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OIG Unfavorably Reviews a Laboratory Management Company's Proposed Provision of Allergy Testing and Related Services in Exchange for a Percentage of Gross Collections

A new OIG fraud and abuse Advisory Opinion sheds makes percentage-based MSO arrangements questionable, where Medicare is involved.

In Advisory Opinion 11-17, the Office of Inspector General ("OIG") of the Department of Health and Human Services reviewed an arrangement in which the "Requestor," a laboratory services management company:

Under the Proposed Arrangement, Requestor proposes to provide allergy testing and immunotherapy laboratory services and related items to primary care physicians and physician practices ("Physicians") within the Physicians' medical offices. Specifically, Requestor would enter into exclusive contracts with the Physicians to operate an allergy testing laboratory on the Physicians' behalf.

Requestor would provide all of the necessary laboratory personnel (including laboratory technicians), equipment, supplies, training, and billing and collection services to Physicians on an as-needed basis. Additionally, Requestor would assist the Physicians with marketing allergy services to patients by providing patient education materials and reviewing patient files to identify candidates for [Requestor's] allergy laboratory services. [The OIG did not comment on HIPAA or federal and state privacy and confidentiality laws.] 

The Physicians would provide: (1) space within their offices to operate the laboratory; (2) administrative staff for patient scheduling and other administrative tasks; (3) general medical office supplies and furniture; (4) general liability and malpractice insurance; and (5) physician supervision and interpretation of laboratory results.

The Physicians would bill Federal health care programs and third-party payors for the laboratory items and services provided under the Proposed Arrangement under the Physicians’ provider identification numbers. Requestor would provide billing and collection services on behalf of the Physicians for the allergy testing services.

In consideration for Requestor's services, under the Proposed Arrangement, Physicians would pay Requestor a fee equal to 60% of the Physicians' gross collections from the testing and services, a fee that Requestor stated as equal to fair market value (FMV).

The Physicians would agree to use Requestor as their exclusive provider of antigen-based immunotherapy laboratory services and as the sole allergy testing unit for the Physician’s patients.

            The OIG review the federal anti-kickback statute (not Stark, which was not implicated here). The OIG noted that the anti-kickback statute (“AKS”) “ascribes criminal liability to parties on both sides of an impermissible ‘kickback’ transaction.”

            The OIG next noted that the safe harbors for equipment leases and personal services and management contracts were potentially applicable (42 CFR 1001.952(c) and (d)). These safe harbors provide:

 

(c) Equipment rental. As used in section 1128B of the Act, “remuneration” does not include any payment made by a lessee of equipment to the lessor of the equipment for the use of the equipment, as long as all of the following six standards are met—

(1) The lease agreement is set out in writing and signed by the parties.

(2) The lease covers all of the equipment leased between the parties for the term of the lease and specifies the equipment covered by the lease.

(3) If the lease is intended to provide the lessee with use of the equipment for periodic intervals of time, rather than on a full-time basis for the term of the lease, the lease specifies exactly the schedule of such intervals, their precise length, and the exact rent for such interval.

(4) The term of the lease is for not less than one year.

(5) The aggregate rental charge is set in advance, is consistent with fair market value in arms-length transactions and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid or all other Federal health care programs.

(6) The aggregate equipment rental does not exceed that which is reasonably necessary to accomplish the commercially reasonable business purpose of the rental. Note that for purposes of paragraph (c) of this section, the term fair market value means that the value of the equipment when obtained from a manufacturer or professional distributor, but shall not be adjusted to reflect the additional value one party (either the prospective lessee or lessor) would attribute to the equipment as a result of its proximity or convenience to sources of referrals or business otherwise generated for which payment may be made in whole or in part under Medicare, Medicaid or other Federal health care programs.

(d) Personal services and management contracts. As used in section 1128B of the Act, “remuneration” does not include any payment made by a principal to an agent as compensation for the services of the agent, as long as all of the following seven standards are met—

(1) The agency agreement is set out in writing and signed by the parties.

(2) The agency agreement covers all of the services the agent provides to the principal for the term of the agreement and specifies the services to be provided by the agent.

(3) If the agency agreement is intended to provide for the services of the agent on a periodic, sporadic or part-time basis, rather than on a full-time basis for the term of the agreement, the agreement specifies exactly the schedule of such intervals, their precise length, and the exact charge for such intervals.

(4) The term of the agreement is for not less than one year.

(5) The aggregate compensation paid to the agent over the term of the agreement is set in advance, is consistent with fair market value in arms-length transactions and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid or other Federal health care programs.

(6) The services performed under the agreement do not involve the counselling or promotion of a business arrangement or other activity that violates any State or Federal law.

(7) The aggregate services contracted for do not exceed those which are reasonably necessary to accomplish the commercially reasonable business purpose of the services.

 

For purposes of paragraph (d) of this section, an agent of a principal is any person, other than a bona fide employee of the principal, who has an agreement to perform services for, or on behalf of, the principal.

 

            The OIG concluded that the Proposed Arrangement would not quality for safe harbor protection under the anti-kickback laws for two reasons:

First, the services would be provided on an as-needed basis; the agreement therefore would not specify the schedule of intervals, the precise interval length, or the charge for such intervals.

Second, the relevant safe harbors provide that aggregate compensation to be paid under the contract must be set in advance and cannot be determined in a manner that takes into account the volume or value of any business generated between the parties that is payable by a federal health care program (such as Medicare). Significantly, here:

Because the Physicians would pay Requestor a percentage of their gross collections from allergy tests and immunotherapy items and services under their Proposed Arrangement, the aggregate charges would not be set in advance, and they would be based, in part, on the volume or value of Federal health care program business.

This portion of the OIG Advisory Opinion stands as a warning for those would try to rely on the equipment lease and personal services and management contracts safe harbor where entering into a percentage-based arrangement. This is of particular concern to those entering into an MSO (medical services organization) arrangement that attempts to rely on these safe harbors yet uses percentage of revenues for compensating the MSO.

Note that California law handles this differently (Business & Professions Code, sections 650(a) versus 650(b)). However, OIG advisory opinions can be influential to state medical fraud and abuse enforcement authorities.

Per usual, the OIG noted that the fact that the Proposed Arrangement does not fit into a safe harbor is not the end of the analysis; rather, the OIG must examine “the totality of the facts and circumstances to determine the extent of the risk posed by the Proposed Arrangement” with respect to inducements to refer.

Examining the facts and circumstances, for the following reasons, the OIG determined that the Proposed Arrangement would not be afforded protection:

First, the Requestor's fee would not be tied to actual and necessary services provided by Requestor to Physicians; instead, the Requestor's fee would be based upon a percentage of gross collections for the allergy testing and immunotherapy services. The OIG repeated its earlier observation that: “Percentage compensation arrangements are inherently problematic under the anti-kickback statute, because they relate to the volume and value of business generated between the parties, rather than the fair market value of the services provided.”

Second, the Requestor's review of patient files to identify candidates for its services would be "a suspect marketing activity." The OIG stated:

We are concerned that this type of marketing activity could encourage Physicians to order medically unnecessary tests that could pose a risk of patient harm. 

The OIG noted that its concern was “magnified” because the Physicians, “who may not have significant, specialized allergen immunotherapy experience, may be influenced by Requestor, a non-physician, to order unnecessary services.” The OIG added that this created a risk of overutilization.

            The OIG noted that it was not analyzing the “in-office ancillary services” exception to the Stark law. The OIG stated: "Even if some features of the Proposed Arrangement were to comply with the Stark Law, such compliance would not affect our analysis under the anti-kickback statute." In other words, Stark and AKS must be separately analyzed.

***

Michael H. Cohen is a thought leader in health care law, pioneering legal strategies and solutions for business law clients in traditional and emerging healthcare. wellness, and lifestyle markets.  As a corporate and regulatory attorney who has also handled litigation matters, Michael H. Cohen represents conscious business leaders in a transformational era. Clients seek Michael H. Cohen's legal expertise on business structure and entity formation (corporations, partnerships, LLCs); health care licensing matters; employment contracts and independent contractor agreements; dispute resolution; e-commerce; intellectual property issues; informed consent and malpractice liability issues; HIPAA and confidentiality and privacy issues; Stark, self-referral, anti-kickback, patient brokering, and fee-splitting questions; dietary supplement labeling; medical device and FDA matters; insurance reimbursement and Medicare issues; website disclaimers; concierge medicine legal advice; telemedicine; and other business law and health care regulatory compliance arenas.  Whether advising start-ups or established companies, he brings his entrepreneurial spirit and caring insight to cutting-edge legal and regulatory challenges. Attorney Michael H. Cohen is admitted to practice in California, Massachusetts New York, and Washington, D.C.  Contact attorneys at our Beverly Hills, California law firm today.

 

 

 

 

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