On May 20, 2011, the Office of Inspector General (OIG) of the U.S. Department of Health and Human Services issued an Advisory Opinion (AO) in which it concluded that a referral arrangement operated by a for-profit company that many SNFs reportedly use could violate the anti-kickback statute and expose the parties to the arrangement to civil money fines and other sanctions, including exclusion from federal government programs, because it could create an undue risk of overutilization of or overbilling for services covered by Medicare or Medicaid.

The federal anti-kickback statute makes it a crime to knowingly and willfully offer, pay, solicit, or receive any remuneration (i.e., anything of value) to induce or reward referrals of items or services reimbursable by a federal health care program. The law ascribes criminal liability to parties on both sides of an illegal transaction, and it covers arrangements where even one purpose of the arrangement is to induce referrals by exchanging items of value.

The arrangement at issue in the May 20th AO involved a for-profit company that makes referrals from hospitals to post-acute care settings, including SNFs, home health providers and others. The company used an online referral service that provided hospitals with a nationwide list of all licensed post-acute care providers, with the names coming from state licensure databases.

When hospitals needed to discharge a patient, they would provide the patient’s information, including medical records, to the online referral service and receive back a list of providers in the area with the requisite level of care. Both the hospital and the post-acute providers would pay a fee for access to the online service. Other post-acute care providers could also participate in the service without paying a fee but had to fax their information to the referral company, which, according to the referral service, seriously impaired their ability to obtain referrals because of the time involved in faxes going back and forth, as opposed to the more rapid exchange of information online. The referrals were normally made on a first-come, first-served basis, so a rapid response to a referral inquiry was important.

The company also conceded that while the fees charged to participants in the system were not based on the volume or value of referrals made or received, those costs did exceed what it actually cost to operate the system. Some post-acute providers reported that their profit margins are so slim, they cannot afford to pay the required fees.

Over the years, the OIG has created by regulation certain “safe harbors” that provide protection from criminal liability if the arrangement at issue meets all elements of the regulatory safe harbor. Specifically, the OIG has created a safe harbor for referral services and agencies. However, under that safe harbor, any fees must be uniformly charged to all participants, fees must be based only on the costs of operating the service, and fees must not vary with the volume or value of referrals of federal health care program business.

The OIG concluded that the arrangement at issue in the May 20th AO did not meet all elements of the referral services safe harbor, including the requirement that fees be uniformly assessed against all participants in the referral arrangement and be based only on the cost of operating the system. The OIG specifically noted the following problems with the arrangement. One, only providers paying the referral fees would have access to the more rapid online referrals, effectively eliminating providers who would not or could not pay the fees and thus had to rely on the system of faxing information to receive a referral. Two, the system would operate to penalize post-acute providers that did not pay the company’s referral fee. Three, providers that could not afford to pay the fee would be at a serious competitive disadvantage, and even those that did pay the fee might feel pressure to recoup their costs by prolonging patient stays, providing separately billable unnecessary services, or upcoding RUG assignments.

While every AO is technically limited to the facts presented by the requestor and is limited only to the parties involved, providers and health care lawyers look to these AOs for guidance on how similar or identical arrangements would be viewed by the OIG. Interestingly, one or more national companies that either use or are considering using a system like that addressed in the AO have claimed that a competing referral service intentionally sought a negative AO from the OIG, presumably as a competitive maneuver.

Several national organizations representing SNFs and other post-acute providers are studying the AO and considering responses that would potentially permit such referral arrangements, or examining how they might be structured to be acceptable to the OIG. We will continue to monitor these developments and report on them in future issues of Shorts.