On October 10, the U.S. Office of Inspector General (OIG) issued Advisory Opinion 11-15, in which it found that physicians having an ownership interest in a company that would provide pathology laboratory management services to a third party could generate prohibited remuneration in violation of the Medicare and Medicaid anti-kickback statute.
The Advisory Opinion was requested by a physician who operated the pathology laboratory management company (Management Company). The Management Company would enter into a contract with a clinical anatomic pathology laboratory (Laboratory). Under the management agreement, the Management Company would, in essence, provide turnkey laboratory services. More specifically, the Management Company would provide the Laboratory with all clinical laboratory pathology services for a fixed maximum number of hours each year, as well as utilities, furniture, fixtures and the exclusive use of laboratory space and equipment. Additionally, the Management Company would provide marketing and billing services and essential nonphysician staff. The Laboratory would pay the Management Company a usage fee that would be calculated based on a percentage of the Laboratory's income, fixed in advance for a term of 12 months, which generally would correspond to the volume of the Laboratory's use of the Management Company's services. The management agreement would be for a term of three years.
The Management Company would offer various additional physicians, including urologists, gastroenterologists and dermatologists (each, individually, a New Physician Investor and, collectively, the New Physician Investors) the opportunity to invest in the Management Company. Most of the New Physician Investors would have little or no background in the laboratory services. The Management Company stated that it intended to recruit individuals with the appropriate experience and expertise to provide clinical laboratory services. While no referral requirement would exist, the New Physician Investors, who would be in a position to generate referrals of laboratory specimens to the Laboratory, would own in excess of 40 percent of the ownership interest and the party requesting the opinion certified that more than 40 percent of the Management Company's gross revenue would be related to such referrals.
The Advisory Opinion offered the OIG an opportunity to reiterate its well documented opposition to contractual joint ventures involving turnkey arrangements. This arrangement, however, differed from past arrangements addressed by the OIG where a physician entity obtained turnkey laboratory services. In the instant case, the Management Company actually provided turnkey services to the Laboratory. The result, however, was not different.
The OIG found that a safe harbor would not apply. Because more than 40 percent of the ownership interest would be held by referral sources and more than 40 percent of the revenues for the Management Company would be the result of owner referrals, the small entity investment entity safe harbor would not apply. Similarly, the safe harbors for space leases, equipment leases and management contracts would not apply because the aggregate usage fees were not determined in advance.
With no safe harbor available, the OIG examined the risk in the underlying relationship and found that it posed more than a minimal risk of fraud and abuse. The OIG stated that the usage fees paid by the Laboratory to the Management Company take into account the value or volume of referrals made by the New Physician Investors. This, the OIG believed, posed considerable risk of overutilization for the laboratory services. The OIG also was concerned that, because the safe harbor 40/40 tests could not be met, there were no safeguards to counter the reliance on referrals from New Physician Investors. Finally, the OIG questioned whether the Management Company was simply a vehicle to reward the New Physician Investors for referrals to the Laboratory because it was unlikely that the New Physician Investors, or the physician who requested the Advisory Opinion, have any experience operating a clinical laboratory.
Given the facts in the proposed arrangement and its past positions, it is not surprising that the OIG reached its decision. The Advisory Opinion underscored the importance of examining potential joint ventures to ensure that they have a legitimate business purpose.