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Structuring contractual joint ventures

By Todd A. Rodriguez, Esq.

With the migration of ancillary services to physician-owned outpatient centers, hospitals are feeling the pinch and are looking for ways to keep their physicians and their lucrative ancillary services in the fold. Not surprisingly, many hospitals are looking for novel ways to “joint venture” with key physician practices. Hospitals are not the only ones looking to joint venture, either. Physical therapy providers have long sought to joint venture with physical medicine and orthopedic group practices and pathology laboratory companies are developing new models to enable practices with high pathology laboratory volumes to bring those services (and revenues) in-house.

Many of these joint ventures can be categorized as what the Office of Inspector General of the Department of Health and Human Services (OIG) has termed “contractual joint ventures” and the OIG has expressed considerable suspicion about the possible illegality of such arrangements under the federal anti-kickback statute. In light of the OIG’s vocal stance in opposition to contractual joint ventures, physicians considering entering into contractual arrangements with other providers for the provision of services covered by federal payor programs must take particular care to ensure that the arrangements not only comply with the anti-kickback statute but, wherever possible, do not have the “suspect” attributes identified by the OIG.

The OIG’s concern with joint ventures is actually nothing new. The OIG first made its concern with these arrangements known in a 1994 Special Fraud Alert stating that joint ventures potentially violate the anti-kickback statute where they are “intended not so much to raise investment capital legitimately to start a business, but to lock up a stream of referrals from the physical investors and to compensate them indirectly for these referrals.” (Special Fraud Alert, Office of Inspector General of the Department of Health and Human Services, December 19, 1994)

Almost ten years after its initial Fraud Alert on joint ventures, the OIG published its Special Advisory Bulletin on Contractual Joint Ventures which identifies as suspect, arrangements wherein one provider opens up a new product line which is completely managed by an entity that otherwise is in the same business on a retail basis. (OIG Special Advisory Bulletin, Contractual Joint Ventures, April 2003) Unlike the typical joint venture where multiple investors invest in a common venture, contractual joint ventures typically involve one or more providers joining forces through one or more contractual relationships to offer a service that may be new to only one of the participants in the venture. An example of a contractual joint venture would be an orthopedic practice that engages a physical therapy company to staff, equip and manage a new physical therapy line of business for the orthopedic practice.

The OIG’s Advisory Bulletin identifies the following indicia that, according to the OIG, will make a joint venture suspect under the anti-kickback statute:

· A provider expands into a related line of business, which is dependent on referrals from, or other business generated by, the owner’s existing business (for example, a sleep center business driven by referrals from the investing physicians’ existing practices).

· The provider neither operates the new business itself nor commits substantial financial, capital, or human resources to the venture. Instead, it contracts out substantially all the operations of the new business.

· The provider and the venture partner (typically a manager or supplier of the new line of business) share in the economic benefit of the new business. For example, the manager/supplier of the service takes its share in the form of payments under the various contracts with the provider and the provider receives its share in the form of the residual profit from the new business.

· The aggregate payments to the manager/supplier typically vary with the value or volume of business generated for the new business by the provider.

Perhaps one of the most disturbing aspects of the contractual joint venture analysis is that even if a joint venture arrangement is structured to fit squarely within a safe harbor under the anti-kickback statute, the OIG has stated that only the compensation or other remuneration paid by one party to another party within the joint venture will receive safe harbor protection. Where, however, the joint venture is structured to permit one or the other party to make a profit over and above the compensation or other remuneration, such profit will not, according to the OIG, receive safe harbor protection and may constitute illegal remuneration under the anti-kickback statute. So, for example, where a group practice leases equipment and technical personnel from another health care provider in a new line of business that enables the group practice to make a profit billing on those services, that profit may constitute illegal remuneration, even where the rent paid to the leasing provider is consistent with fair market value and the arrangement otherwise conforms to an applicable safe harbor.

In 2004, the OIG addressed a contractual laboratory joint venture in a formal Advisory Opinion. There the OIG concluded that a proposed joint venture arrangement between a provider of laboratory services and various physician groups could potentially generate prohibited remuneration under the anti-kickback statute. The proposed venture involved a pathology laboratory company (Lab Company) which would enter into a series of contracts with physician group practices to operate pathology laboratories for each group at an off-site location. Under the proposed arrangement, each physician group would lease space, equipment and professional (i.e., pathologist) and technical personnel from the Lab Company. Each physician group would also enter into a management agreement with the Lab Company to manage each group’s laboratory. The physician group would bill patients and their insurers, including Medicare, for pathology services furnished at the laboratory. The Lab Company would be paid (1) a management fee that would consist of: (i) a fixed flat fee based on historical utilization; (ii) a per-specimen collection fee; and (iii) a percentage of collections for billing services, and (2) separate lease payments.

The OIG found that the arrangement involved a physician group expanding into a new but related line of business which was dependent on referrals from the group. The physician group would be able to do this by contracting out substantially all laboratory operations, including the professional services, necessary to provide the pathology services. As a result, according to the Advisory Opinion, the physician group would be able to expand into a line of business that it would not otherwise have the capacity or expertise to provide while committing very little in the way of financial, capital or human resources. Based on the facts presented, the OIG concluded that the arrangement was designed to permit the Lab Company to pay the physician groups a share of the profits from their laboratory referrals by giving them the opportunity to obtain the difference between the reimbursement received by the physician groups and the fees (i.e., management fee and lease payments) paid by the physician groups to the Lab Company. Moreover, the OIG concluded that while the payments to the Lab Company pursuant to the management agreement and the lease could be structured to meet applicable safe harbors, the retained profits from the pathology services would not be protected by any safe harbor.

So how does one go about navigating the dangerous contractual joint venture waters? As an initial matter, if the joint venture will involve referrals by the investing physicians for Stark “designated health services,” the venture must first be structured to comply with an available exception to the Stark prohibitions. Because Stark is a strict liability statute – meaning no intent to violate the law is necessary for a violation to occur – an arrangement involving Stark services which fails to meet an exception will be deemed illegal regardless of its permissibility under the anti-kickback statute.

Next, the proposed joint venture should be analyzed to determine whether it can be made to fit within one of the available regulatory safe harbors to the anti-kickback statute. Unfortunately, not every venture can be made to fit squarely within a safe harbor, and failure to meet each and every element of a safe harbor will take the arrangement outside of the protections of the safe harbor. Failure to meet a safe harbor, of course, is not fatal to the legality of a joint venture arrangement, but does leave the venture open to scrutiny by enforcement authorities with prosecutorial discretion. So even if all elements of a safe harbor cannot be met, it is generally advisable to meet as many of those elements as possible.

As noted previously, even if a contractual joint venture does fall within a safe harbor, the arrangement may still not be safe from exposure under the anti-kickback statute. It is advisable, therefore, to avoid or minimize the “suspect” attributes identified by the OIG when structuring these arrangements. For example, ideally all parties to the venture should make a meaningful investment in the venture either in the form of capital, personnel or human resources. Similarly, balancing the obligations of the parties in the venture will serve to show that the venture is more than a means of simply locking up a stream of referrals. So, one party to the venture may contribute personnel while the other may contribute space and equipment. Finally, the venture should be justifiable from more than just a profitability standpoint. Ventures which create a novel service or delivery mode, create overall cost savings or which add patient convenience are generally more defensible than those which simply serve to generate profits for venture participants.

At a time when contractual joint ventures between and among providers are proliferating, the OIG’s contractual joint ventures analysis is a disturbing proposition. However, as a final point, it is important to remember when analyzing and structuring contractual joint ventures that the anti-kickback statute is an intent-based statute. In other words, the parties must have intended to induce or reward referrals or the generation of business covered by a federal payor program. Accordingly, a contractual joint venture, even having the suspect attributes identified by the OIG, can be quite legitimate and perfectly legal absent the requisite intent to induce or reward referrals and/or business.

Todd A. Rodriguez, Esq., is a health care attorney in the Chester County, Pennsylvania office of Fox Rothschild LLP.

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