On October 11, 2011, the Department of Health and Human Services Office of Inspector General (“OIG”) posted Advisory Opinion (“AO”) 11-15 on its website.  AO 11-15 involved a proposed arrangement whereby the requestor, a physician-owned limited liability company (the “Requestor”) would enter into a management services contract with another company (the “Path Lab”) for a term of at least three (3) years.

Pursuant to a management services contract with the Path Lab, the Requestor would furnish the Path Lab with clinical laboratory services for a fixed maximum number of hours each year and would also furnish utilities, furniture, fixtures, marketing services, billing services and non-physician staff to the Path Lab.

In exchange for providing these services, the Path Lab would pay the Requestor a usage fee based on a percentage of the Path Lab’s income, fixed in advance for twelve (12) months.  Such compensation would correspond to the volume of the Path Lab’s use of the Requestor’s services, personnel and equipment.

The Requestor would allow other physicians to invest in the Requestor. Some of these physician investors would be in a position to make or influence referrals to, or otherwise generate business for, the Path Lab.

The OIG first analyzed this proposed arrangement under the small entity investment safe harbor (42 C.F.R. §1001.952(a)(2)) and found it did not apply and would not protect the proposed arrangement. The OIG also found that the safe harbors for space rental, for equipment rental and for personal services would not apply for several reasons, including the fact that the aggregate usage fees paid by the Path Lab would not be set in advance. The OIG also stated that the proposed arrangement had many problematic features that pose “considerable risks of overutilization of laboratory services, distorted medical decision-making, and increased costs to Federal health care programs.”

Thus, the OIG concluded that the arrangement would have more than a minimal risk of fraud and abuse and that the proposed arrangement appeared to have no business purpose other than to permit the physician investors to profit from the business they generate for the Path Lab in the form of their laboratory specimen referrals.