Integrated systems deal with kickback issues

Integrated delivery systems (IDS) face a unique and growing array of legal pitfalls based on the changing nature of those organizations, says Dan Roach, vice president and corporate compliance officer for San Francisco-based Catholic Healthcare West (CHW).

Roach says one of the primary legal issues is the application of the anti-kickback statutes to related and affiliating organizations. He says systems must understand that the anti-kickback statutes are extraordinarily broad. In fact, read literally, those statutes would bring the nation’s health care system to a grinding halt, he argues.

"The reality is that every time you have a physician who becomes a medical staff member, I could make an argument that every patient she admits is a violation of the kickback statute," he explains. "The good news is that no one has read it that broadly."

According to Roach, there are specific vs. practical exceptions. But he says that development of a consistent process for transaction review is no easy task. For example, Roach says CHW acquired a facility several years ago and structured the deal as an asset acquisition with CHW refusing to assume certain liabilities. "Everyone agreed that we would change the provider numbers immediately at the point of the transaction," he explains. But on the day of the transaction, it turned out that the facility’s computer system could not accommodate the new provider numbers.

Use of the old provider numbers continued until they could upgrade their system, which took about six months. Roach says the government is now arguing CHW has successor liability because CHW had opted to use the old provider numbers. "Even though the transaction was structured correctly, it wasn’t executed appropriately," he says. "This is a real concern.

"The key to avoiding successor liability includes an asset purchase and not to assume undisclosed liabilities." In addition to obtaining new provider numbers, systems should avoid government receivables, he cautions. "When you take accounts receivable as part of the acquisition of an organization and part of that includes receivables for Medicaid or Medicare payments, the government argues that you have assumed the liability for the billings that generated the receivables."

Other areas of concern for the IDS include:

- Three-day window rule. According to Roach, the biggest hurdle for IDS is the three-day window rule, which applies to owned or operated subsidiaries. "The general view is that if the facility providing the diagnostic tests is owned or operated by the admitting facility, the tests fall within the rule," he says.

But there is often a large gray area, he warns. "You have all kinds of different relationships and different levels in the organization and the rules are not at all clear about how you apply the three-day window in these contexts," says Roach.

- Tax issues. Roach notes that many integrated systems are nonprofit organizations with for-profit subsidiaries. That can lead to questions over what portion of a physician group’s losses can be funded before someone argues that the sole motive for doing so is to induce referrals and keep those physicians in the hospitals. "I believe this is an unanswered question, and I think that the recent OIG advice on the gainsharing issue simply muddies the waters," he argues.

- System financing issues. System financing issues also create risk, according to Roach. Access to capital is becoming more difficult and Roach says lawyers are becoming increasingly concerned about issues that need to be disclosed to bond holders. In addition, there are limits on an organization’s ability to spend tax-exempt bond proceeds on nonexempt activities.

- Site of service designation. Roach also points to licensure and accreditation issues as potential trouble spots. In one case, he says a system merged its lab into a "consolidated lab" and performed certain tests in one location and other tests in another. "But it turned out that we didn’t have the appropriate CLIA [Clinical Laboratories Improvement Amendments] certifications." Many times, the decisions about where the tests were performed were simply based on who had the best equipment and the CLIA certification issue was overlooked. "In other cases, the lab tests were being performed in the right place but we were simply using the wrong number and it looked like we were not appropriately performing the tests."

- Conditions of participation/staffing issues. Roach says systems should also guard against running afoul of Medicare’s conditions of participation and staffing requirements. For example, he notes one investigation involving a physician who had been a sole practitioner. The physician opted to merge with a local clinic a few miles away and began to spend three days a week at the new clinic and two days a week in the old clinic.

Unfortunately for the physician, patients kept coming to the old clinic and nurses kept doing the same things they had always done, and soon there was a knock on the door from the OIG. "The OIG said these patients are being seen, but there is no physician on site, [and] there is inadequate supervision. And by the way, it is being billed under your provider number," Roach reports.