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Anti-kickback ruling limits hospital investment methods in physician ASCs
OIG still reluctant to endorse provider/hospital joint ventures that means proceed with caution.
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The Office of Inspector General recently issued an Advisory Opinion that addressed a proposed arrangement between a hospital and a group of physicians relating to the sale of ownership interests in an ambulatory surgical center.
The Office of Inspector General (OIG) found that the arrangement could potentially generate remuneration that is prohibited under the Anti-Kickback Statute and it declined to issue a favorable opinion.
The proposed arrangement involves an ambulatory surgical center (ASC) owned by three orthopedic surgeons, two gastroenterologists and two anesthesiologists. The orthopedic surgeons own 94% of the ASC, the remaining physicians 6%. The physician investors provide all of the services performed in the ASC.
Under the proposed arrangement, a hospital proposed to buy 40% of the ASC from the orthopedic surgeons in cash. Because the ASC was an ongoing concern, the hospital would pay more for its ownership interests in the ASC than the orthopedic surgeons originally paid for their interests. Accordingly, the surgeons would receive a higher rate of return on their remaining investment than the hospital. The surgeons did not offer to sell ownership interests in the ASC to any entity other than the hospital.
Advisory opinion sought
The parties sought an Advisory Opinion from the OIG (part of the U.S. Department of Health and Human Services) because the proposed arrangement could potentially implicate the Anti-Kickback Statute. That statute makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce or reward referrals of items or services reimbursable by a federal health care program. Violators may be subject to criminal and/or civil liability.
The statute contains safe harbors that can protect certain arrangements from prosecution, and one applies to ASCs owned by physicians and hospitals. To satisfy this safe harbor, the arrangement must meet several requirements, including one in which payment to an investor, in return for an investment, be directly proportional to the that investor’s capital investment. The OIG determined the proposed arrangement did not satisfy this safe harbor requirement primarily because the orthopedic surgeons would receive a higher rate of return on their investment than the hospital (since they paid less for their ownership interests).
The fact that this arrangement did not fit within a safe harbor did not, by itself, mean that the arrangement was unlawful. Rather, the OIG examined the circumstances to determine whether it presented a minimal or more substantial risk of anti-kickback violation.
More than minimal risk
The OIG found that the arrangement presented more than a minimal risk of violating the Anti-Kickback Statute. First the OIG noted the hospital’s initial cash investment would not be used to enhance the operation of the ASC. Instead, the surgeons would realize this cash payment as a gain on their original investment in the ASC. That could be viewed as a payment for referrals, according to the OIG. Second, because the surgeons were the only physicians selling services to the hospital, the hospital’s payment could be viewed as a payment from the hospital to a subset of physicians whose referrals are particularly valuable. Third, the payment to the surgeons would result in their receiving a higher rate of return on their remaining ownership interests than the hospital would receive on its newly acquired ownership interests. This higher return rate also could be viewed as a payment to induce referrals.
Experts have questioned the underlying purpose of this opinion. While OIG Advisory Opinions are traditionally conservative, this opinion is particularly disturbing, not for its ultimate position, but for the OIG’s articulated rationale. By noting that the hospital’s intended cash investment (benefiting the surgeons and not enhancing the ASCs operations), the OIG raises a concern which would apply to virtually any investment made by a new investor in an ongoing successful joint venture.
Further, the OIG’s concern about the physicians’ earning a higher rate of return than the hospital in effect calls into questions any new investment in an ongoing operation. In fact, the only way to cure the OIG’s concern would be to set the sale price at the level of the initial investment rather than current fair market value. Undoubtedly, this conduct would be viewed by the OIG as a serious fraud and abuse violation.
Questionable motivation
One must question the motivation of the requestor of this advisory opinion. Most requestors will withdraw their inquiry when advised that the decision will be unfavorable. The fact that a negative opinion was issued suggests that the intent here was to receive a negative opinion all along.
While this suggestion is pure speculation, the justification articulated by the OIG is so contrary to generally recognized and accepted conduct that one should be cautious before accepting these statements as a true reflection of risk under the Anti-Kickback Statute. Nevertheless, this opinion underscores the continued skepticism of the OIG with respect to clinical joint ventures, so pursue such joint ventures with care and consideration.
For more information:
- Alan E. Reider, JD, and Andy Dahlinghaus, JD, can be reached at Arent Fox LLP, 1050 Connecticut Ave., N.W., Washington, D.C. 20036; 202-775-5751; e-mail: reider.alan@arentfox.com and dahlinghaus.andy@arentfox.com.