Are Safe Harbors Safe

A Legal Newsletter From Foley & Lardner LLP VOL. 05-4 JAN. 28, 2005 ARE “SAFE HARBORS” STILL SAFE? In OIG Advisory Opinion 04-17, posted December 17, 2004 (“Advisory Opinion”), the OIG asserts that socalled “contractual” joint ventures can be prosecuted under the federal anti-kickback statute, even if they fully comply with all applicable safe harbors. This significantly raises the stakes in the OIG’s campaign against what it refers to as “contractual” joint ventures. However, it could also have implications far beyond that, potentially calling into question almost any safe harbored arrangement that the OIG chooses to challenge. “Contractual” Joint Ventures The OIG has historically viewed with suspicion joint ventures between those in a position to refer federal health care covered items and services, and those furnishing such items and services, especially when most or all of the joint venture’s business comes from referrals by the joint venturer(s) in a position to refer to the venture. See, e.g., OIG’s Special Fraud Alert on Joint Venture Arrangements, 59 Fed. Reg. 65373 (Dec. 19, 1994). More recently, the OIG amplified its concerns, identifying so-called “contractual” joint ventures as potentially also coming under suspicion. See OIG Special Advisory Bulletin on Contractual Joint Ventures (April 30, 2003) (the “Special Bulletin”); see also Law Watch 03-10, “OIG Loses Head, Still Has Teeth” (May 1, 2003) (which discusses the Special Bulletin). Executive Summary Action: The OIG recently issued an Advisory Opinion that “contractual” joint ventures are subject to prosecution even if they fully comply with all applicable safe harbors. Impact: OIG Advisory Opinions bind only the party(ies) seeking the opinion. However, this recent opinion provides valuable insight into the OIG’s perspective on contractual joint ventures in particular, and the “protection” offered by the safe harbors generally. Effective Date: December 17, 2004. the arrangement, and the other party (the “Manager/Supplier”) possesses all the know-how and performs all the work, but allows the Owner to bill and collect for the items or services, thereby profiting from its own referrals without taking any financial risk, committing any resources or engaging in other endeavors. The OIG has identified five signs of potentially problematic “contractual” joint ventures. They are: (1) the Owner expands into a related line of business designed primarily to serve the Owner’s existing patient base; (2) the Owner’s primary contribution to the “venture” is patient referrals, and the Owner commits little or no financial resources, management time or effort to the venture and has little or no risk; (3) the Manager/Supplier is an established provider in the new venture’s business, and a would-be competitor of the Owner; (4) the Owner has the opportunity to bill for business otherwise provided by the Manager/Supplier and each party’s profits from the venture take into account the value and volume of business generated by the Owner; (5) there are exclusivity or non-compete provisions that have the practical effect of “lockingup” the Owner’s referrals. See Special Bulletin. OIG Advisory Opinion 04-17 OIG Advisory Opinion 04-17 analyzes a proposed arrangement in which The OIG views arrangements as “contractual” joint ventures even if the parties do not: (1) form a new entity; (2) share profits and losses; or (3) otherwise enter an arrangement bearing the traditional hallmarks of a joint venture. The OIG asserts that a “contractual” joint venture may exist even in a lease, services agreement, or supply contract, when one of the parties to the arrangement (the “Owner”) has the ability to refer patients for the particular items or services covered in a management company, affiliated with a pathology laboratory, contracts with various medical groups to operate pathology laboratories for each separate medical group, on a turn-key basis, at a centralized, non-medical group location. The management company provides the medical groups with all the necessary space, equipment, management services, as well as all technical, professional and supervisory pathology personnel and services at the centralized location, so that each medical group has its own laboratory, and bills and collects for its laboratory services. The OIG states that the proposed arrangement is similar to the types of “contractual” joint ventures to which it objected in the Special Bulletin, noting that the medical groups “will not actually participate in the operation” of the laboratories, and “would commit almost nothing in the way of financial, capital, or human resources” to the laboratories. The OIG also notes that because some of the fees paid by the medical groups are based on utilization (e.g., the management fee contains a per specimen fee in addition to a flat, monthly fee), the aggregate payments to the management company vary based on the medical groups’ referrals, and thus the company and the medical groups “share in the economic benefit” of the medical groups’ laboratories. Based on the views expressed in the Special Bulletin, it is not surprising that the OIG reaches an unfavorable conclusion regarding the proposed arrangement. However, the OIG further asserts that even when these types of arrangements are structured to come within applicable safe harbors, the safe harbors protect only rent or compensation paid under the lease or services agreement. Any profit made by the Owner “would not be protected by any safe harbor.” In other words, the OIG has taken the position that the opportunity to profit from one’s own referrals is “remuneration” that a Manager/Supplier provides to an Owner, even if all of the terms of their arrangement come within applicable safe harbors, e.g., there are fixed, periodic payments, consistent with fair market value, without taking into account the volume or value of referrals between the parties. Analytical Underpinnings of OIG’s Position Advisory Opinion 04-17 is counterintuitive, to say the least. In fact, notwithstanding the OIG’s views, it has generally been assumed by health care lawyers that if a lease or services arrangement fully complies with the applicable safe harbor(s), then both parties to the arrangement are immune from prosecution, under the anti-kickback statute. Indeed, the Advisory Opinion is contrary to the decision in Hanlester Network v. Shalala, in which the court examined a turn-key clinical laboratory services management agreement between a large laboratory company and physician owned joint ventures, and rejected the OIG’s assertion that the laboratory company remunerated the joint ventures through its management agreement, noting that “no evidence shows that payments were made to the [physician joint ventures],…payments actually flowed from [them] to [the manager] in the form of fees for its management services”. The OIG’s position that “contractual” joint ventures can potentially run afoul of the ant-kickback statute (even if all of the parties’ arrangements come within all of the applicable safe harbors) appears to be somewhat result oriented, based on what the OIG views as very objectionable facts in Advisory Opinion 04-17, and it is possible that the OIG’s position regarding the limited scope of safe harbor protection would be rejected by a court. The safe harbor regulations were mandated by Congress, intending that the safe harbors would insulate parties from liability if their arrangement came within the applicable safe harbor(s), rather than offering the illusory “protection” that would follow from the OIG’s interpretation. The OIG’s position creates the very confusion and uncertainty that Congress presumably sought to avoid when it mandated that the OIG promulgate the safe harbors so that parties could structure their arrangements to achieve the certainty of protection. Conclusion Notwithstanding the questionable merits of the OIG’s position, in light of Advisory Opinion 04-17, the health care community is now on notice that the OIG may choose to enforce perceived anti-kickback statute violations notwithstanding that all of the parties’ arrangements come within the applicable safe harbors. Accordingly, those structuring “contractual” joint venture arrangements are well advised to consider limiting the existence of the factors identified by the OIG as problematic, to the extent feasible, even if those arrangements would otherwise fully comply with all applicable safe harbors. If you have questions about Advisory Opinion 04-17, or about the antikickback statute generally, please contact Charles Oppenheim, Larry Conn, or Rob Sevell in our Los Angeles office, Fred Entin, Dick Prebil, or LaDale George in our Chicago office, Fred Geilfuss or Laura Gage in our Milwaukee office, Rick Johns in our Orlando office, Mike Scarano in our San Diego/Del Mar office, Jon Lindeke in our San Francisco office, Gary Koch, M.D. in our Tampa office, Lena Robins in our Washington, DC office, or the member of the firm who normally handles your legal matters. _______ 05-4/Page 2 Brussels This Law Watch was authored by Charles B. Oppenheim of our Los Angeles office. 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