OIG Advisory Opinion Finds Proposed Joint Venture Riddled with Problems

A contract therapy services company that provides management of day-to-day operations and therapy staffing for rehabilitation programs in long-term care communities (i.e., skilled nursing facilities, assisted living facilities, and full-service continuing care retirement communities) recently was advised by the HHS Office of Inspector General that a proposed joint venture arrangement presented a host of concerns including patient steering, unfair competition, inappropriate utilization, and increased costs to federal healthcare programs.

The unnamed company requested an advisory opinion regarding a proposed joint venture with a company that directly or indirectly owns long-term care facilities (“JV Partnerâ€). The joint venture entity (“Newcoâ€) would then provide contract therapy services to rehabilitation programs in the requestor’s facilities.

Under the arrangement, the requestor would form Newco and enter into a management services agreement with Newco to provide clinical and back-office employees, space and necessary equipment in exchange for a fee consistent with fair market value. JV Partner would then purchase a 40 percent interest in Newco, while the requestor would own a 60 percent interest in the new company.

Any distributions from Newco to the requestor and the JV Partner would be proportional to their respective ownership interests (40% and 60%). JV Partner would not be involved in the day-operations of Newco. Newco would not have any employees, but instead would lease all clinical and back-office staff from requestor through the management services agreement.

While JV Partner would not be required to contract with or make referrals to Newco for therapy services, the requestor said it expects that would happen, specifically since the owner of the affiliated facilities would be able to control or influence the amount of business directed to Newco. In addition, the requestor stated that it was likely that the JV Partner would terminate its current therapy services contracts and enter into new contracts with Newco.

The federal anti-kickback statutes make it a criminal offense “to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce, or in return for, the referral of an individual to a person for the furnishing of, or arranging for the furnishing of, any item or service reimbursable under a federal healthcare program.†This prohibition extends to remuneration to induce, or in return for, the purchasing, leasing, or ordering of, or arranging for or recommending the purchasing, leasing, or ordering of, any good, facility, service, or item reimbursable by a federal healthcare program.

In addition, because the proposed arrangement would involve the ownership of a non-public entity by investors, the small entity investment safe harbor also might be potentially applicable. This safe harbor requires that, among other things: no more than 40 percent of an entity’s investment interests are held by investors in a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the entity.

In its analysis, OIG stated that the proposed arrangement would violate the federal anti-kickback statute because it would “involve a joint venture for the furnishing of items and services that are reimbursable by a federal healthcare program between a party in a position to refer, arrange for, or recommend those items and services and a party that currently provides those covered items or services.†And therefore, this arrangement presents “more than a minimal risk of fraud and abuse.â€

Secondarily, the arrangement is not covered under any safe harbor. Specifically, more than 40 percent of Newco would be owned by investors who could influence referrals or otherwise generate business for Newco. In addition, OIG noted that the proposed arrangement would fail the Safe Harbor’s Revenue Test and Investment Offer Test.

OIG pointed out that the proposed arrangement also might include other compensation for which there is not safe harbor protection. For example, the opportunity for the JV Partner to make a profit through the difference between the fees that affiliated facilities pay Newco for therapy services and the reimbursement the affiliated facilities receive from federal healthcare programs and payors.

The bottom line: OIG advised that “the proposed arrangement is designed to permit the requestor “to do indirectly what it cannot do directly: pay the JV Partner a share of the profits from the JV Partner’s referrals (whether directly or through its Affiliated Facilities) to Requestor for therapy services that are reimbursable by a federal health care program. Indeed, there is a significant risk that the Proposed Arrangement could be used as a vehicle to: (i) reward the JV Partner for directing Federal healthcare program and other business to Requestor; (ii) lock in that referral stream to Requestor; and (iii) block out potential competitor therapy services providers.â€

The Health Law Offices of Anthony C. Vitale advises healthcare entities on business arrangements and risk mitigation. You can contact us at 305-358-4500 or send us an email to info@vitalehealthlaw.com and let’s discuss how we might be able to assist you.