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OIG Releases Unfavorable Advisory Opinion Regarding an Arrangement Between a Physician-Invested Entity and a Pathology Laboratory

On October 3, 2011, the Department of Health and Human Services Office of Inspector General (OIG) issued an unfavorable advisory opinion regarding a proposed arrangement under which physicians would invest in a company that would provide pathology laboratory management services to a third party.

Under the proposed arrangement, a physician who owns and manages a limited liability company (“Requestor”) would enter into a management contract with a pathology laboratory (“Path Lab”), whereby the Requestor would provide the Path Lab with various clinical laboratory services for a fixed number of hours each year. The Requestor would also provide utilities, furniture, fixture, the exclusive use of laboratory space and equipment, and marketing and billing services. In return, the Path Lab would pay a usage fee to the Requestor that would be calculated based on a percentage of the lab’s income which would be fixed in advanced for a 12-month term.

The Requestor’s owner/manager would offer an opportunity for physicians to invest in the Requestor. The new physician investors are anticipated to have little or no background experience in the clinical laboratory services field. According to the Requestor, the value of the investment interest that would be held by physician investors in a position to generate business for the Requestor through referral of laboratory specimens to the Path Lab would exceed 40 percent. Additionally, the Requestor anticipates that the business generated through referrals by physician investors would equate to substantially more than 40 percent of the Requestor’s gross revenue related to the furnishing of health care items and services. Finally, the Requestor has certified that each of the physician investors would have the option of referring specimens to the Path Lab but referrals are not implicitly or explicitly a condition of the arrangement.

The OIG analyzed a number of safe harbor regulations that were potentially applicable to the proposed arrangement, which included: small entity investment, space rental, equipment rental, and services and management contracts safe harbors.

As for the small entity investment safe harbor, the OIG concluded that the Requestor failed to meet two of the requirements in order to be awarded protection. First, no more that 40 percent of an entity’s investment interests may be held by investors that are in a position to influence referrals. Secondly, no more than 40 percent of an entity’s gross income revenue may come from referrals or business otherwise generated from investors. Due to the Requestor certifying that the proposed arrangement would violate both of these requirements, the small entity investment safe harbor is not available.

The safe harbors for space rental, equipment rental, and for personal services and management contracts all share the same basis elements. Therefore, the OIG analyzed these claims as a group. The OIG held that the proposed arrangement could not take advantage of any of these safe harbors. The main reason for this conclusion was that the aggregate usage fees paid to the Requestor would not be set in advance. Rather, the usage fees under the proposed arrangement would be calculated based on a percentage of the Path Lab’s income.

Since the OIG was unable to apply a safe harbor exception, it next had to analyze whether the proposed arrangement poses no more than a minimal risk of fraud and abuse under the anti-kickback statute. The OIG concluded that the proposed arrangement would pose more than a minimal risk of fraud and abuse for the following reasons:

  1. The fee structure would link the physician investor’s profit distribution to the business they refer to the Path Lab. This would pose considerable risks of overutilization of laboratory services, distort medical decision-making, and increase costs to federal health care programs.
  2. The same risks as in (1) would also occur due to more than 40 percent of Requestor’s investment interests being held by physician investors, along with substantially more than 40 percent of its gross revenue coming from business generated from its investors.
  3. The physician investors would have no experience in providing clinical pathology services. Therefore, the sole business purpose of the arrangement would be to allow physician investors to profit from their referrals to the Path Lab.

For more information on compliance with the Anti-Kickback Statute or any other health care regulations, please contact a Wachler & Associates attorney at 248-544-0888.

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