In an Advisory Opinion long awaited by many in laboratory industry, the OIG concluded that a proposed arrangement that would have allowed physicians to profit from their own referrals for anatomic pathology services would “pose more than a minimal risk of fraud and abuse.”   The American Clinical Laboratory Association and other industry organizations have been outspoken in their opposition to such business arrangements for many years.

A limited liability company (“Requestor”) owned and managed by a physician (“Owner/Manager”), proposed to contract with another company (“Path Lab”) that operates a licensed, Medicare-certified clinical anatomic pathology laboratory or that would form one for the purpose of doing business with Requestor.  The parties would enter into a management services agreement under which Requestor would manage Path Lab’s laboratory in exchange for a usage fee that would be based on a percentage of the laboratory’s income and would be set in advance for a term of 12 months.  Owner/Manager would offer the opportunity to invest in Requestor to various physicians who would have the option of referring to Path Lab’s laboratory.  Requestor anticipated that physician investors who would be in a position to generate business for Requestor through referrals to Path Lab’s laboratory would hold more 40 percent of the value of the investment interests in Requestor and that more than 40 percent of Requestor’s gross revenue would come from the referrals of those physician investors.

After noting the similarities between the proposed arrangement and previously considered “questionable joint venture arrangements” (see, for example, Advisory Opinion 04-17), the OIG concluded that the proposed arrangement would not satisfy the requirements of any of the applicable safe harbors.  The OIG went on to articulate the reasons why the proposed arrangement posed more than minimal risk under the Anti-Kickback Statute.  First, the fee structure as well as Requestor’s reliance on interested investors to generate business through their referrals to Path Lab would “pose risk of overutilization of laboratory services, distorted medical decision-making, and increased costs to Federal health care programs.”  In addition, the proposed arrangement “appeared to have no business purpose other than to permit the physician investors to profit from the business they generate….”  The fact that they would profit indirectly was immaterial.    

Although this Advisory Opinion applies only to the arrangement proposed by Requestor, it may also shed light on the OIG’s thinking about physician-owned distributorships (known as “PODs”) in the medical device industry, which the OIG has agreed to examine in response to a request from the Senate Finance Committee.