Contractual Joint Ventures

Excerpted from W. Bradley Tully, Federal Anti-Kickback Law (Health L. & Bus. Series No. 1500)

In April 2003, the OIG issued a Special Advisory Bulletin criticizing a wide range of contractual arrangements for the provision of health care services referred to as "contractual joint ventures."¹ Although the OIG attempted to tie this Bulletin to its 1989 Special Fraud Alert dealing with true joint ventures,² it is clear that the Bulletin addresses a much broader variety of arrangements, including ones that would not constitute joint ventures under any standard definition. According to the Bulletin, a "joint venture" is "any common enterprise with mutual economic benefit," and the OIG makes it clear that its concerns are not limited to those "joint ventures" that meet "technical qualifications under applicable state or common law."

The OIG was responding to common arrangements under which health care providers in a position to refer business to an outside vendor have instead chosen to "internalize" that business. These arrangements often involve contracts for providing items and services to a health care provider's existing patient population by a party that also directly offers those types of services.

The arrangements the OIG indicated are problematic typically exhibit several common elements. First, according to the OIG, a health care provider in one line of business (hereinafter the Owner) expands into a related line of business that is dependent on referrals from, or other business generated by, the Owner's existing business. Second, the Owner neither operates the new business itself nor commits substantial financial, capital, or human resources to the venture. Instead, it contracts out substantially all operations of the new business to an existing provider (hereinafter the Manager/Supplier). Third, the Manager/Supplier is a provider of the same items or services as the Owner's new line of business. Fourth, the Owner and Manager/Supplier share the economic benefit of the Owner's new business, with the Manager/Supplier taking its share in the form of payment under various contracts with the Owner and the Owner benefiting by retaining the residual profit from the business. Finally, these arrangements involve payments to the Manager/Supplier that vary with the volume or value of business generated for the new business by the Owner.

The Bulletin provides the following examples of the types of ventures it believes to be suspect:

• A hospital establishes a subsidiary to provide DME. The subsidiary enters into a contract with an existing DME company to operate the subsidiary and to provide it with DME inventory. The existing DME company already provides DME services comparable to those provided by the new hospital DME subsidiary and bills insurers and patients for them.

• A DME company sells nebulizers to federal health care beneficiaries. A mail order pharmacy suggests that the DME company form its own mail order pharmacy to provide nebulizer drugs. Through a management agreement, the mail order pharmacy runs the DME company's pharmacy, providing personnel, equipment, and space. The existing mail order pharmacy also sells all nebulizer drugs to the DME company's pharmacy for its inventory.

• A group of nephrologists establishes a wholly owned company to provide home dialysis supplies to their dialysis patients. The new company contracts with an existing supplier of home dialysis supplies to operate the new company and provide all goods and services to the new company.

One difficulty with the OIG's criticism of these arrangements is understanding exactly what remuneration is being exchanged for referrals. The Bulletin identifies discounts as a form of remuneration under the anti-kickback statute, and suggests that the Manager/Supervisor may be providing services on a discounted basis to the new Owner. While a safe harbor regulation protects many discounted arrangements, the OIG took the position in the Bulletin that the discount safe harbor cannot protect the types of discounts criticized, because the safe harbor requires the price to be negotiated between the parties in an arms'-length transaction. Quoting from the preamble to the 1991 safe harbor regulations, the OIG stated:

Another problem exists where an entity, which is both a provider and supplier of items or services and joint venture partner with referring physicians, makes discounts to the joint venture as a way to share its profits with the physician partners. Very often this entity furnishes items or services to the joint venture, and also acts as the joint venture's general partner or provides management services to the joint venture… . These arrangements are not arms length transactions where the joint venture shops around for the best price on a good or service. Rather, it has entered into a collusive arrangement with a particular provider or supplier of items or services that seeks to share its profits from referring physician partners.³

According to the Bulletin, a discount is not based on an arms'-length transaction "if it is provided by a seller to a purchaser in connection with a common venture, regardless of whether the venture is memorialized in separate contracts."

Comment: The problem with the OIG's position is that it defines a "common venture" in the Bulletin to be no more than one or more contracts by which items or services are sold. While it may be true that in a bona fide joint venture the participants do not necessarily engage in arms'-length negotiations, there appears to be no reason to assume that the Owner and Manager/Suppliers would not negotiate their contractual arrangements at arms' length.⁴

Even more surprisingly, the OIG takes the position that even if the various contracts could fit into safe harbors, the safe harbors would only protect remuneration flowing from the Owner to the Manager/Supplier, and that the arrangements that it is criticizing would not be protected since they involve remuneration flowing in the other direction:

By agreeing effectively to provide services it could otherwise provide in its own right for less than the available reimbursement, the Manager/Supplier is providing the Owner with the opportunity to generate a fee and a profit. The opportunity to generate a fee is itself remuneration that may implicate the anti-kickback statute.

Comment: This position that affording the opportunity to make a profit is a form of prohibited remuneration is highly questionable, and does not appear to be supported by the plain language of the anti-kickback statute.

The OIG ends its Bulletin by providing the following characteristics of "suspect contractual joint ventures":

• The Owner typically seeks to expand into a health care service that can be provided to the Owner's existing patients.

• The newly created business predominately or exclusively serves the Owner's existing patient base (or patients under the control or influence of the Owner).

• The Owner's primary contribution to the venture is referrals; it makes little or no financial or other investment in the business, delegating the entire operation to the Manager/Supplier, while retaining profits generated from its captive referral base.

• The Manager/Supplier is a would-be competitor of the Owner's new line of business and would normally compete for the captive referrals.

• The Manager/Supplier provides all, or many, of the following key services: day to day management, billing, equipment, personnel and related services, office space, training and health care items, supplies, and services.

• The practical effect of the arrangement, viewed in its entirety, is to provide the opportunity to the Owner to bill for business provided by the Manager/Supplier.

• The parties may agree to a non-compete clause barring the Owner from providing items or services to patients coming from other than Owner and/or barring the Manager/Supplier from providing services in its own right to the Owner's patients.

Obviously, the Bulletin calls into question a wide range of arrangements. It is far from clear that the courts would uphold the positions the OIG took in the Bulletin. For example, in the 1995 Hanlester Network v. Shalala litigation,⁵ the OIG challenged an arrangement under which a national laboratory company provided "turnkey" management services to a number of licensed laboratories that the government had characterized as "sham" businesses. The U.S. Court of Appeals for the Ninth Circuit rejected the government's argument by concluding that remuneration flowed from the managed business to the manager, and not the other way around.⁶

Comment: Despite questions about the OIG's analysis, however, it will be prudent for providers to evaluate their existing arrangements within the scope of the Bulletin under these new guidelines, particularly where those arrangements include some or all of the characteristics of "suspect" ventures the OIG identified.

¹ Office of Inspector Gen., U.S. Dep't of Health & Human Servs., Special Advisory Bulletin: Contractual Joint Ventures (Apr. 2003), reproduced infra Working Papers, Doc. 5B.

² See Joint ventures, supra at §1500.06.A.2.

³ Quoting 56 Fed. Reg. 35977 (July 9, 1991), emphasis added in the Bulletin.

⁴ Another problem with the Bulletin is that the OIG failed to acknowledge that an exemption for discounts exists under the anti-kickback statute itself, 42 U.S.C. §1320a-7b(b)(3)(A). SeeDiscounts, supra §1500.05.A.1. That discount exemption does not require that a discount be negotiated at arms' length. The only court to have considered the issue held that the statutory discount exemption remains independently available, notwithstanding the OIG's creation of a separate regulatory discount safe harbor and the OIG's view that its safe harbor regulation limited the scope of the statutory discount exemption. United States v. Shaw, 106 F. Supp. 2d 103 (D. Mass. 2000). See The relationship of the statutory discount exception to the discount safe harbor, supra §1500.05.C.7.a.(2). However, unlike the discount safe harbor, the statutory exemption requires that the discount be "properly disclosed and appropriately reflected in the costs claimed or charges made by the provider or entity under a Federal health care program."

⁵ Hanlester Network v. Shalala, 51 F.3d 1390 (9th Cir. 1995).

⁶ For in-depth discussion, see Laboratory management, infra §1500.07.C.1.