printer friendly version

OIG ISSUES SPECIAL ADVISORY BULLETIN ON CONTRACTUAL JOINT VENTURES
[April 2003]

by Robert G. Homchick

The Special Advisory Bulletin issued on April 23, 2003, by the Office of Inspector General (OIG) is raising concerns throughout the health care industry about the legality of a variety of provider joint ventures. The suspect arrangements involve a health care provider (Provider) expanding into a related service line by contracting with an existing provider of that service (Supplier) to serve the Provider's existing patient population. In the OIG's view, the Provider contracts out the entire operation of a related line of business to what would otherwise be a competitor. The OIG asserts that the Provider's share of the profits from the new venture constitutes remuneration for the referral of the Provider's Medicare/Medicaid patients and thus may violate the federal Anti-kickback Statute.

The OIG cites as an example of a suspect arrangement a hospital entering into a new venture with an existing DME company, where the joint venture with an existing durable medical equipment (DME) company and primarily serves hospital patients. Another example is a group of nephrologists forming a joint venture with an existing home dialysis supply company to operate a new company to sell supplies to the nephrologists' dialysis patients.

The OIG explains that "problematic arrangements" of this sort typically have certain common elements, including:

New Line of Business. The Provider seeks to expand into a related line of business that can serve the Provider's existing patient base.

Captive Referral Base. The new venture predominantly or exclusively serves the Provider's existing patients.

Lack of Business Risk. The Provider's primary contribution to the new venture is referrals. It does not operate the new business nor does it commit substantial financial, capital or human resources. Instead, virtually all of the operations of the new business are provided by the Supplier, while the billing of insurers and patients is done in the name of the Provider.

Supplier is Competitor. The joint venture partner selected by the Provider is an established Supplier of the same services as those to be offered by the new venture. In other words, absent the joint venture, the Supplier would be a competitor for the new line of business.

Shared Benefit: Remuneration. The Provider and the Supplier share in the economic benefit of the new business. The practical effect is that the Provider has the opportunity to bill for services that would otherwise be provided independently by the Supplier.

Volume or Value. The aggregate payments to the Supplier will typically vary with the volume or value of business generated for the new venture. Likewise, the remuneration to the Provider (profits from the venture) also varies based upon the Provider's referrals to the new business.

Exclusivity. The parties may agree to a noncompete, barring the Provider, the Supplier, or both from offering the products or services of the new venture to Provider's patients other than through the new venture.

Of these factors, the "lack of business risk" is likely the most important. In describing suspect arrangements, the Bulletin emphasizes ventures in which the Provider is not actively involved either as an investor or as an operator. In these situations, the OIG views the financial benefits of the venture to the Provider not as a return on investment or labor but as a kickback for patient referrals.

The OIG characterizes the above-listed factors as "illustrative, not exhaustive," and reiterates that the Bulletin does not describe the entire universe of suspect contractual joint ventures. The Bulletin is troublesome because it identifies as problematic ventures that are relatively common in the industry.

What the Bulletin does not fully address is the level of risk associated with ventures that have some but not all of the suspect attributes. It also may be difficult to determine what level of involvement by the Provider in the operations or business risk of the new venture would be sufficient to avoid being characterized as suspect. These issues may be clarified over time by either policy statements or enforcement actions.

The Special Advisory Bulletin is not the first word from the OIG on the subject of joint ventures. The 1989 Fraud Alert on joint ventures as well as the Anti-kickback safe harbor for small investments illustrates the ongoing interest of the regulators in provider joint ventures. The Bulletin's most significant implication is what it suggests about enforcement policy. It may signal the OIG's intention to be more aggressive in pursuing suspect joint ventures under the Anti-kickback statute. Although the Special Advisory Bulletin is not the law, providers contemplating or participating in joint ventures involving related lines of business should review the Bulletin carefully to be fully informed of the regulatory risks.

If you have any questions or if you would like to discuss the implications of the Special Advisory Bulletin in more detail, contact Robert G. Homchick at (206) 628-7676 or your usual Davis Wright Tremaine attorney.

Published by DWT's Health Law Department

This Health Law Advisory is a publication of the Health Law Department of Davis Wright Tremaine LLP. Our purpose in publishing this Advisory is to inform our clients and friends of recent developments in health law. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

Copyright © 2003, Davis Wright Tremaine LLP.

return to Advisory Bulletins main page