Joint ventures present opportunities and pitfalls

A federal court in Texas recently ruled that a nonprofit, tax-exempt hospital could have a joint venture with a for-profit organization without risking its tax-exempt status. While hospitals may see it as an advantage from the standpoint of conducting joint ventures with physicians, Dan Mulholland of Horty Springer in Pittsburgh warns that hospital-physician joint ventures carry other risks from a fraud and abuse standpoint, if not properly structured.

Joint ventures typically are agreements, exclusive or otherwise, between a hospital and physicians who traditionally treat patients in a hospital setting, often times providing services ancillary to the services that the attending physician provides such as radiologists, anesthesiologists, emergency room physicians and pathologists, he says.

Many of the same principles are applicable to specialties that have not traditionally been considered hospital-based arrangements, he adds. However, these doctors are more and more frequently looking to the hospitals for some kind of contractual relationship not only to establish the terms under which they are going to provide services but also provide them with some kind of financial support or assistance, Mulholland reports.

He says this includes cardiologists, neonatologists, and even cardiac surgeons. "The type of specialty that is involved is not as determinative of what kind of relationship would be entered into as the dynamics of the situation between the hospital and the hospital-based physician."

According to Mulholland, these contracts may or may not be established on an exclusive basis. However, he says hospitals can follow certain steps to determine if they require an exclusive arrangement with hospital-based physicians.

One problem that many hospitals are struggling with is a shortage of physicians in hospital-based specialties along with financial pressures that make it increasingly difficult to provide the level of services that hospitals require, he adds.

Mulholland says hospitals have employed a number of strategies with varying degrees of success to assist with direct or indirect financial input into the hospital-based group to assist in keeping quality physicians in sufficient numbers to meet the needs of the institution.

Hospitals have broad latitude when recruiting a doctor to relocate to a hospital-based service area, says Henry Casale, also of Horty Springer. He says the problem when negotiating with hospital-based physicians or physicians who are already located in the hospital service area is that while Stark and the anti-kickback statute offer broad latitude in recruiting individuals who are not currently located in your area, Stark has limited exceptions for physicians who already are on the hospital staff.

Casale notes that in 1992, the OIG issued a fraud alert warning that the hospital-based physician arrangements can give rise to violations of the anti-kickback statute. However, the fraud alert is limited. "The issue is that many of those same legal principles that apply to a hospital and a referring physician will also apply to a hospital-based physician."

The legal principles still apply, he adds. However, he says the ways in which those principles are interpreted are different because the factual relationship between a hospital-based physician and the hospital is very different than they are with a typical referring physician.

According to Casale, a useful discussion with a good legal basis for why a hospital can provide certain types of financial assistance to hospital-based physicians can be found in OIG Advisory Opinion 01-01, which looks at both the physician incentive rules and the anti-kickback statute. "It is very helpful and very telling in the analysis why hospitals can provide financial assistance to hospital-based physicians," he says.

The physicians involved in this arrangement were cardiovascular surgeons and recipients of referrals. "They did not refer patients to the hospital per se, but rather received referrals from cardiologists, internists, and other physicians on the staff," says Casale. The fact that they only worked at that hospital was important to the OIG because the OIG’s concern was that if a hospital provides a program to physicians, it may cause a physician to relocate his practice from a different hospital in the same location and act as an inducement to refer.

In terms of the analysis, he says there are many similarities between the OIG’s analysis in Advisory Opinion 01-01 and what hospitals are doing when faced with hospital-based physicians who require financial assistance. "You need to look at the specifics involved because some anesthesiologists that perform pain management might refer."