OIG advises caution with joint ventures

Red flag raised with startup

The Office of Inspector General (OIG) of the Department of Health & Human Services has clarified when certain health care joint venture arrangements might be problematic and in violation of federal health care statutes and regulations. Risk managers are advised to study the guidance in anticipation of their roles in vetting any future joint ventures, says Brandy L. Rea, JD, an attorney with the law firm of Lathrop & Gage in Overland Park, KS.

The OIG guidance came in OIG Advisory Opinion No. 11-03, in which the OIG discussed a proposed joint venture arrangement between existing companies and a startup. The OIG guidance omits the names of the actual companies involved and uses pseudonyms. A new long term care pharmacy (referred to as NewCo) owned by a company providing long term care (LTC Facilities) wished to enter a joint venture with an established long term care pharmacy (OldCo) that provided services for LTC Facilities. The OIG stated that this proposed arrangement might be in violation of the federal anti-kickback statute, Rea explains.

The requestor of the opinion was OldCo. The LTC Facilities and one pharmacist-employee of OldCo desired to own and establish a new long term care pharmacy (NewCo) that would engage in the exact same line of business as OldCo, Rea says. NewCo would provide services to the LTC Facilities and would operate in the same market at OldCo. NewCo and OldCo would enter into a management agreement in which OldCo would provide all personnel, operational, billing, inventory, storage, and all day-to-day services of NewCo.

In addition, NewCo would purchase from OldCo most of its non-controlled medications. In exchange for these services, NewCo would pay OldCo a certain amount per prescription and would pay OldCo for all medications it purchased from OldCo for its customers. NewCo's services would be reimbursable by federal health care programs.

Seeing the potential for trouble, the companies asked the OIG for guidance. The OIG stated that the proposed arrangement might be in violation of the federal anti-kickback statute (42 U.S.C. § 1320a-7b(b)). The federal anti-kickback statute prohibits the offering, soliciting , receiving or paying of any remuneration in exchange for the referral of any item or service that is payable by a federal healthcare program.

"Remuneration includes the transfer of anything of value, directly or indirectly," Rea says. "To violate the anti-kickback statute, at least one purpose of the payment of remuneration must be to reward or incentivize referrals. A violation of the anti-kickback statute is a criminal offense and is subject to both criminal and civil penalties."

Risk managers should be aware of healthcare joint venture arrangements that might be problematic and a violation of federal healthcare laws, Rea says. In particular, be cautious of arrangements in which one entity expands into a related line of business and contracts out substantially all of its operations to a potential competitor in exchange for a portion of the profits.

The scenario in the recent opinion is only one example of this problematic type of joint venture arrangement. Another common example, Rea says, would be a hospital wanting to start a durable medical equipment (DME) subsidiary and contract all the services to an established DME provider in the area. The hospital would refer all its patients to this subsidiary, and the DME would be paid based on the volume of referrals. The hospital, as the owner of the subsidiary, would receive compensation based on the referrals.

"This opinion brings to light that these types of joint venture arrangements are under heightened scrutiny," Rea says. "A risk manager should know that if your organization is trying to get involved in a joint venture like this, the OIG is going to take a particularly close look at it. They would be well advised to know the potential risks and be prepared to advise their organization before deal gets too far along."


• Brandy L. Rea, JD, Associate, Lathrop & Gage, Overland Park, KS. Telephone: (913) 451-5108. E-mail: brea@lathropgage.com.

• OIG Advisory Opinion No. 11-03 regarding joint ventures is available at www.oig.hhs.gov. Select "Compliance" from the drop-down menu at the top of the page, and then select "Advisory opinions." The opinions are listed in order on that page. No. 11-03 was released on April 14, 2011.