Physicians Cautioned to Scrutinize Their Carve-Out Arrangements

On June 13, 2013, HHS' Office of Inspector General(OIG) published OIG Advisory Opinion No. 13-03, which further confirms the department’s longstanding antipathy towards carving out referrals of federal healthcare beneficiaries or business generated from otherwise questionable financial arrangements.

In Opinion No. 13-03, a "Parent Laboratory" proposed to establish and own a management company, which would enter into contracts with physician practices in order to allow the physicians to effectively own and operate their own clinical laboratories. The management company would provide the physicians with facility space, lab management, and support, and would lease them personnel, equipment, and licenses for use of the Parent Laboratory’s proprietary methods of operation. The Parent Laboratory certified that the physicians would agree to only use these clinical laboratories for patients who are not beneficiaries of federal healthcare programs; patients who are federal healthcare program beneficiaries may be sent to any laboratory.

The OIG found that the Parent Laboratory would offer the physicians prohibited remuneration in the form of an opportunity to expand into a financially profitable lab business. Although the physicians would bill only for non-federal healthcare program services, OIG acknowledged that referrals covered by a federal healthcare program might occur for several reasons: physicians would make referrals to the Parent Laboratory for convenience, to further demonstrate a commitment to the Parent Laboratory, or to potentially secure more favorable pricing on private-pay services. Additionally, the physicians may not make a distinction between the Parent Laboratory and the laboratories operated with support from the management company owned by the Parent Laboratory. OIG concluded that this arrangement insufficiently minimized the risk of federal healthcare program fraud and abuse and that it could potentially impose administrative sanctions in connection with its enforcement of the Anti-Kickback Statute, if requisite intent was found to exist.

The Anti-Kickback Statute protects against the exchange of remuneration for the inducement or reward of referrals reimbursable by a federal healthcare program. Carve-out arrangements implicate, and may violate, the Anti-Kickback Statute by disguising remuneration for federal healthcare program business through payments purportedly related to non-federal healthcare program business.

Like Opinion No. 13-03, in Opinion No. 12-06, OIG similarly held that the arrangement insufficiently minimized the risk of federal healthcare program fraud and abuse. In No. 12-06, Arrangement B, the physicians similarly had elements of a suspect contractual joint venture - the physicians had an opportunity to expand into another profitable business with little or no risk. Specifically, the physicians formed a subsidiary company that contracted out all operations exclusively to an established anesthesia provider. The physicians’ business risk was minimal because the anesthesia service referrals were wholly dependent on the physician’s ASC’s referrals; they controlled the amount of business they referred to the subsidiary. The physicians also did not participate in the operation of its anesthesia subsidiary, but shared in the economic benefit of the new business of the ASC (the anesthesia provider receiving the negotiated rate and the physician-owners received residual profits equal to the amount the subsidiaries collected from Medicare and other third-party payers and patients for anesthesia services minus the amount the subsidiaries paid the anesthesia provider).

Although OIG has noted its displeasure with arrangements failing to minimize the risk of federal healthcare program fraud and abuse, some carve-out arrangements have passed OIG muster.

In Opinion No. 00-1, a consulting organization entered into an agreement with hospitals to audit hospital bills for undercharges and overcharges to private insurer paying on a charge basis, but with no auditing of any bills reimbursed by federal healthcare programs either as primary payers or secondary payers. Although this arrangement carved-out non-federal healthcare beneficiaries, it posed a limited risk of fraud and abuse because it was a one-time, wholly retrospective billing audit and the items or services were previously ordered, provided, and claimed prior to the audit.

In Opinion No. 98-15, a university's hemophilia center entered into a contract with a pharmacy company to dispense anti-hemophilia factor and other outpatient drugs and to provide outpatient pharmacy services for the university. The arrangement excluded Medicaid fee-for-service patients from receiving drugs through the university’s outpatient drug program. OIG recognized that parallel arrangements that bifurcate services between federal and private pay business may create a risk that the parties will swap discounted private pay business for referrals of higher paying federal business. However, OIG concluded that the arrangement contained several safeguards to minimize the risk of swapping: the company would not control the price charged for drugs for non-Medicaid patients nor file claims for such drugs, there was no inference that the company paid for referrals as there was no remuneration between the companies through the provision of free or below-market services, and the exclusion of the Medicaid patients was consistent with the section 340B bar on duplicate discounting and the Medicaid prohibition against reassignment.

Although some arrangements overcome OIG scrutiny, physicians should heed OIG warnings.

Often in practice, arrangements that attempt to exclude federal program business are improperly affected by a tainted referral arrangement despite the carve-out.

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