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09/16/2003 |
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Patrick K. O'Hare Appeared in Health Care Financial Management Do you participate in a contractual joint venture? Or do you conduct business through a wholly-owned subsidiary? Then it's important to be aware of recent guidance from the HHS Office of Inspector General (OIG) about joint contractual relationships. In an April 23, 2003, Special Advisory Bulletin, the OIG targets what it terms "suspect contractual joint ventures," business relationships that exhibit three characteristics not uncommon in today's healthcare environment:
In a nutshell, the OIG takes the view that profit distributions paid by the subsidiary to the provider owner in these circumstances could constitute illegal remuneration for the referrals of such patients. The Bulletin is problematic for several reasons. Not only is the OIG's position difficult to justify logically and legally, but it also leaves numerous unanswered questions for providers. Background Contractual Joint Ventures The OIG characterizes this arrangement as the use of a "shell" entity and "subcontracting agreements." The agency further assumes that the manager will 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 the profits paid in this case are, in reality, prohibited payments for the referral of its own patients. Examples 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 out-sources 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. Assumptions and Conclusions 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 violates the anti-kickback statute. This position is aggressive for the OIG, which had previously suggested that payments within divisions of a single legal entity were not to be considered payments for referral, as indicated in the July 19, 1991, Federal Register and the November 19, 1999, Federal Register. The same is true in the context of an academic medical center. The OIG had indicated in a September 29, 2000, Advisory Opinion that payments among individual, but mission-related components of an academic medical center would not be considered problematic. Difficulties Also important are the unanswered questions posed by the Bulletin. If the divided payment to the parent is problematic in the joint-venture context described by the OIG, is it equally problematic if a 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 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 good economics and on considerations of which entity can most efficiently perform the task at issue. The Bulletin's conclusion that "Arrangements 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. Legality of Existing, Future Ventures [A]rrangements involving wholly-owned subsidiaries may present opportunities for the payment of improper financial incentives that result in overutilization of services and increased program costs and that may adversely affect quality of care and patient freedom of choice. The OIG went on to note that this concern is particularly significant in the context of a hospital's referrals to its wholly-owned home health agency. If these concerns are in fact the target of the Bulletin, it would have been better to address them directly through enhanced operational requirements. 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. Reliance on the anti-kickback statute to perform this function is misplaced. The Bulletin clearly leaves provider's guessing as to the legality of existing and future ventures. |
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Ober, Kaler, Grimes & Shriver Maryland
Washington, D.C. Virginia |
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