Legal risks of a joint venture optical shop

Physicians who are both investors in the joint venture and in a position to refer to the joint venture may raise concern under the Federal Anti-Kickback Law.

Issue: July 1, 2005

ByAllison W. Shuren, JD, MSN

Facts

Quality Eye Care P.C. and Outstanding Ophthalmology P.C. both want to own and operate an optical shop to enhance the profitability of their group practices. The physicians in both groups realize, however, that their geographic area will not sustain two optical shops. As a result, the groups decide to enter into a joint venture to own and operate one optical shop, called Clear Vision Inc. The terms of the joint venture call for the ophthalmologists of both practices to own equal shares of Clear Vision and for the distribution of any profits to be divided according to referrals to the optical shop. Both practices include Medicare patients, some of whom will obtain post-cataract surgery eyeglasses from Clear Vision.

Does the proposed joint venture pose any legal risk for the physician-owners?

Yes. Historically, ophthalmologists and optometrists were advised to refrain from entering into any type of investment or compensation arrangement involving an optical shop that was not part of their own practice or group practice. Such relationships ran afoul of the Federal Physician Anti-Self-Referral Law, commonly referred to as the Stark Law after its sponsor, Rep. Fortney “Pete” Stark, D-Calif. The Stark Law prohibits a physician from ordering a service that is provided by an entity in which the physician or an immediate family member has a financial relationship if the service falls within one of the categories of designated health services (DHS) covered by the Stark Law, is reimbursed by Medicare or Medicaid and if the financial relationship does not qualify for an exception. Until the release of the final Stark II regulations by the Center for Medicare and Medicaid Services in January 2001, post-cataract spectacles and lenses were considered part of the DHS category of prosthetic devices. Consequently, unless an optical shop arrangement fell within one of the Stark Law exceptions, referrals for post-cataract spectacles or lenses by a physician to an optical shop with which he or she had an investment or compensation relationship violated the Stark Law.

As of 2001, however, this limitation on physician ownership of optical shops was eliminated as the result of regulations issued by CMS, which removed post-cataract spectacles and lenses from the list of DHS covered by the law. Now, assuming an optical shop does not provide any other service that is considered a DHS, the Stark Law is not applicable to ventures involving optical shops.

Despite the elimination of the legal concerns raised by the Stark Law, optical shop joint ventures involving physicians who are both investors in the joint venture and in a position to refer to the joint venture may raise concern under the Federal Anti-Kickback Law. To the extent that ophthalmologists may profit from referrals of patients to optical shops in which the ophthalmologists have a financial interest, the Federal Anti-Kickback Law may be triggered.

The Federal Anti-Kickback Law prohibits the offer, solicitation, payment or receipt of anything of value (direct or indirect, overt or covert, in cash or in kind) that is intended to induce the referral of a patient for an item or service that is reimbursed by a federal health care program, including Medicare or Medicaid. The law imposes liability to both sides of an impermissible “kickback” transaction and has been interpreted broadly by several courts to apply to situations where only one purpose of a payment is to induce referrals, notwithstanding the fact that there may be other legitimate purposes for which the payment is made. As a result, virtually any financial relationship in which a health care provider is a referral source, as is the case here, has potential anti-kickback implications.

Because the Anti-Kickback Law, as drafted, would prohibit many practical and non-abusive ways of delivering health care, Congress adopted several exceptions to the law and granted the Office of the Inspector General (OIG) of the Department of Health and Human Services authority to except additional arrangements from the reach of the law through regulations called “safe harbors.” These safe harbors define practices that are not subject to the Anti-Kickback Law because they are viewed by the government as being unlikely to result in fraud and abuse. Unfortunately, because of the narrow manner in which the safe harbor regulations are drafted, the existing safe harbors offer no protection under the presented facts. Failure to fit within a safe harbor, however, does not mean that an arrangement is per se illegal. Therefore, one must look to other guidance to determine the degree of risk involved.

One source of information is a publication by the OIG known as a “Fraud Alert.” Fraud Alerts are statements of the OIG’s view on certain common arrangements. In 1989, the OIG issued a Special Fraud Alert on Joint Venture Arrangements discussing arrangements that may violate the Federal Anti-Kickback Law. Although 16 years old, the document remains useful for identifying factors of various investment structures that may increase or decrease liability under the Anti-Kickback Law. The Fraud Alert identified three principal areas that the OIG would review when analyzing joint ventures: (1) the manner in which investors are selected, (2) the nature of the business structure of the arrangement and (3) the financing and profit distributions. Specifically, the Fraud Alert identified the following red flags as indicators of potentially unlawful activity:

Investors are chosen because they are in a position to make referrals.
Physicians who are expected to make a large number of referrals may be offered a greater investment opportunity in the joint venture than those anticipated to make fewer referrals.
Physician investors may be actively encouraged to make referrals to the joint venture and may be encouraged to divest their ownership interest if they fail to sustain an acceptable level of referrals.
The joint venture tracks its sources of referrals and distributes this information to the investors.
Investors may be required to divest their ownership interest if they cease to practice in the service area (eg, if they move, become disabled or retire).
Investment interests are nontransferable.
The structure of the joint venture may be suspect, such as in the case of a “shell entity.” A shell entity is identified as one in which there is little capital, equipment or other hard assets in the venture and another entity is responsible for the day-to-day operations of the joint venture.
The amount of capital invested by the physician is disproportionately small and the return disproportionately large compared to a typical investment in a new business.
Physician investors only invest a nominal amount, such as $500 to $1,500.
Investors are permitted to borrow the amount of the investment from the entity and pay it back through deductions from profit distributions.
Investors may be paid extraordinary returns on the investment in comparison to the risks involved, often well over 50% to 100% per year.

While the optical shop venture likely avoids many of the concerns set forth in the Fraud Alert, there is one issue that should be addressed. In particular, the investors should not receive distributions based on the volume of their referrals to the business but, instead, returns should be based solely on their equity ownership in Clear Vision Inc. Another way to reduce risk is extending investment opportunity to non-referral sources.

For Your Information:

Allison Weber Shuren, MSN, JD, can be reached at Arent Fox PLLC, 1050 Connecticut Ave. NW, Washington, DC 20036-5339; 202-775-5712; fax: 202-857-6395; e-mail: shuren.allison@arentfox.com.