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New OIG Advisory Opinion 13-15 Sheds Further Light on Company Model Type Arrangements

November 13, 2013

[Disclosure: I am the attorney for the anesthesia group which was the Requestor of Advisory Opinion 13-15 and represented it in connection with its Request.]

On November 12, 2013, the Office of Inspector General (“OIG”) of the Department of Health and Human Services publicly released the redacted version of its Advisory Opinion 13-15. Although the fact pattern is not completely on point with the standard “company model” deal, and is far more complex, it sheds light on the limits of those arrangements.

In particular, the proposed arrangement involved placing the referring physician/medical group in the position of capturing the difference between the amount collected and a per diem rate to be paid to the anesthesia provider.

The OIG declined to approve the arrangement.

The Opinion also questions the legality of a carve out provision in an anesthesia exclusive contract in favor of the referring medical group.

The Facts

The Requestor is an anesthesia group.

From 1993 until early 2011, the anesthesia group contracted with a hospital (“Hospital”) to provide all anesthesia services, other than chronic pain management procedures, on an exclusive basis. The scope of the exclusive contract therefore included anesthesia services for ECT procedures performed at the Hospital.

In late 2010, a medical group (“Psychiatry Group”) with a medical practice centering on performing electroconvulsive therapy (“ECT”) procedures relocated to the Hospital. One of the owners of Psychiatry Group is Dr. X, who is board certified in both psychiatry and anesthesiology but who no longer accepts new psychiatry patients.

Shortly after the Psychiatry Group relocated to the Hospital, the anesthesia group began negotiating the 2011 renewal of its exclusive anesthesia service contract (the “2011 Contract”) with the Hospital. In the course of negotiating the 2011 Contract, the Hospital negotiated for Dr. X’s right to provide anesthesia services to ECT patients independent of any relationship with Requestor. The anesthesia group attempted to negotiate out of that carve out, but the Hospital refused: The final 2011 Contract included a provision permitting Dr. X to provide anesthesia services to ECT patients in the Hospital’s ECT program and requiring the anesthesia group to provide up to six weeks of coverage for Dr. X  for ECT procedures that otherwise would have been performed by Dr. X in his role as an anesthesiologist. That 2011 Contract had a one-year term.

Subsequently, in the course of negotiating the 2012 renewal of the anesthesia services contract (the “2012 Contract”), the Hospital negotiated for further amendments to the 2011 Contract’s carve-out provision. Ultimately, the 2012 Contract allowed Dr. X to provide anesthesia services to ECT patients in the Hospital’s ECT program and required the anesthesia group to provide coverage for Dr. X with prior notice as agreed to between the anesthesia group and Dr. X.

The 2012 Contract also included the following provision (the “Additional Anesthesiologist Provision”):

“In the event [the Psychiatry Group] or the Hospital determines that an additional anesthesiologist is needed to provide ECT, [anesthesia group] shall negotiate in good faith with [the Psychiatry Group] to contract with [anesthesia group] to provide those services. If, after good faith negotiations, [anesthesia group] and [the Psychiatry Group] are not successful in negotiating the terms of an agreement for [anesthesia group] to provide anesthesia services to [the Psychiatry Group], then, so long as the last offer from [the Psychiatry Group] was at a fair market value rate, as reasonably determined by the Hospital, [the Psychiatry Group] or [Dr. X] may contract with an additional anesthesiologist to provide anesthesia services for ECT, and the provision of anesthesia services by that additional anesthesiologist shall not constitute a violation of [anesthesia group’s right to provide anesthesia services on an exclusive basis].”

Subsequently, the Psychiatry Group informed the anesthesia gorup that it had determined that an additional part-time physician was needed to provide ECT anesthesia services and asked the anesthesia group to enter into the arrangement examined by the OIG in the Opinion (the “Proposed Arrangement”).

Under the Proposed Arrangement, the anesthesia group and the Psychiatry Group would enter into a contract pursuant to which the anesthesia group would fulfill the Psychiatry Group’s need for an additional part-time physician to provide ECT anesthesia services: (i) every Monday, (ii) as necessary to provide vacation coverage for Dr. X, and (iii) as necessary when emergent coverage is required. The Psychiatry Group estimated that such coverage would require between 6 and 12 hours of the anesthesiologists’ time during each day of service. The anesthesia group would reassign its right to bill for the services rendered by its anesthesiologists to the Psychiatry Group on coverage days. The Psychiatry Group would bill and collect for those services and, in turn, would pay the anesthesia group a fixed, per diem rate of $Y for the anesthesiologists’ services, which the anesthesia group maintains is below fair market value and below what it would receive if it billed for the services directly. The Psychiatry Group would retain the difference between the amount collected and the per diem rate.

OIG’s Analysis

The OIG has stated on numerous occasions its view that the opportunity to generate a fee could constitute illegal remuneration under the anti-kickback statute, even if no payment is made for a referral. Under the Proposed Arrangement, the anesthesia group would provide the Psychiatry Group the opportunity to generate a fee equal to the difference between the amounts the Psychiatry Group would bill and collect.

The Proposed Arragement would not qualify for protection under the safe harbor for personal services and management contracts for a number of reasons, including that the aggregate compensation to be paid over the term of the agreement would be neither set in advance nor consistent with fair market value.

In any event, that safe harbor protects only those payments made by a principal (here, the Psychiatry Group) to an agent (here, the anesthesia group); no safe harbor would protect the remuneration the anesthesia group would provide to the Psychiatry Group by way of the discount between the per diem rate and the amount that would actually be collected.

Because failure to comply with a safe harbor does not mean that an arrangement is per se illegal, the OIG then went into an analysis to determine whether, given all of the relevant facts, the Proposed Arrangement would pose no more than a minimal risk under the anti-kickback statute.

The OIG flatly stated that the Proposed Arrangement appears to be designed to permit the Psychiatry Group to do indirectly what it cannot do directly; that is, to receive compensation, in the form of a portion of the anesthesia group’s revenues, in return for the Psychiatry Group’s referrals of ECT patients to the anesthesia group for anesthesia services.

The Additional Anesthesiologist Provision gave the Psychiatry Group the ability to solicit this remuneration for its ECT patient referrals by allowing the Psychiatry Group to contract with an anesthesiologist other than the anesthesia group if the anesthesia group and the Psychiatry Group were not successful in negotiating the terms of an agreement for the anesthesia group to provide ECT anesthesia services. The Proposed Arrangement therefore presents the significant risk that the remuneration the anesthesia group would provide to the Psychiatry Group—i.e., the opportunity to generate a fee equal to the difference between the amounts the Psychiatry Group would bill and collect for the anesthesia group’s services, and the per diem amounts the Psychiatry Group would pay to the anesthesia group —would be in return for the Psychiatry Group’s anesthesia referrals.

The OIG concluded that the Proposed Arrangement could potentially generate prohibited remuneration under the anti-kickback statute and that the OIG could potentially impose administrative sanctions in connection with the Proposed Arrangement.

On another important point, although not officially within the scope of the opinion, the OIG noted the problematic nature of the carve out by stating that they cannot exclude the possibility that: (i) the Hospital agreed to negotiate for the Additional Anesthesiologist Provision in exchange for, or to reward, the Psychiatry Group’s continued referral of patients to the Hospital for ECT procedures; (ii) the Hospital leveraged its control over its large base of anesthesia referrals to induce the anesthesia group to agree to the Additional Anesthesiologist Provision; and (iii) the anesthesia group agreed to the Additional Anesthesiologist Provision in exchange for access to the Hospital’s stream of anesthesia referrals.

Bottom Line Analysis

Advisory Opinion 13-15 is important for several reasons.

First, it once again demonstrates a fact lost to many when discussing “company model” and similar potential anti-kickback law violations: they generally do not fit into an available safe harbor — the personal services and the employment safe harbors. Not only is this because payment to the referral-receiving physician is not set in advance and will vary with the value or volume of referrals, but even more fundamentally because those safe harbors only apply to payments from the principal to the agent, not to payments from the agent to the principal. In 13-15, the discount that permits the referral source to profit from the arrangement is a payment to the principal.

Second, although failure to fit within a safe harbor is not ipso facto fatal, the OIG has again illustrated, as it did, for example, in Advisory Opinion 11-03 and in Advisory Opinion 12-06, that being put in a position to profit from one’s referrals raises significant concerns of prohibited remuneration — that is, of violation of the federal anti-kickback statute.

Third, even though it is addressed only in a footnote, the OIG discusses the potential kickback nature underpinning a hospital’s carve out from an exclusive contract. Although this issue is distinct from that of company model type ventures and even from the normal circumstance in which anti-kickback analysis often arises, in my experience there are many problematic arrangements centering around hospitals benefiting financially, directly or indirectly, as a result of exclusive contract arrangements and from special carve outs from those arrangements.

Anyone considering entering into an arrangement that potentially violates the federal anti-kickback law should obtain counsel well-versed in the intricacies of the subject.

For further information, please contact me.


Comment or contact me if you’d like to discuss this post.

Mark F. Weiss

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