On October 11, the U.S. Department of Health and Human Services Office of Inspector General (the OIG) posted Advisory Opinion No. 11-15, which concluded that a proposed physician investment in a pathology laboratory management services company could potentially generate prohibited remuneration under the anti-kickback statute and that the OIG could potentially impose administrative sanctions in connection with the proposed arrangement.

Under the proposed arrangement, a limited liability company owned and managed by a physician (the “Requestor”) would contract with a yet-to-be-identified company that operates a licensed, Medicare-certified clinical anatomic pathology laboratory (the “Path Lab”).  The Path Lab would enter into a management services contract with the Requestor.  Under the management contract, the Requestor would furnish the Path Lab the complete array of clinical laboratory pathology services, as well as utilities, furniture, fixtures, marketing services, essential non-physician staff and the exclusive use of laboratory space and equipment.  Although the services would be billed in the Path Lab’s name, the Requestor also would provide billing services to the Path Lab.  In turn, the Path Lab would pay the Requestor a fair market value fee that would be calculated based on a percentage of the Path Lab’s income, which percentage would be fixed in advance for 12 months, and which generally would correspond to the volume of the Path Lab’s use of the Requestor’s services, personnel and equipment.

The opportunity to invest in the Requestor would be offered to other physicians, including urologists, gastroenterologists and dermatologists.  Investors would purchase membership interests at a cost equal to the Requestor’s book value times the pro rata share of the Requestor being purchased. All profit distributions would correspond to an investor’s percentage ownership interest in the Requestor.

The Requestor certified that the value of the investment interests in the Requestor held by physician investors in a position to generate business for the Requestor through referrals of laboratory specimens to the Path Lab would exceed 40 percent (although no physician investor would be required to refer to the Path Lab).  In addition, it is expected that substantially more than 40 percent of the Requestor’s gross revenue related to the furnishing of healthcare items and services would derive from business generated by physician investors through referrals of laboratory specimens to the Path Lab.

In the unfavorable opinion, the OIG began its analysis by noting the similarities between the proposed arrangement and questionable joint venture arrangements that have been the subject of OIG guidance in the past, including those addressed in the OIG’s 1989 Special Fraud Alert on Joint Venture Arrangements, and the OIG’s 2003 Special Advisory Bulletin on Contractual Joint Ventures.  The OIG observed that the proposed arrangement is the converse of the arrangements addressed in past guidance.  In particular, rather than contracting with an existing provider to obtain turn-key laboratory services for which a physician-owned entity would bill federal healthcare programs, the Requestor (a physician-owned entity) would contract to provide such services to an entity that would, in turn, bill federal healthcare programs.  Under both types of arrangements, however, the income of the physician-owned entity would vary with the volume or value of referrals from physician investors.  As a result, the OIG stated that the proposed arrangement must be evaluated for compliance with any applicable safe harbor and for the potential for abuse.

The OIG concluded that the proposed arrangement would not satisfy the small entity investment safe harbor because more than 40 percent of the Requestor would be held by physician investors who could generate business for the Requestor and substantially more than 40 percent of Requestor’s gross revenue from providing healthcare items and services would be derived from laboratory business generated by its physician investors.  The OIG also found that the proposed arrangement failed to satisfy the space rental, equipment rental, and personal services and management contracts safe harbors because, among other reasons, the aggregate fees paid to the Requestor would not be set in advance but, instead, would be calculated based on a percentage of the Path Lab’s income.

Because the proposed arrangement would not satisfy any anti-kickback statute safe harbor, the OIG turned its analysis to whether the proposed arrangement would pose more than a minimal risk of fraud and abuse under the anti-kickback statute.  The OIG concluded that the proposed arrangement would pose more than a minimal risk of fraud and abuse for three primary reasons.  First, the fees to be paid by the Path Lab to the Requestor would pose “considerable risk of overutilization of laboratory services, distorted decision-making and increased costs to Federal health care programs” because the fees take into account the volume or value of business generated for the Path Lab by physician investors.  Second, the absence of limits on involvement by interested investors or other safeguards to restrain the proposed arrangement’s reliance on investor-generated business also underscored these risks.  Finally, noting that the Requestor would be owned largely by persons with no experience in providing clinical pathology services—but with the ability to refer patients for these services—the OIG stated that the proposed arrangement appears 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 referrals.

A copy of the Advisory Opinion is available by clicking here.