CONTRACTUAL JOINT VENTURES: LOOK BEFORE YOU LEAP

Sheryl Tatar Dacso, J.D., Dr.P.H.
Robert “Bob” Bennett, J.D.

As physician incomes are squeezed by reduction in reimbursement under managed care and Medicare, many practices seek to maximize other sources of income. One such scenario involves medical practice expanding into a related business venture such as infusion, clinical diagnostic laboratory services, durable medical equipment (DME) or other diagnostic services by contracting with an existing provider [“the Supplier”] to deliver new services or medical items to the physician’s existing patients. The services offered by the Supplier include, but are not limited to, managing the new business venture, supplying inventory, employees, rental space, or billing services in exchange for referrals by the health care provider. The physician then bills insurers, patients and the Federal government in his name for the services rendered by the Supplier, sharing with the Supplier the residuary profits after costs of the services or items is paid to the Supplier. It is this arrangement that has caught the attention of the Office of Inspector General resulting in a “Fraud Alert” concerning such arrangements.  The OIG expresses concern that these arrangements can violate the federal anti-kickback statutes 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.

It is important to understand that under the federal anti-kickback laws, 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.

In this article, we will describe the key characteristics of this potentially problematic arrangement and address where some practices found themselves violating not only the anti-kickback laws, but also billing rules because of these business arrangements.

What type of business arrangements have been identified by the OIG as contractual joint ventures?

The types of arrangements that can implicate a contractual joint venture are varied. We have seen some that involve rental arrangements where the suppliers of DMEPOS (DME, prosthetics, orthotics and other supplies) operate a consignment closet in the physician’s office. Others involve mobile diagnostic equipment that is provided by the Supplier to the physician to be operated out of the physician’s office. Still others involve the provision of physical and/or occupational therapy services by a vendor that employs the staff, furnishes the equipment and enters into a contractual arrangement with the physician so the physician can bill under his/her provider number for these services.

What are the key features of a potentially problematic arrangement?

One important feature identified by the OIG in the Alert is that substantially all of the operations of a new line of business are contracted out to a would-be competitor. Key characteristics of a potentially problematic arrangement involving Managers/Suppliers which are of concern to the OIG include the following:

1. New Lines of Business.  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.  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.

2. Services That are Provided by the Manager/Supplier with Limited Business Risk to Owner.  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.

3. Supplier would be Competitor absent Contract Arrangement.  The Manager/Supplier is usually 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 Owner in the new line of business, providing items and services in its own right, billing insurers and patients in its own name, and collecting reimbursement.

4. Exclusive Contract with Profit-Sharing.  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.

5. Compensation is tied to Utilization/Referrals.  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.

Where do practices get in trouble when billing for contracted diagnostic tests and services?

The federal government allows physicians to provide diagnostic tests and other services on a “purchased” basis subject to specific billing rules. These regulations are designed to control the costs of tests, and to prohibit physicians from improperly marking up the cost of tests.  While the government permits physicians to charge a reasonable technical fee for tests done by the physician’s staff, the regulations prohibit physicians from making any profit off of tests done by outside vendor or supplier where staff or tests are “purchased” from another entity (regardless of the location in which the tests are performed). The Medicare billing rules are very specific. Improper billing arrangements that result in payment may be deemed improper and subject to claims of billing fraud, which is subject to civil and criminal penalties. For this reason, physicians and their office staff should be very careful to comply with these rules. This includes ensuring that the persons or organizations that are contracted as vendors are qualified to perform the tests or provide the services under both state and federal law.

Sometimes, the Medicare billing rules prohibit physicians from billing for certain services because of the nature of those services. An example is with physical therapy, where for a physician to bill Medicare for physical therapy services, the physical therapy services “must be of a level of complexity that requires they be performed by or under the direct supervision of the physician.”   Physical therapy services can not be billed by a physician if they do not meet the complexity requirements as stated, above. Those that do not fit this standard are not considered reasonable and necessary, even if they are supervised by a physician. This is not to prohibit physical therapy services being provided directly by a licensed physical therapist or one providing those services under the supervision of a licensed physical therapist. 

Conclusion

Physicians and their practice managers should approach new lines of business with due care. Determine whether the proposed arrangement is legal before you “jump” on the bandwagon. Many physicians have learned the hard way that they will be held primarily responsible for repayment of any and all monies to Medicare or the Fiscal Intermediary where it is determined that such tests and services were improperly billed. Even if the Supplier/Vendor provides you with a legal opinion regarding the arrangement, remember that it is written for the Supplier/Vendor and not for the physician or his/her practice. You should consult an attorney with knowledge of Medicare law before you “leap” into a problem.

The authors appreciate the research done by Scott Novak and the assistance and review performed by Katherine White, J.D., both associated with the Firm of Sheryl Tatar Dacso, PLLC. The foregoing information is not intended as legal advice. Because facts vary from one situation to another, the reader should consult his/her attorney before relying on this or any other writing related to regulatory issues.