As the economy continues to flourish, there is a proliferation of merger and acquisition activity in the healthcare space. We continue to see a rise in ketamine clinic acquisitions as well as investors who are starting management services organizations (“MSO”) to assist such clinics with their administrative burden. Likewise, we have seen an increase in joint venture activity between ketamine clinics and MSOs. For those clinics that receive any kind of federal reimbursement (e.g., Medicare, Medicaid, the VA, etc.), the federal anti-kickback (“AKS”) statute applies – and the AKS has criminal penalties, including jail time.
We have previously written about the AKS and how it applies to ketamine clinics (click here to review). In general, the AKS prohibits anyone from receiving or paying any form of remuneration for the referral patients who are covered by federal reimbursement (and some state laws prohibit the same for private insurance and self-pay patients).
The primary investigative arm for federal reimbursement fraud and abuse activity is the Office of Inspector General (“OIG”) which is housed in the U.S. Department of Health & Human Services. Among other things, the OIG provides guidance to the healthcare industry in a variety of ways, including fraud alerts, opinion letters, and compliance guidance. Healthcare lawyers should be well aware of the OIG and the importance of any guidance it promulgates.
Fraud Alerts by the OIG
The OIG has published two special alerts for joint venture activity – the first in 1994 (click here to review) and the second in 2003 (click here to review). Before we discuss some of the important factors to consider for joint ventures, it is important to stress the underlying issues for the AKS. As the OIG summarized in the 2003 fraud alert – 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. Any time there is a healthcare transaction, you should always keep those four factors in mind. If any part of the transaction triggers one of the foregoing issues (and there is federal reimbursement involved), you should dive into the AKS to see if there is a possible violation and to review the safe harbors under the AKS.
Factors to Consider
The OIG, in its 2003 fraud alert, provided a list of suspect contractual joint venture characteristics. As the OIG noted, this list is illustrative, not exhaustive. Below, we have reproduced the list (with minor edits). However, it is important to note that the OIG focused on business lines and joint ventures where both parties are healthcare providers. In the typical MSO arrangement, the MSO is not itself a healthcare provider nor is it owned by healthcare providers. While this helps to reduce certain risks, it does not ameliorate all risks under the AKS.
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. 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.
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:
- day-to-day management;
- billing services;
- personnel and related services;
- office space;
- health care items, supplies, and services.
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.
While the foregoing factors primarily apply when there are two healthcare providers involved in a contractual joint venture, there are certain factors that would apply to MSOs too. It is vitally important to always remember the underlying purposes of the AKS, as outlined above. Any time those factors are implicated, you need to consider whether the AKS will be triggered and/or violated.
One of the foregoing issues that will always apply is whether the remuneration from the venture to the healthcare provider (i.e., the profits of the venture) takes into account the value and volume of business the healthcare provider generates. If this is prevalent, you need to step back and restructure the compensation so as not to take into account the value or volume of business generated by the provider.
As we have said before in prior posts, healthcare is a very complex area of the law. Every transaction is different, yet oftentimes, AKS issues are prevalent in one form or another. Given the severe consequences of violating the AKS, it is imperative to do things the right way.