A contractual arrangement whereby two senior residential communities paid a fee to a placement agency for the promotion and placement of new residents at two senior residential communities (the “Arrangement”) will not result in sanctions, according to a recent advisory opinion posted January 21, 2014 (10-14) (the “Opinion”) by the Department of Health and Human Services Office of Inspector General (“OIG”).

What Was the Arrangement?

The nonprofit corporation that requested the Opinion from the OIG was the parent company of several subsidiary companies (the “Affiliated Entities”), including eleven senior residential communities (the “Communities”), two skilled nursing facilities and a management company that negotiated and administered contracts for the Affiliated Entities and provided them other management services. The Communities offered their residents various services, including skilled nursing services, medication assistance and assistance with daily living activities. Two of the Communities (the “Participating Communities”) entered into the Arrangement with an independent placement agency for senior housing, whereby the placement agency promoted the Participating Communities’ available housing and placed new residents with the Participating Communities. The skilled nursing facilities’ staffs did not provide services at either of the two Participating Communities.

Under the Arrangement, the placement agency received a fee from the Participating Communities for every new resident who arrived at one of the Participating Communities through the placement agency. The fee was calculated based on a percentage of a new resident’s charges for his or her initial two months at one of the Participating Communities, but did not take into account any charges for items or services billed to any federal healthcare program. Moreover, the contracts between the placement agency and the Participating Communities prohibited both placement and acceptance of potential residents who were known to rely on federal healthcare programs for payment of amounts that would be owed to the Participating Communities.

Why Was the Arrangement Subject to Scrutiny by the OIG?

The Anti-kickback Statute makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration or to induce or reward referrals of items or services that are reimbursable by a federal healthcare program. The OIG noted in its Opinion that the Arrangement could potentially generate prohibited remuneration under the Anti-kickback Statute if the requisite intent to induce or reward referrals of federal health care program business was present. Specifically, the Opinion stated that the Arrangement implicated the Anti-kickback Statute because the placement fee paid by the Participating Communities to the placement agency constituted remuneration for the referral of residents who may one day receive services reimbursed by a Federal or state health care program.

Additionally, the OIG noted its concern with regard to percentage-based compensation arrangements and its view that such arrangements are inherently problematic under the Anti-kickback Statute because they relate to the volume and value of business generated between the parties to such arrangements. The OIG noted this concern, even though this particular percentage-based fee was not based upon items or services that are paid for by a federal healthcare program.1

Ultimately, however, the OIG reasoned that the “core issue” is whether remuneration is likely to constitute an improper payment to generate federal healthcare program business for the parent company or the Affiliated Entities.

Why the OIG Got Comfortable with this Arrangement.

Although the OIG concluded that the Arrangement could potentially generate prohibited remuneration under the Anti-kickback Statute, it would not impose administrative sanctions or penalties in this case due primarily to the safeguards and factors listed below.

  • Nearly all new residents of the Communities covered the costs of any services provided by the Communities and their housing rental out of their own resources or via private payors
  • The placement fee under the Arrangement did not include charges billed to Federal health care programs
  • The contracts between the placement agency and the Participating Communities prohibited both placement and acceptance of potential residents who were known to rely on federal healthcare programs for payment of amounts that would be owed to the Participating Communities
  • None of the Participating Communities provided services reimbursed by Medicare
  • Although a State Medicaid program (the “Elderly Waiver Program”) paid for services provided to a small percentage of residents in one of the Participating Communities, no residents who were referred to the Participating Communities by the placement agency received care paid for by the Elderly Waiver Program
  • Other than some involvement with the Elderly Waiver Program, the skilled nursing facilities were the only Affiliated Entities that provided Federally reimbursed health care services to residents of the Communities—and the skilled nursing facilities’ staffs did not provide services at the Participating Communities
  • The parent company certified that it did not regularly track information regarding common residents or patients among the Affiliated Entities from existing records—which, in the view of the OIG, reduced the risk that the Affiliated Entities generated federal healthcare program business by directing or influencing referrals of residents placed by the placement agency among themselves
  • The Affiliated Entities did not limit their residents’ choice of providers, practitioners, or suppliers of services

Take Away

The Opinion appears to indicate that placement fee arrangements involving referrals to healthcare providers may survive scrutiny from the OIG in certain limited situations. However, open questions remain about whether the Opinion might have been different had the Arrangement not prohibited both placement and acceptance of potential residents who were known to rely on federal healthcare programs for payment of amounts that would be owed to the Participating Communities, had the skilled nursing facilities’ staffs provided services at the Participating Communities, or had it not included one of the other various safeguards listed above.

Also noteworthy is the OIG’s reiteration of its suspicion of percentage-based compensation arrangements, even though this arrangement was not based upon items or services billed to a federal healthcare program.2 Although the Opinion states that the facts and circumstances of the Arrangement adequately reduced the risk that the remuneration to the placement agency was in return for federal health care program patients, healthcare providers should continue to carefully assess whether to enter into such compensation structures, particularly those that are percentage-based only, as opposed to more complex compensation formulas that may involve a percentage-based component, among other components.3

The Opinion, on the whole, appears to offer some limited encouragement to healthcare providers who are evaluating whether to enter into placement fee arrangements as they pursue strategic growth and marketing strategies, but it does not “open the gate” to all such arrangements. Healthcare providers should continue to tread with care in considering these types of agreements.