Yesterday, the Department of Health and Human Services Office of Inspector General (OIG) published its first Advisory Opinion of 2012.  Advisory Opinion 12-01 sanctioned a novel group purchasing organization (GPO) arrangement.  The proposed arrangement was not merely hypothetical.  Today, Ascension Health Alliance announced that, in view of the OIG’s favorable response to its opinion request, it had formed a GPO.

Under the proposed (and now actual) arrangement, a health system (the “Parent Organization”)—consisting primarily of nonprofit corporations (the “Nonprofit Corporations”) that own and operate health care facilities—would create a wholly-owned GPO to be utilized by the Nonprofit Corporations and potentially other unaffiliated health care organizations (collectively, with the Nonprofit Corporations, the “Participants”).  As with most GPOs, the proposed GPO would charge vendors an administrative fee.  But unlike most GPOs, the proposed GPO would retain only a portion of the administrative fee to cover its costs and would distribute the remainder to the Participants.

The distribution would qualify for the discount safe harbor of the federal anti-kickback statute.  The portion of the administrative fee retained by the GPO would not qualify for the discount safe harbor (because it wasn’t passed on to the Participants) and would not qualify for the GPO safe harbor.  The proposed arrangement, as a whole, also would not qualify for the GPO safe harbor because the GPO safe harbor is limited to entities that “are neither wholly-owned by the GPO nor subsidiaries of a parent corporation that wholly owns the GPO (either directly or through another wholly-owned entity).”  42 C.F.R. §1001.952(j).

The OIG noted the absence of safe harbor protection but nonetheless approved the proposed arrangement, pointing to a number of mitigating features that lessened the risk of abuse often seen in wholly-owned GPO arrangements.  The OIG identified the following mitigating factors:

  • Only a portion of the administrative fee would be retained by the GPO (to cover the costs of centralizing the services);
  • Participants would be contractually required to account for all rebates and allocated administrative fees;
  • All vendors would be notified that they may have reporting requirements related to allocated administrative fees (as rebates);
  • Participation in the GPO would not be restricted to organizations affiliated with the Parent Organization; and
  • The Parent Organization would not restrict it affiliates to using only the GPO, but would instead continue allowing its affiliates to use multiple resources to obtain the best value.

This Advisory Opinion expands the possibilities for subsidiaries of a parent organization to participate in a wholly owned GPO.  The Opinion also opens the door for health care administrators to review their organization’s GPO arrangements and determine if other solutions, even solutions outside of the GPO safe harbor, would better meet the needs of the organization.  As stated by the OIG in this opinion, “absence of safe harbor protection is not fatal”; rather, it requires consideration on a “case-by-case basis” to evaluate the “potential for risk to Federal health care programs.”