Issue 10 - August 2003

Ask the attorney
Is this joint venture too good to be true?
By Deborah Green, ESQ.

Q - I have been offered a great opportunity to enter into a joint-venture agreement with a company that would provide diagnostic lab services to my patients. Not only will the company manage the business for me, it will also provide me with inventory, employees, space and billing for the services it will provide. All I need to do is refer my patients. My partner thinks that this deal is to good to be true. What do you think?

A - I think that you’re your partner is right and so does the Office of Inspector General (“OIG”). In fact, the OIG has recently issued a special fraud alert concerning just this type of joint venture.

Although the entity providing the services and the entity referring the patients do not always need to form a new business entity, the result is always the same: The doctor provides only patients and the other company provides all the services, right down to the leased technical employees.

The OIG Fraud Alert focuses on questionable contractual arrangements in which a healthcare provider in one line of business expands into a related healthcare business by contracting with an existing provider of a related item or service (referred to as the “manager/supplier”) to provide the new item or service to the provider’s existing patient population, including federal healthcare program patients.

The manager/supplier not only manages the new line of business, but may also supply it with inventory, employees, space, billing and other services. In other words, the provider contracts out substantially the entire operation of the related line of business to the manager/supplier and receives in return the profits of the new business as compensation.

Problem ventures share commonalities
These problematic arrangements usually have common elements:

1 The 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 may be organized as a part of the existing entity or as a separate subsidiary. Typically, the new business primarily serves the provider’s existing patient base.

2 The provider neither operates the new business itself nor commits substantial financial, capital or human resources to the venture.

Instead, it contracts out substantially all the operations of the new business. The manager/supplier typically agrees to provide not only management services, but also a range of other services, such as the inventory necessary to run the business, office and healthcare personnel, billing support and space.

While the manager/supplier essentially operates the business, the billing of insurers and patients is done in the name of the provider. In many cases, the contractual arrangements result in either practical or legal exclusivity for the manager/supplier through inclusion of non-competition provisions or restrictions on access.

While the contract terms of these arrangements may appear to place the provider at financial risk, the provider’s actual business risk is minimal because of the provider’s ability to influence substantial referrals to the new business.

3 The manager/supplier is an established provider of the same services as the provider’s new line of business. In other words, absent the contractual arrangement, the manager/supplier would be a competitor of the new line of business, providing items and services in its own right, billing insurers and patients in its own name, and collecting reimbursement.

4 The provider and the manager/supplier share in the economic benefit of the provider’s new business. The manager/supplier takes its share in the form of payments under the various contracts with the provider; the provider receives its share in the form of the residual profit from the new business.

5 Aggregate payments to the manager/supplier typically vary with the value or volume of business generated for the new business by the provider.

While in some arrangements certain payments are fixed (for example, the management fee), other payments, such as payments for goods and services supplied by the manager/supplier, will vary based on the number of goods and services provided. In other words, the aggregate payment to the manager/supplier from the whole arrangement will vary with referrals from the provider.

Likewise, the provider’s payments — that is, the difference between the net revenues from the new business and its expenses (including payments to the manager/supplier) — also vary based on the provider’s referrals to the new business.

Through these contractual payments, the parties are able to share the profits of the new line of business.

Safe harbors
The government provides for certain “safe harbors” under the anti-kickback statute. To qualify for such protection, an arrangement must fall under a safe-harbor provision. Failure by a transaction to fit into a safe harbor does not automatically make it a kickback, but there is no blanket immunity as there would be if the transaction fit into a safe harbor.

Consider the following issues when analyzing a proposed transaction — they signify potential problems. These factors are illustrative, not exhaustive. The presence or absence of any one of these factors will not determine whether a particular arrangement is suspect, but they may raise questions:

• New line of business. Will the new business be provided by your existing patients?

• Captive referral base. Will the newly-created business predominantly or exclusively service your existing patient base (or patients under your control or influence).

• No business expansion. You do not intend to expand the business to serve new patients who are not already served by you and, therefore, you make no or few bona fide efforts to do so.

• Primary contribution to the venture — referrals. You make little or no financial or other investment in the business, delegating almost the entire operation to the manager/supplier, while retaining profits generated from your captive referral base. (Residual business risks, such as nonpayment for services, will be relatively ascertainable based on historical activity.)

• Status of the manager/supplier. The manager/supplier would normally compete for the captive referrals but for the fact that you are making your patient base available.

• Scope of services provided by the manager/supplier. The manager/supplier provides all, or many, of the following key services with respect to the new venture: day-to-day management; billing services; equipment; personnel and related services; office space; training; healthcare items, supplies, and services. (In general, the more services provided by the manager/supplier, the greater the likelihood that the arrangement is a contractual joint venture.)

• Remuneration. The practical effect of the arrangement, viewed in its entirety, is to provide you with the opportunity to bill insurers and patients for business otherwise provided by the manager/supplier. The remuneration from the venture to you (that is, the profits of the venture) takes into account the value and volume of business that you generate.

• Exclusivity. You and the manager/supplier agree to a non-compete clause, barring you from providing items or services to any patients other than your own and/or barring the manager/supplier from providing services in its own right to your patients.

• Marketing services. The manager/supplier may provide marketing services, although in many instances no such services are required, since you generate substantially all of the venture’s business from your existing patient base.

Deborah Green has been a practicing attorney since 1977. She is a member of the American Health Lawyers Association, the New York State Bar Association Health Care System Design Committee, the New York State Bar Association Health Care Providers Committee, the American Bar Association Health Law Section and the Florida Bar Health Law Section.

If you require clarification on these questions or have any questions of general interest on other legal healthcare issues, please contact the law office of Deborah Green. Her number is 954-236-8282; fax, 954-236-6939; or e-mail, healthattorney@aol.com.

LEGAL DISCLAIMER: This column is provided subject to and governed expressly by the terms of this disclaimer. This column is provided for educational purposes only. The accuracy or timeliness of the information presented herein is not warranted. The information presented herein is not intended to be advice as to a specific fact pattern with which you may be presented. Accordingly, please note that the information contained herein is not being presented as legal advice with respect to any matter and that no attorney-client relationship is hereby established.