Federal Anti-Kickback Statute

Generally, the federal Anti-Kickback Statute prohibits an individual or entity from knowingly and willfully offering or paying, or from soliciting or receiving, remuneration in order to induce the referral or the arranging for the referral of business reimbursed by federal health care programs. The primary concern for physician-hospital joint ventures under the Anti-Kickback Statute is whether distributions to investors constitute disguised remuneration for referrals. Although OIG has adopted safe harbors to protect certain venture arrangements, strict and rather onerous requirements of these safe harbors do not always make them a viable option.

Safe Harbors

Historically, the investment interests safe harbor for small investments has been utilized to protect physician-hospital joint ventures. To get protection under this safe harbor, however, a physician-hospital joint venture has to satisfy a number of requirements, including what are commonly known as the "60/40 Investor and Revenue Rules." These rules require that no more than 40 percent of the value of the investment interests of each class of investment interests be held in the previous fiscal year or previous 12-month period (Look-Back Period) by investors who are in a position to generate business for the venture. In addition, no more than 40 percent of the venture’s gross revenue related to the furnishing of health care services in the Look-Back Period may come from business generated from investors. Unfortunately, these strict investor and revenue requirements often foreclose safe harbor protection to many legitimate wholly-owned and operated physician-hospital ventures.

Additionally, in 1999, OIG finalized the ambulatory surgery center (ASC) safe harbor which protects physician-hospital owned ASCs. This safe harbor contains many of the same elements as the small investment interests safe harbor. Unlike the small investment interests safe harbor, however, there is no cap on the services rendered or referrals made to the entity by physician investors. On the contrary, physician-investors are required to provide a certain level of services and generate a certain amount of revenue for the ASC. Specifically, in a multi-specialty physician-hospital ASC, at least one-third of the physician investor’s medical practice income from all sources for the Look-Back Period must be derived from the physician’s performance of procedures, and at least one-third of the procedures performed by the physician investor for the Look-Back Period must be performed at the investment entity.

Accordingly, the safe harbor is circumscribed to apply only to physicians who are unlikely to use the investment as a vehicle for profiting from their referrals to other physicians using the ASC. This safe harbor has been very helpful in protecting legitimate ASC ventures that have otherwise failed to obtain immunity under the small investment interests safe harbor. Because the ASC safe harbor is tailored to the provision of ambulatory surgical services, however, many ventures offering non-surgical services are ineligible for protection under this safe harbor.

The Anti-Kickback Statute is, however, a criminal statute, meaning intent to violate the statute must be demonstrated and failure to fall within a safe harbor does not equate to violation of the law. Therefore, ventures that do not satisfy a safe harbor are not illegal, but rather, if carefully structured in accordance with OIG’s position concerning joint ventures and other safe harbors relevant to the proposed venture, may pass muster under the statute.

OIG’s Position on Joint Ventures

OIG has long been concerned with the fraud and abuse risk posed by health care ventures in which investors are also sources of referrals. In 1989, OIG issued a special fraud alert concerning suspect joint ventures. In the alert, OIG distinguishes between legitimate joint ventures and those which it considers suspect. Importantly, OIG indicated that under suspect joint ventures, physicians may be investors not so much for raising investment capital to start a business, but rather to lock-up a stream of referrals from the physicians in exchange for compensation for those referrals. Some questionable features of suspect joint ventures include:

Selection and retention of investors.

· Physician investors are chosen because they are in a position to make referrals to the venture.

· There is discrimination in the opportunity of physicians to invest based on their ability to make referrals.

· Physician investors are encouraged to make referrals and may be encouraged to divest their ownership interest where they fail to maintain an acceptable level of referrals.

· The venture tracks referrals and distributes the information to investors.

Business structure.

· One party to the joint venture may be an ongoing entity that is already engaged in a particular line of business and acts as the reference supplier under the arrangement with the venture, the venture being nothing more than a shell entity.

· The joint venture contracts out all of the services and conducts very few services on its own premises, even though it bills the federal health care programs for the services.

Financing and profit distributions.

· Capital invested by physicians is disproportionately small, the risk involved in the venture is low, and the returns on investment are disproportionately large.

· Physician investors may borrow their capital contribution from the entity and pay it back through deductions of profit distributions.

Once these arrangements have cleared the fraud and abuse hurdle, they are then left to face the anti-referral prohibitions under Stark.

Stark

Generally, Stark prohibits a physician (or immediate family member) who has a financial relationship with an entity from making referrals to that entity for the furnishing of designated health services for which payment may be made under the federal health care programs, unless an exception or safe harbor is satisfied. Stark is often implicated in the physician-hospital joint venture context because physicians make referrals for designated health services, such as orthopedic surgery, to the entity and have an ownership or compensation relationship with the entity.

Historically, there was much confusion over the types of health care ventures that were permissible under Stark, especially in the ASC, urology and radiology contexts. Clarification from the Department of Health and Human Services (HHS) on these issues, with some helpful guidance from OIG, has led to a revival of these ventures. Unfortunately, with the carrot comes the stick and currently there exists much uncertainty over a new kind of joint venture – the specialty hospital. As clarified under Phase II of the final Stark II regulations, a moratorium has been placed on investments in certain specialty hospitals, including orthopedic hospitals. Unless grandfathered, these ventures will continue to be precluded at least until the moratorium is lifted in June 2005. Passage of regulations during this period, however, could foreclose many legitimate specialty hospital ventures.

Not all physician-hospital joint ventures achieve safe harbor protection. Most, however, are legitimate and work to achieve cost-savings not only for physicians and hospitals, but the federal health care programs, as well. To manage the uncertainty and potential risk of liability presented by these ventures, the parties should consider tailoring the venture as closely as possible to HHS and OIG guidance in this area, implementing certain safeguards, including the following.

· Interests offered to passive investors should not be made on terms different from those of other investors.

· The terms on which an investment is offered should not take into account any previous or expected volume of referrals, services furnished, or amount of business generated from such investors.

· The entity should not market or furnish the items or services differently to passive investors and non-investors.

· The entity should not loan or guarantee funds to an investor if the loan or guarantee would be used to obtain the investment interest.

· The investor’s return on investment should be directly proportional to the amount of capital investment of that investor.

· The hospital or its employed physicians should not make referrals to the joint venture.

· The hospital should not take any actions (including, the adoption of any policy, whether formal or informal) to cause, encourage or require hospital physicians to refer patients to the joint venture.

· To the extent the joint venture provides a service already provided by a hospital investor, such as radiology services, the hospital should continue to provide this service.

· Ancillary arrangements should not appreciably increase the risk of fraud and abuse.