application of the federal antikickback statute to contract arrangements between hospitals and hospital-based physicians has been the subject of debate for more than a decade. In 1991, the OIG issued a Management Advisory Report (MAR) alerting HCFA (now CMS) to contract arrangements that potentially violate the antikickback statute. According to the OIG, these arrangements appeared to require hospital-based physicians to pay more than fair market value for services provided by hospitals. The OIG referred specifically to arrangements for physicians to pay a percentage of revenues to the hospital or a related entity, and to arrangements under which "[a] hospital provides no, or token, reimbursement to pathologists for Part A services in return for the opportunity to perform and bill for Part B services at that hospital." Since that time, the debate generated by the MAR has been principally between hospitals and hospital-based physicians negotiating contracts. Physicians have asserted frequently that compensation arrangements offered by hospitals were unlawful; hospitals expressed a different opinion. To our knowledge, the OIG has never brought an action against a hospital or hospital-based physician based on principles reflected in the MAR.

Draft Compliance Guidance Causes Alarm
In Draft Supplemental Compliance Program Guidance for Hospitals published by the OIG last June, the OIG stated that an arrangement between a hospital and hospital-based physicians might violate the antikickback statute if the hospital paid the physicians less than fair market value for their goods or services or required the physicians to pay more than fair market value for the hospital's services. 69 Fed. Reg. 32,012, 32,021-22 (June 8, 2004). The OIG acknowledged the existence of contract arrangements under which hospital-based physicians performed management, staffing, and other administrative functions, and, in some cases, limited clinical duties "at no cost to the hospitals." According to the OIG, such arrangements benefited both parties. The OIG indicated that the value from the arrangement may be unrelated to the hospital-based physicians' opportunity to furnish services to hospital patients.

The OIG then stated: "In an appropriate context, an arrangement that requires a hospital-based physician or physician group to perform reasonable administrative or clinical duties directly related to their hospital-based professional services at no charge to the hospital or its patients would not violate the anti-kickback statute." 69 Fed. Reg. at 32,022. This single sentence caused significant alarm, particularly to hospital-based physicians and their trade organizations. The College of American Pathologists (CAP) characterized this statement as "a step backward" — a basis for hospitals to refuse to appropriately pay pathologists for directing the hospital's clinical laboratory. CAP requested that the final document state that token or no payment for pathologist Part A and medical direction services in exchange for Part B referrals violated the antikickback statute.

Final Compliance Guidance Raises New Issues
By government standards, the final supplemental guidance was issued with near breath-taking speed — on January 31, 2005 — only six months after completion of the draft document's comment period. 70 Fed. Reg. 4858 (Jan. 31, 2005). In the final guidance, the OIG indicated that illegal contracts could include arrangements that required physicians to pay a hospital more than fair market value for the hospital's services, or where a hospital paid physicians less than fair market value for goods or services the physicians provided. Thus, the OIG confirmed that it had not reversed its long-standing position that a hospital might violate the antikickback statute by requiring hospital-based physicians to furnish services to the hospital without compensation for those services. However, the OIG then stated:

[A]rrangements that require physicians to provide Medicare Part A supervision and management services for token or no payment in exchange for the ability to provide physician-billable Medicare Part B services at the hospital potentially violate the anti-kickback statute and should be closely scrutinized.

70 Fed. Reg. at 4867. This statement was not the clear-cut prohibition against "token or no payment" for Part A services that had been sought by CAP. The OIG also introduced a framework for evaluating exclusive contract arrangements under the antikickback statute that permits benefits from the exclusive arrangement to be acknowledged as part of financial arrangements between hospitals and hospital-based physicians.

The OIG acknowledged that the exclusivity aspect of arrangements between hospitals and hospital-based physicians "affect the cash and non-cash value of the overall arrangement to the respective parties." According to the OIG, "depending on the circumstances," the exclusive contract could have substantial value to the hospital-based physicians and to the hospital, "that may well have nothing to do with the value or volume of business flowing between the hospital and the physicians." For example, "an exclusive arrangement may reduce the costs a physician or group would otherwise incur for business development and may eliminate administrative costs otherwise incurred by the hospital." The OIG stated that if the overall arrangement was consistent with fair market value in an arm's-length transaction, taking into account the value attributable to the exclusivity, then in an appropriate context, "an exclusive arrangement that requires a hospital-based physician or physician group to perform reasonable administrative or limited clinical duties directly related to the hospital-based professional services at no or a reduced charge would not violate the anti-kickback statute." According to the OIG, "depending on the circumstances," this might include "participation on hospital committees, tumor boards, or similar hospital entities; participation in on-call rotation; and performance of quality assurance and oversight activities."

Under the OIG's analysis, benefits to hospital-based physicians from exclusive arrangements might serve as a basis to require the physicians to provide otherwise uncompensated services. The OIG concluded that "whether the scope and volume of the required services in a particular arrangement reasonably reflect the value of the exclusivity will depend on the facts and circumstances of the arrangement." At the same time, the OIG cautioned that hospital-based physicians would not be required to furnish such services, stating that "nothing .should be construed as requiring hospital-based physicians to perform administrative or clinical services at no or a reduced charge." Additionally, the principle recognized by the OIG purports to be a two-way street. For example, hospital-based physicians may rely on administrative savings to the hospital from the exclusive arrangement to offset the value of cost reductions to the physicians that might otherwise support their provision of uncompensated services.

Conclusion
The final supplemental guidance might be read broadly to permit hospitals to require hospital-based physicians to provide reasonable administrative or limited clinical duties directly related to their professional services in recognition of benefits they receive from the exclusive arrangement. It might also be read more narrowly — consistent with the OIG's statement that "token or no payment" for Part A supervision and management services potentially violates the antikickback statute. Under the more narrow reading, it would be legally permissible for the parties to take into account financial benefits from exclusive arrangements only if the benefits were unrelated to the physicians' opportunity to provide services to hospital patients resulting from the arrangements. Under that interpretation, "the scope and volume" of services required to be performed by hospital-based physicians, without charge, should "reasonably reflect the value of the exclusivity" — value that is unrelated to the value or volume of business flowing from the hospital to the physician.

If the OIG intended to distinguish benefits resulting from an exclusive contract that may be considered in determining the appropriateness of uncompensated services and fair market value compensation from those which may not, the distinction is difficult to understand and harder yet to apply. For example, the distinction between reduction of physician "business development" costs and the value of business flowing to the physicians from the hospital is difficult to discern. Business development costs are reduced because of business flowing from the hospital as a result of the exclusive arrangement. Moreover, it will be extremely difficult to compute the value of each party's benefits from the exclusive arrangement that is unrelated to referrals — as would appear necessary to compare the cash and non-cash benefits each would receive from the arrangement.

Difficulty in applying the principles included in the final supplemental guidance may continue to dissuade the OIG from pursuing arrangements between hospitals and hospital-based physicians as unlawful kickbacks. In fact, the OIG provided mixed signals regarding its intent to pursue such arrangements. The OIG stated that "[u]ncompensated or below-market arrangements for goods or services will be subject to close scrutiny for compliance with the [antikickback] statute." However the OIG also noted that "arrangements between hospitals and traditional hospital-based physicians generally do not pose the same potential to cause the harms typically associated with kickback schemes." Therefore, an action under this theory may be more likely to be initiated by a qui tam relator under the FCA's whistleblower provisions than by a government authority directly.