As medical reimbursement declines and operating expenses increase, hospitals and physicians are becoming increasingly interested in joint venture arrangements. For hospitals, a physician joint venture may enable the hospital to recapture lost ancillary income (e.g., imaging, physical therapy, laboratory) and may strengthen ties with, and secure a stream of referrals from community physicians. For physicians, a hospital joint venture provides access to startup and working capital and administrative support, as well as revenue from new ancillary services that may be difficult for the physicians to establish on their own. Nevertheless, the Centers for Medicare and Medicaid Services and the Office of Inspector General have raised significant concerns regarding hospital-physician joint ventures and any proposed arrangement must be in strict compliance with applicable regulations in light of this anticipated scrutiny.

For physicians, the federal Stark law (Stark) prohibits certain referrals to entities with which physicians have direct or indirect financial relationships. Specifically, Stark prohibits the referral of designated health services (DHS), which include imaging, laboratory and physical therapy services, one or more of which are likely to be rendered by a hospitalphysician joint venture. Joint ventures for the provision of ambulatory surgical services are not directly impacted by this prohibition. The DHS joint venture creates a Stark issue if a new entity is created because DHS referrals from the owner physicians to the joint venture constitute referrals to an entity with which the owner physicians have a prohibited financial relationship. The Stark prohibitions also apply to hospitalemployed physicians who may intend to refer to the joint venture.

One viable structure would be for the proposed “joint venture” services to be provided directly by the physicians’ group, as an extension of the physicians’ existing medical practice. Under this scenario, the services are billed under the physician group’s tax identification number used for all other professional services rendered by the group. Such an arrangement would need to be structured to comply with the “in-office ancillary services” exception to Stark, which permits referrals of DHS by physicians within the confines of the physicians’ group practice, as long as such services are (i) provided in the medical group’s physical space, (ii) billed under the group’s tax identification number, and (iii) supervised by the medical group’s physicians. This structure also provides an opportunity for hospital involvement, albeit not as an equity owner. The hospital can furnish space and clinical and non-clinical personnel, as well as various management functions, including billing/collection, back office support, purchasing and contracting assistance. The relationship will need to satisfy anti-kickback requirements, so any agreement must be in writing and the amount paid to the hospital for space, personnel and services must be consistent with fair market value. Such an alternative avoids the numerous pitfalls that can arise in a hospital-physician joint venture.