OIG Reiterates its Longstanding Concern about Joint Ventures between Health Care Providers/Suppliers and Referral Sources

December 1, 2021

On November 22, 2021, the Office of Inspector General for the Department of Health and Human Services (OIG) posted a negative Advisory Opinion regarding a proposed joint venture (JV) for the provision of therapy services (Proposed Arrangement) between an existing therapy services provider (Therapy Services Provider) and an owner of long-term care facilities (LTC Owner).  The OIG noted that the Proposed Arrangement would present significant risk of fraud and abuse and is potentially designed to permit the Therapy Services Provider to pay the LTC Owner a share of the profits derived from referrals for therapy services made by the LTC Owner’s facilities.

This Advisory Opinion is yet another example of OIG guidance reiterating its view that joint ventures formed between entities in the position to provide health care items or services and entities in the position to refer business can present risk under the federal Anti-Kickback Statute (AKS).

The Proposed Arrangement

The Therapy Services Provider would form the JV to provide therapy services to long-term care facilities.  The JV would contract out the bulk of the operations (i.e. all clinical and non-clinical employees, space, and equipment) to the Therapy Services Provider in exchange for a fee consistent with fair market value.  

The LTC Owner would purchase a 40 percent interest in the JV, and the Therapy Services Provider would hold the remaining 60 percent interest in the JV.  Though the LTC Owner’s purchase price would be consistent with fair market value, the LTC Owner’s investment in the JV would be based, in part, on the JV’s expected business from the LTC Owner’s facilities.

While the LTC Owner’s facilities would not be required to contract with the JV or otherwise make or direct referrals to the JV, the Therapy Services Provider certified that it expected the LTC Owner’s facilities to do so and that, during the initial phases of the JV, all of the JV’s revenues would be generated by services provided to the LTC Owner’s facilities.

Analysis

The Proposed Arrangement implicates the federal AKS because the JV would be held by (i) the LTC Owner, which is in the position to refer, arrange for, or recommend therapy services reimbursable by a Federal health care program, and (ii) the Therapy Services provider, which currently provides the therapy services.  The OIG noted that it has a longstanding concern about joint venture arrangements where all or most of the JV’s business is derived from one of its investors.  The OIG analyzed the Proposed Arrangement under both the small entity investment safe harbor and its OIG’s 2003 Special Advisory Bulletin on Contractual Joint Ventures, ultimately determining that the Proposed Arrangement presents significant fraud and abuse risk.

Small Entity Safe Harbor

The OIG concluded that the Proposed Arrangement would not satisfy any AKS safe harbors, including the small entity investment safe harbor, which protects profit distributions paid on investments in small entities if certain conditions are met.  In particular, the OIG concluded that the Proposed Arrangement would not satisfy the following small entity investment safe harbor conditions:

  • Investor Test.  The small entity investment safe harbor requires that no more than 40% of an entity’s investment interests be held by investors in a position to make or influence referrals, furnish items or services to, or otherwise generate business for the entity.  Under the Proposed Arrangement, all of the JV’s investments would be held by the Therapy Services Provider, which is in the position to furnish items or services, and the LTC Owner, which is in the position to make or influence referrals. 

  • Revenue Test.  The small entity investment safe harbor also requires that no more than 40% of an entity’s gross revenue come from referrals or other business generated from investors.  Here the parties expect that more than 40 percent of the JV’s revenues will come from referrals from the LTC Owner’s facilities, particularly during the initial phases of the JV. 

  • Investment Offer Test.  The small entity investment safe harbor requires that terms on which an investment interest is offered to an investor who is a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the entity are not related to the previous or expected volume of referrals, items or services furnished, or the amount of business otherwise generated from that investor to the entity. The Proposed Arrangement would not satisfy this requirement, because the LTC Owner’s investment in the JV would be based, in part, on the JV’s expected business with the LTC Owner’s facilities.

2003 Special Advisory Bulletin on Contractual Joint Ventures

The OIG determined that the Proposed Arrangement exhibited many characteristics of problematic joint ventures identified in the OIG’s Special Advisory Bulletin on Contractual Joint Ventures.

  • New Line of Business Dependent on Referrals.  By entering into the JV, the LTC Owner would be expanding into a line of business – therapy services for its facilities’ patients – that would be dependent on referrals and business generated by the LTC Owner through its facilities. 

  • Established Provider of the Services.   The Therapy Services Provider is an established provider of the same services that the JV would provide.  The Therapy Services Provider has the capacity to provide therapy services in its own right and bill facilities for them in its own name.  Absent the JV, the Therapy Services Provider would normally compete with other providers for referrals from the LTC Owner’s facilities.  

  • Share in the Revenue.  The JV effectively gives the LTC Owner a share in the revenues from therapy services provided to its facilities (and other facilities), which could be viewed as an inducement to ensure the LTC Owner’s facilities do not refer the therapy services to a competitor.

  • Scope of Services Provided by the Manager.  The LTC Owner would not actually participate in the operation of the JV, and substantially all of the JV’s operations would be contracted out to the Therapy Services Provider. The OIG has indicated the greater the scope of services provided by a manager/supplier (here, the Therapy Services Provider), the greater the likelihood that the arrangement is a suspect contractual joint venture.

  • Little Financial Risk.  The LTC Owner’s financial risk would be minimal, because it would be in the position to control or influence the amount of business its facilities refer to the JV.  

Key Takeaways

This Advisory Opinion is part of a long line of OIG guidance expressing concern about joint ventures between health care providers/suppliers and entities in the position to refer business.  In addition, to this Advisory Opinion and the Special Advisory Bulletin on Contractual Joint Ventures, the OIG has issued multiple Advisory Opinions on such joint ventures (e.g. a 2011 negative Advisory Opinion on a contractual joint venture between a long-term care pharmacy and an owner of long-term care facilities; a 2011 negative Advisory Opinion on physician investment in a company that would provide pathology laboratory management services; a 2012 negative Advisory Opinion on contractual joint ventures between an anesthesia services provider and physician-owned entities; and, a 2010 favorable Advisory Opinion on a contractual joint venture between a sleep testing provider and a hospital).

Health care entities considering forming such a joint venture should proceed with caution to avoid structuring a joint venture that exhibits the characteristics identified by the OIG as potentially indicative of a prohibited joint venture arrangement.

©1994-2022 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.
National Law Review, Volume XI, Number 335
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