The Office of Inspector General (OIG) recently issued an advisory opinion disapproving two related proposals regarding the provision of anesthesia services at physician-owned ambulatory surgery centers (ASCs) using variants of what is commonly known as the "Company Model."

A physician group wanted to continue providing anesthesia services on an exclusive basis to several physician-owned ASCs. Currently, the anesthesia group independently bills and collects its professional anesthesia services fees for services provided in the ASCs.

The ASCs, based upon competitor arrangements, were seeking alternative measures that would allow them to profit from the physician's provision of anesthesia services. Two potential anesthesia arrangements were proposed. Under the first alternative, the physician anesthesia service provider would pay the ASCs a per-patient fee for "Management Services," including a fee for services for which the ASCs already were reimbursed through the Medicare ASC facility fee. The fee was to be set at fair market value and would not take into account the volume or value of referrals or other business generated. Federal healthcare program beneficiaries would, however, be excluded from the management services fee.

Under the second alternative, the ASCs' physician owners would establish a separate professional entity to provide anesthesia services at the ASCs on an exclusive basis. The ASC subsidiary would, in turn, employ or contract with the anesthesia providers for the clinical services and nearly all other administrative, management and operational oversight services related to the provision of anesthesia services. The ASC affiliates would pay the anesthesia provider a negotiated rate for its services, and the ASCs' physician owners would retain the balance of the revenue received for anesthesia services.

The OIG's reaction to the alternatives has application to many proposed arrangements including nonanesthesia arrangements:

  • First, because the anesthesia provider would be the exclusive anesthesia provider, the carve-out of federal program beneficiaries, according to the OIG, would not reduce the risk that the management fee payable under the first alternative would still serve as an inducement for referrals for federal beneficiaries. Consequently, carve-outs of federal patients from various arrangements may not fully mitigate inducement risks, as the OIG will view the arrangement holistically.
  • Second, as one would expect, the OIG jumped on the anesthesia provider's statement that the ASCs would, in effect, be paid twice for the same service. Once as part of the facility fee and once as part of the anesthesia management fee. The OIG found that the redundant remuneration could be an improper inducement for federal program beneficiary referrals. Consequently, care must be taken when structuring remuneration arrangements to avoid "double remuneration" inducement risks.
  • With respect to the second alternative, the OIG found that the ASC safe harbor would not apply to the ASCs owners' anesthesia affiliates as they were not providing "surgical services." This, of course, highlights the importance of evaluating all the terms of a safe harbored arrangement to assure compliance, unless an affirmative decision has been made that a nonsafe harbored arrangement is appropriate.
  • Finally, the OIG also concluded that neither the employment safe harbor nor the personal services and management contracts safe harbor would protect the profits distributed to the physician owners of the anesthesia subsidiaries. The OIG found that the proposed venture was very similar to the types of "Contractual Joint Ventures" it warned against in its April 30, 2003,  Special Advisory Bulletin . In particular, the OIG was concerned with: (1) the lack of involvement by the ASCs' physician owners in their new "anesthesia services business" as a result of the near-total contracting back of the services to the actual anesthesia provider and (2) the fact that the same parties would be providing nearly the same services as they did previously with the addition of a sharing of the revenue, in order for the contractor to maintain its income stream.

The OIG's conclusions are consistent with its previous joint venture guidance. In short, a company model arrangement cannot be used to convert referrals into a revenue stream or to incentivize undue influence over choice of a contract services provider. Company model arrangements involve a significant element of risk and can be used for purposes such as quality of care improvement, if structured carefully and implemented appropriately.

The OIG's analysis is equally applicable to many types of joint ventures and should be considered when structuring such arrangements between providers.