OIG offers clarifications on existing safe harbors

Investment guidelines change

The Office of the Inspector General (OIG) has offered clarifications of existing safe harbors that could affect how you do business. Here are the ramifications according to an analysis done by Foley and Lardner, a law firm that operates on a national scale.

Large- and small-entity investments. The existing safe harbor for investments in large and small entities has been refined in these ways:

- Only assets or revenues relating to health care will count toward the $50 million asset requirement for large entities or the 60-40 revenue test for small entities (i.e., no more than 40% of revenue may come from referrals or business generated by investors).

- Prohibition of small entities loaning funds to investors to acquire their interests is extended to prohibit loans to an investor from other investors or persons acting "on behalf of" the entity or an investor.

- The current prohibition of no more than 40% of "each class" of a small entity’s investors being in a position to refer to the entity has been modified to permit equivalent classes of investments to be aggregated.

- The 60-40 revenue test for small entities has been modified so only referred business is counted toward the 40% limitation (i.e., it no longer counts revenue from items or services furnished by an investor to the venture);

- Interests acquired in large entities must be on terms available to the general public with regard to restrictions on transferability, and price.

Space and equipment rentals and personal services and management contracts. The OIG makes the same two changes to the space rental safe harbor, the equipment rental safe harbor, and the safe harbor for personal services and management contracts.

The first change expands the existing requirement that the lease or contract specify the prem ises, equipment, or services covered with a requirement that the lease or contract cover all of the premises, equipment, or services leased or provided between the parties during the term of the lease or contract. This new requirement is designed to prevent "schemes involving the use of multiple overlapping contracts," says the OIG.

The second change is a new requirement that the aggregate space, equipment, or services provided must be reasonably necessary for "commercially reasonable business" purposes. This require - ment is meant to prevent parties from renting space or equipment or purchasing services that have no intrinsic value to the lessee or purchaser other than as a way of paying for referrals.

Additionally, the OIG says contracts that specify conditions under which they can be terminated for cause also qualify for safe harbor protection.

However, the OIG refused safe harbor protection for "without cause" termination provisions on the grounds that such clauses "could be used by unscrupulous parties to create sham leases and contracts."

Referral services. This changes the safe harbor from prohibiting referral service charges based on "referrals to or business otherwise generated by the participants for the referral service" to a prohibition of charges based on referrals of business generated by either party for the other party.

Discount arrangements. One of the most complex and confusing safe harbors, discount arrangements have been modified significantly to make them easier to use and broaden their application.

Recognizing that some parties offering discounts are intermediaries and not strictly speaking buyers or sellers, this safe harbor has been expanded to include "offerors." All parties to discount transactions — buyers, sellers, and offerors — can now come within the safe harbor by meeting the separate requirements applicable to them.

One of the greatest concerns raised by the original safe harbor was that a seller’s ability to come within the safe harbor was contingent on the buyer’s compliance, which, of course, is not within the seller’s control.

Says Micklos, "a seller can satisfy the safe harbor, even if the buyer does not, as long as the seller informs the buyer in a manner reasonably calculated to give notice to the buyer’ of their reporting obligations under the safe harbor, and the seller does nothing that impedes the buyer from meeting its obligations.’"

Another change permits discounts to be offered to a beneficiary if other requirements of the safe harbor are met. Previously, discounts to beneficiaries were ineligible under the safe harbor. Routine waivers of deductibles or co-insurance, however, are not protected.

Another significant change modifies the old prohibition of discounts offered on a good or service to induce the purchase of a different good or service. As modified, the rule permits mixing discounts on different goods and services as long as the goods and services are reimbursed by the same federal health care program using the same methodology and the reduced charge is fully disclosed and accurately reflects the current reimbursement methodology.

The OIG also issued two interim final safe harbor rule changes concerning shared risk arrangements. The first protects virtually any financial arrangement between an eligible managed care organization compensated on a capitated basis by a federal health care program and any of its direct contracting providers and their "downstream" subproviders as long as the agreement between the "upstream" provider and the downstream subprovider:

- is set out in writing and signed by the parties;

- specifies the items and services covered by the agreement;

- is for a period of at least one year;

- specifies that the downstream provider cannot claim payment in any form from a federal health care program.

In addition, no remuneration under or outside of the agreement may used to induce referral of Medicare or Medicaid covered business (other than that covered under the arrangement) for which payment is made on a fee-for-service basis.

"This rule will protect a substantial portion of managed care arrangements involving federal health care program business," says Foley and Lardner lawyer George Root.

The second final interim rule protects contracting arrangements between certain qualified managed care plans and their contractors and subcontractors when those contractors and subcontractors are at "substantial financial risk" for the cost or utilization of items or services they provide or order for federal health care program beneficiaries.

"Substantial financial risk" is defined in two basic ways under the new rule: by payment methodology (e.g., capitation, percentage of premium, and DRG payments) and by a numeric standard (i.e., if a certain percentage of the provider’s compensation is subject to a withhold).

The numeric threshold is met for hospitals and nursing homes if their total potential compensation is at least 10% greater than their minimum compensation. For all other providers, maximum potential compensation must be at least 20% greater than minimum compensation.