[Federal Register Volume 68, Number 83 (Wednesday, April 30, 2003)]
[Notices]
[Pages 23148-23150]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-10626]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Office of Inspector General


Publication of OIG Special Advisory Bulletin on Contractual Joint 
Ventures

AGENCY: Office of Inspector General (OIG), HHS.

ACTION: Notice.

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SUMMARY: The OIG periodically develops and issues guidance, including 
Special Advisory Bulletins, to alert and inform the health care 
industry about potential problems or areas of special interest. This 
Federal Register notice sets forth the recently issued OIG Special 
Advisory Bulletin addressing certain contractual joint venture 
arrangements.

FOR FURTHER INFORMATION CONTACT: Vicki Robinson or Joel Schaer, Office 
of Counsel to the Inspector General, (202) 619-0335.

SUPPLEMENTARY INFORMATION:

Special Advisory Bulletin: Contractual Joint Ventures (April 2003)

Introduction

    This Special Advisory Bulletin addresses certain complex 
contractual arrangements for the provision of items and services 
previously identified as suspect in our 1989 Special Fraud Alert on 
Joint Venture Arrangements.\1\ While much of the discussion in the 1989 
Special Fraud Alert focused on investor referrals to newly formed 
entities, we observed that:
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    \1\ The 1989 Special Fraud Alert was reprinted in the Federal 
Register in 1994. See 59 FR 65372 (December 19, 1994). The Special 
Fraud Alert is also available on our Web page at http://oig.hhs.gov/fraud/docs/alertsandbulletins/121994.html.

[t]he Office of Inspector General has become aware of a 
proliferation of arrangements between those in a position to refer 
business, such as physicians, and those providing items or services 
for which Medicare or Medicaid pays. Some examples of the items or 
services provided in these arrangements include clinical diagnostic 
laboratory services, durable medical equipment (DME), and other 
diagnostic services. Sometimes these deals are called ``joint 
ventures.'' A joint venture may take a variety of forms: it may be a 
contractual arrangement between two or more parties to cooperate in 
providing services, or it may involve the creation of a new legal 
entity by the parties, such as a limited partnership or closely held 
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corporation, to provide such services. (Emphasis added.)

    Notwithstanding that caution, the Office of Inspector General (OIG) 
is concerned that contractual joint venture arrangements are 
proliferating.\2\
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    \2\ The kinds of contractual arrangements addressed in this 
Special Advisory Bulletin are sometimes referred to as ``joint 
ventures'' or ``contractual joint ventures'' or may be referenced by 
other terminology. For purposes of the analysis set forth in this 
Bulletin, a ``joint venture'' is any common enterprise with mutual 
economic benefit. The application of this Bulletin is not limited to 
``joint ventures'' that meet technical qualifications under 
applicable state or common law.
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A. Questionable Contractual Arrangements

    The federal anti-kickback statute, section 1128B(b) of the Social 
Security Act (the Act), prohibits knowingly and willfully soliciting, 
receiving, offering, or paying anything of value to induce referrals of 
items or services payable by a federal health care program. Kickbacks 
are harmful because they can (1) distort medical decision-making, (2) 
cause overutilization, (3) increase costs to the federal health care 
programs, and (4) result in unfair competition by freezing out 
competitors unwilling to pay kickbacks. Both parties to an 
impermissible kickback transaction may be liable. Violation of the 
statute constitutes a felony punishable by a maximum fine of $25,000, 
imprisonment up to 5 years, or both. The OIG may also initiate 
administrative proceedings to exclude persons from the federal health 
care programs or to impose civil money penalties for kickback 
violations under sections 1128(b)(7) and 1128A(a)(7) of the Act.
    This Special Advisory Bulletin focuses on questionable contractual 
arrangements where a health care provider in one line of business 
(hereafter referred to as the ``Owner'') expands into a related health 
care business by contracting with an existing provider of a related 
item or service (hereafter referred to as the ``Manager/Supplier'') to 
provide the new item or service to the Owner's existing patient 
population, including federal health care program patients. The 
Manager/Supplier not only manages the new line of business, but may 
also supply it with inventory, employees, space, billing, and other 
services. In other words, the Owner contracts out substantially the 
entire operation of the related line of business to the Manager/
Supplier--otherwise a potential competitor--receiving in return the 
profits of the business as remuneration for its federal program 
referrals.
    Some examples of potentially problematic contractual arrangements 
include the following:

[[Page 23149]]

    [sbull] A hospital establishes a subsidiary to provide DME. The new 
subsidiary enters into a contract with an existing DME company to 
operate the new subsidiary and to provide the new subsidiary with DME 
inventory. The existing DME company already provides DME services 
comparable to those provided by the new hospital DME subsidiary and 
bills insurers and patients for them.
    [sbull] A DME company sells nebulizers to federal health care 
beneficiaries. A mail order pharmacy suggests that the DME company form 
its own mail order pharmacy to provide nebulizer drugs. Through a 
management agreement, the mail order pharmacy runs the DME company's 
pharmacy, providing personnel, equipment, and space. The existing mail 
order pharmacy also sells all nebulizer drugs to the DME company's 
pharmacy for its inventory.
    [sbull] A group of nephrologists establishes a wholly-owned company 
to provide home dialysis supplies to their dialysis patients. The new 
company contracts with an existing supplier of home dialysis supplies 
to operate the new company and provide all goods and services to the 
new company.
    These problematic arrangements typically exhibit certain common 
elements. First, the Owner expands into a related line of business, 
which is dependent on referrals from, or other business generated by, 
the Owner's existing business.\3\ The new business line may be 
organized as a part of the existing entity or as a separate subsidiary. 
Typically, the new business primarily serves the Owner's existing 
patient base.
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    \3\ The Owner's referrals may be direct or indirect and may 
include not only ordering or purchasing goods or services, but also 
``arranging for'' or ``recommending'' goods and services. See 
section 1128B(b) of the Act. For example, a hospital may generate 
business for a DME company, notwithstanding that orders for specific 
DME items must be signed by a physician who may or may not be a 
hospital employee.
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    Second, the Owner 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 Manager/Supplier typically agrees to provide not 
only management services, but also a range of other services, such as 
the inventory necessary to run the business, office and health care 
personnel, billing support, and space. While the Manager/Supplier 
essentially operates the business, the billing of insurers and patients 
is done in the name of the Owner. In many cases, the contractual 
arrangements result in either practical or legal exclusivity for the 
Manager/Supplier through inclusion of non-competition provisions or 
restrictions on access. While the contract terms of these arrangements 
may appear to place the Owner at financial risk, the Owner's actual 
business risk is minimal because of the Owner's ability to influence 
substantial referrals to the new business.
    Third, the Manager/Supplier is an established provider of the same 
services as the Owner's new line of business. In other words, absent 
the contractual arrangement, the Manager/Supplier would be a competitor 
of the new line of business, providing items and services in its own 
right, billing insurers and patients in its own name, and collecting 
reimbursement.
    Fourth, the Owner and the Manager/Supplier share in the economic 
benefit of the Owner's new business. The Manager/Supplier takes its 
share in the form of payments under the various contracts with the 
Owner; the Owner receives its share in the form of the residual profit 
from the new business.
    Fifth, aggregate payments to the Manager/Supplier typically vary 
with the value or volume of business generated for the new business by 
the Owner. While in some arrangements certain payments are fixed (for 
example, the management fee), other payments, such as payments for 
goods and services supplied by the Manager/Supplier, will vary based on 
the number of goods and services provided. In other words, the 
aggregate payment to the Manager/Supplier from the whole arrangement 
will vary with referrals from the Owner. Likewise, the Owner's 
payments, that is, the difference between the net revenues from the new 
business and its expenses (including payments to the Manager/Supplier), 
also vary based on the Owner's referrals to the new business. Through 
these contractual payments, the parties are able to share the profits 
of the new line of business.

B. Safe Harbor Protection May Be Unavailable

    Under the kickback statute, a number of statutory and regulatory 
``safe harbors'' immunize certain arrangements that might otherwise 
violate the anti-kickback statute. (See 42 U.S.C. 1320a-7b(b)(3); 42 
CFR 1001.952.) To qualify for safe harbor protection, an arrangement 
must fit squarely in one of these safe harbor provisions. Some parties 
attempt to carve otherwise problematic contracting arrangements into 
several different contracts for discrete items or services (e.g., a 
management contract, a vendor contract, and a staffing contract), and 
then qualify each separate contract for protection under a ``safe 
harbor.'' Such efforts may be ineffectual and leave the parties subject 
to prosecution for the following reasons.
    First, many of these questionable joint venture arrangements 
involve contracts pursuant to which the Manager/Suppliers agree to sell 
items and services to the Owners at a discounted price. However, where 
a discount is given as part of an overarching business arrangement, it 
cannot qualify for protection under the discount safe harbor. Simply 
put, the discount safe harbor does not protect--and has never 
protected--prices offered by a seller to a buyer in connection with a 
common enterprise. To be protected under the discount safe harbor, a 
price reduction must be based on an arms length transaction. (See 42 
CFR 1001.952(h) under which ``the term discount means a reduction in 
the amount a buyer * * * is charged for an item or service based on an 
arms-length transaction.''). As we expressly stated in the preamble to 
the 1991 safe harbor regulations, the provision of items or services to 
a joint venture by a participant in the venture is not an ``arms 
length'' transaction:

    Another problem exists where an entity, which is both a provider 
and supplier of items or services and joint venture partner with 
referring physicians, makes discounts to the joint venture as a way 
to share its profits with the physician partners. Very often this 
entity furnishes items or services to the joint venture, and also 
acts as the joint venture's general partner or provides management 
services to the joint venture. * * * These arrangements are not arms 
length transactions where the joint venture shops around for the 
best price on a good or service. Rather it has entered into a 
collusive arrangement with a particular provider or supplier of 
items or services that seeks to share its profits with referring 
physician partners. [We did] * * * not intend to protect these types 
of transactions which are sometimes made to appear as ``discounts'' 
* * * (Emphasis added) (See 56 FR 35977; July 29, 1991).

    In short, a discount is not based on arms length transaction if it 
is provided by a seller to a purchaser in connection with a common 
venture, regardless of whether the venture is memorialized in separate 
contracts.
    Second, even if the various contracts could fit in one or more safe 
harbors, they would only protect the remuneration flowing from the 
Owner to the Manager/Supplier for actual services rendered. In the 
contractual arrangements that are the subject of this Bulletin, 
however, the illegal remuneration is often the difference between the 
money paid by the Owner to the Manager/Supplier and the

[[Page 23150]]

reimbursement received from the federal health care programs. By 
agreeing effectively to provide services it could otherwise provide in 
its own right for less than the available reimbursement, the Manager/
Supplier is providing the Owner with the opportunity to generate a fee 
and a profit. The opportunity to generate a fee is itself remuneration 
that may implicate the anti-kickback statute.

C. Indicia of a Suspect Contractual Joint Venture

    To help identify the suspect contractual joint ventures that are 
the focus of this Special Advisory Bulletin, we describe below some 
characteristics, which, taken separately or together, potentially 
indicate a prohibited arrangement. This list is illustrative, not 
exhaustive.
    New Line of Business. The Owner typically seeks to expand into a 
health care service that can be provided to the Owner's existing 
patients. As illustrated in Part A, examples include, but are not 
limited to, hospitals expanding into DME services, DME companies 
expanding into the nebulizer pharmacy business, or nephrologists 
expanding into the home dialysis supply business.\4\
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    \4\ These examples are illustrative only. This list is not 
intended to suggest that other analogous ventures are not equally 
suspect.
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    Captive Referral Base. The newly-created business predominantly or 
exclusively serves the Owner's existing patient base (or patients under 
the control or influence of the Owner). The Owner typically does not 
intend to expand the business to serve new customers (i.e., customers 
not already served in its main business) and, therefore, makes no or 
few bona fide efforts to do so.
    Little or No Bona Fide Business Risk. The Owner's primary 
contribution to the venture is referrals; it makes little or no 
financial or other investment in the business, delegating the entire 
operation to the Manager/Supplier, while retaining profits generated 
from its captive referral base. Residual business risks, such as 
nonpayment for services, are relatively ascertainable based on 
historical activity.
    Status of the Manager/Supplier. The Manager/Supplier is a would-be 
competitor of the Owner's new line of business and would normally 
compete for the captive referrals. It has the capacity to provide 
virtually identical services in its own right and bill insurers and 
patients for them in its own name.
    Scope of Services Provided by the Manager/Supplier. The Manager/
Supplier provides all, or many, of the following key services:
    [sbull] Day-to-day management;
    [sbull] Billing services;
    [sbull] Equipment;
    [sbull] Personnel and related services;
    [sbull] Office space;
    [sbull] Training;
    [sbull] Health care items, supplies, and services.\5\
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    \5\ The Manager/Supplier may also provide marketing services, 
although in many instances no such services are required since the 
Owner generates substantially all of the venture's business from its 
existing patient base.
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    In general, the greater the scope of services provided by the 
Manager/Supplier, the greater the likelihood that the arrangement is a 
contractual joint venture.
    Remuneration. The practical effect of the arrangement, viewed in 
its entirety, is to provide the Owner the opportunity to bill insurers 
and patients for business otherwise provided by the Manager/Supplier. 
The remuneration from the venture to the Owner (i.e., the profits of 
the venture) takes into account the value and volume of business the 
Owner generates.
    Exclusivity. The parties may agree to a non-compete clause, barring 
the Owner from providing items or services to any patients other than 
those coming from Owner and/or barring the Manager/Supplier from 
providing services in its own right to the Owner's patients.
    As noted above, these factors are illustrative, not exhaustive. The 
presence or absence of any one of these factors is not determinative of 
whether a particular arrangement is suspect. As indicated, this Special 
Advisory Bulletin is not intended to describe the entire universe of 
suspect contractual joint ventures. This Bulletin focuses on 
arrangements where substantially all of the operations of a new line of 
business are contracted out to a would-be competitor. Arrangements 
involving the delegation of fewer than substantially all services, or 
delegation to a party not otherwise in a position to bill for the 
identical services, may also raise concerns under the anti-kickback 
statute, depending on the circumstances.
    The Office of Inspector General (OIG) was established at the 
Department of Health and Human Services by Congress in 1976 to identify 
and eliminate fraud, abuse, and waste in the department's programs and 
to promote efficiency and economy in departmental operations. The OIG 
carries out this mission through a nationwide program of audits, 
investigations, and inspections.
    The Fraud and Abuse Control Program, established by the Health 
Insurance Portability and Accountability Act of 1996 (HIPAA), 
authorized the OIG to provide guidance to the health care industry to 
prevent fraud and abuse and to promote the highest level of ethical and 
lawful conduct. To further these goals, the OIG issues Special Advisory 
Bulletins about industry practices or arrangements that potentially 
implicate the fraud and abuse authorities subject to enforcement by the 
OIG.

    Dated: March 27, 2003.
Dennis J. Duquette,
Acting Principal Deputy Inspector General.
[FR Doc. 03-10626 Filed 4-29-03; 8:45 am]
BILLING CODE 4150-01-P