The Office of Inspector General of the Department of Health & Human Services (the “OIG”) provided recent guidance on when certain health care joint venture arrangements may be problematic and in violation of federal health care statutes and regulations. In OIG Advisory Opinion No. 11-03 issued on April 7, 2011 (the “Opinion”), the OIG discussed a proposed joint venture arrangement between a new long term care pharmacy (“NewCo”) owned by long term care facilities (the “LTC Facilities”) and an established long term care pharmacy (“OldCo”) that provided services for the LTC Facilities. The OIG stated that this proposed arrangement may be in violation of the federal anti-kickback statute.

What are the facts of the proposed problematic arrangement?

The requestor of the Opinion was OldCo, an established long term care pharmacy that provides pharmaceutical services to LTC Facilities. The LTC Facilities and one pharmacist-employee of OldCo desired to own and establish a new long term care pharmacy (“NewCo”) that would engage in the exact same line of business as OldCo. NewCo would provide services to the LTC Facilities and would operate in the same market at OldCo. NewCo and OldCo would enter into a management agreement in which OldCo would provide all personnel, operational, billing, inventory, storage and all day-to-day services of NewCo. In addition, NewCo would purchase from OldCo most of its non-controlled medications. In exchange for these services, NewCo would pay OldCo a certain amount per prescription and would pay OldCo for all medications it purchased from OldCo for its customers. NewCo’s services would be reimbursable by federal health care programs.

What federal statutes may the proposed arrangement violate?

The OIG stated that the proposed arrangement may be in violation of the federal anti-kickback statute (42 U.S.C. § 1320a-7b(b)). The federal anti-kickback statute prohibits the offering, soliciting, receiving or paying of any remuneration in exchange for the referral of any item or service that is payable by a federal health care program. Remuneration includes the transfer of anything of value, directly or indirectly. To violate the anti-kickback statute, at least one purpose of the payment of remuneration must be to reward or incentivize referrals. A violation of the anti-kickback statute is a criminal offense and is subject to both criminal and civil penalties.

What factors of the proposed arrangement caused the OIG to determine that the arrangement may violate federal law?

The OIG stated that it has “longstanding concerns” about joint venture arrangements between a party that is in a position to refer patients to receive certain items or services, such as the LTC Facilities, and a party that is already in the business of providing such items or services, especially when the party is in a position to make such referrals is anticipated to be a significant source of patients for the joint venture. The OIG discussed that the elements, in the aggregate, of the proposed arrangement that create a possible violation of the anti-kickback statute are the following:

  • The LTC Facilities are expanding into a related line of business (long term care pharmaceuticals) that would be dependent on referrals from the LTC Facilities.
  • The LTC Facility owners would not participate in the operation of NewCo, but would contract out substantially all of the NewCo operations to OldCo.
  • The LTC Facility owners would not be exposed to any business or financial risk because they would control the business that would be referred to NewCo.
  • OldCo provides the exact same services as NewCo and is in the position to provide all of the services that it would provide as a manager of NewCo to its own clients.
  • Payment to OldCo would vary with the volume of referrals from the LTC Facilities.
  • The LTC Facility owners’ income would vary with the volume of referrals from the LTC Facilities.
  • OldCo and the LTC Facility owners would benefit from the formation of NewCo.

Based upon these factors, the OIG concluded that the proposed arrangement may be in violation of the anti-kickback statute because it permitted the parties to be paid based upon the volume or value of referrals to items and services which may be reimbursed by federal health care programs. In particular, OldCo would be indirectly paying the LTC Facility owners a share of the profits from their referrals.

What should you do?

Be aware of health care joint venture arrangements that may be problematic and a violation of federal health care laws. In particular, be cautious of arrangements in which one entity expands into a related line of business and contracts out substantially all of its operations to a potential competitor in exchange for a portion of the profits.