HHAs take note: OIG looks at joint ventures

By Elizabeth E. Hogue, Esq.
Burtonsville, MD

The Office of the Inspector General (OIG) of the U.S. Department of Health and Human Services issued a Special Advisory Bulletin on contractual joint ventures on April 30, 2003. This bulletin addresses contractual arrangements for the provision of items and services that the OIG previously identified as suspect in a Special Fraud Alert on joint venture arrangements in 1989.

Specifically, the OIG is aware of a proliferation of arrangements between those in a position to refer patients, such as physicians and hospitals and those providing certain types of items or services, including home care. Sometimes, these arrangements are called joint ventures.

Such ventures may take a variety of forms, including contractual arrangements between two or more parties, or may involve the establishment of new legal entities such as corporations or partnerships. For purposes of the bulletin, the OIG defines a joint venture as "any common enterprise with mutual economic benefit."

The bulletin focuses on joint ventures in the form of contractual arrangements in which a provider in one line of business expands into a related health care business by contracting with an existing provider of a related item or service to provide a new item or service to existing patients. In other words, a referring provider with an existing base of patients contracts out the entire operation of the related line of business to a managing party that is otherwise a potential competitor and receives profits of the business in return.

Arrangements between some physicians and hospitals and home health agencies may be included in these types of arrangements. These problematic arrangements typically are established as follows:

  • The referring provider expands into a related line of business, which is dependent on referrals from or other business generated by the provider’s existing business. The new business primarily serves the provider’s existing patient base.
  • The provider does not operate the new business or commit substantial financial, capital, or human resources to the venture. Instead, it contracts out substantially all of the operations of the new business. The other party to the venture typically agrees to provide management services, but also a range of other services such as inventory, personnel, and billing services. The referring provider’s actual business risk often is minimal because of the provider’s ability to influence substantial referrals to the new business.
  • The other party or managing party to the arrangement is an established provider of the same services as the referring provider’s new line of business and might otherwise be a competitor.
  • Both parties share in the economic benefit of the new business. The managing party takes its share in the form of payments under the various contracts with the referring provider; the referring provider receives its share in the form of profits from the new business.
  • Aggregate payments to the managing party typically vary with the value or volume of business generated for the new business by the referring provider.

The OIG further explains that the protection of safe harbors or exceptions to the federal statutes that prohibit illegal remuneration are unlikely to apply to these types of arrangements. The illegal remuneration, kickback, or rebate in these arrangements often is the difference between the money paid by the referring provider to the managing party and the reimbursement received from federal and state health care programs. The opportunity to generate a fee and profits is itself remuneration that may violate the federal anti-kickback statute.

To help suppliers identify ventures that may violate fraud and abuse prohibitions, the OIG lists criteria that may indicate a prohibited arrangement:

• New line of business

The referring provider typically seeks to expand into a health care service that can be provided to the referring provider’s existing patients.

• Captive referral base

The new business predominantly or exclusively serves the referring provider’s existing patient base or patients under the control or influence of the referring provider.

• Little or no bona fide business risk

The referring provider’s primary contribution to the venture is referrals; it makes little or no financial or other investment in the business, often delegating the entire operation to the managing party while retaining profits generated by the new business.

• Status of the managing party

The managing party would be a competitor of the referring provider’s new line of business and normally would compete for the referring provider’s patients. The managing party has the capacity to provide virtually identical services in its own right and bill insurers and patients for them in its own name.

• Scope of services provided by the managing party

The managing party provides all or many of the following key services:

  • day-to-day management;
  • billing services;
  • equipment and supplies;
  • personnel and related services;
  • office space;
  • training;
  • health care services.

Generally speaking, the greater the scope of services provided by the managing party, the greater the likelihood that the arrangement will not pass muster with the OIG.

• Remuneration

The practical effect of the arrangement is to provide the referring provider with the opportunity to bill insurers and patients for business otherwise provided by the managing party.

• Exclusivity

The parties may enter into a noncompete agreement that bars the referring provider from rendering similar services to patients other than those that it refers to the arrangement and bars the managing party from providing services in its own right to patients of the referring provider.

Now is the time for agencies which are owned or affiliated with hospitals to review the arrangements in which they provide services. Existing relationships that meet some or all of the criteria described above may require restructuring. Now that providers specifically have been warned about potential violations inherent in some types of joint ventures, it would be unwise to consider establishing such arrangements in the future.

[A complete list of Elizabeth Hogue’s publications is available by contacting: Elizabeth E. Hogue, Esq., 15118 Liberty Grove, Burtonsville, MD 20866. Telephone: (301) 421-0143. Fax: (301) 421-1699. E-mail:]