October 2023 Legal Intelligencer article by Lamb McErlane Health Law attorneys Vasilios J. (Bill) Kalogredis and Sonal Parekh.

The HHS Office of Inspector General (“OIG”) issued Advisory Opinion No. 23-05 (“Opinion”) on August 15, 2023 regarding a proposed arrangement in which the “Requestor” would assist physicians who perform surgeries using intraoperative neuromonitoring (“IONM”) with the formation and operation of a turnkey physician-owned entity[1] that would perform IONM services (the “Proposed Arrangement”). Specifically, the Requestor inquired as to whether the Proposed Arrangement would warrant sanctions under Section 1128(b)(7) or Section 1128(a)(7) of the Social Security Act (“SSA”), as they relate to Section 1128B(b), the Federal anti-kickback statute (“AKS”).

The opinion concludes that the Proposed Arrangement, if undertaken, would generate prohibited remuneration under the AKS, if the requisite intent were present, which would warrant sanctions under both provisions of the SSA, due to the presence of indicia of suspect contractual joint ventures, about which the OIG has longstanding and persistent concerns.

1. Factual Background

IONM is used to observe a patient’s neurological functions during certain surgeries in which the patient’s neurological structures are at risk. IONM involves a neurophysiologist physically with the equipment in the operating room (“Technical Component”), and a neurologist remotely monitoring the test results and waveforms generated by the equipment during the surgery (“Professional Component”).

The Requestor contracts with various hospitals and ambulatory surgical centers (“ASCs”) under an IONM Services Agreement to: (i) perform the Technical Component of IONM services for surgeries through its employed neurophysiologists; and (ii) arrange for the performance of the Professional Component of IONM services for the same surgeries through neurologists employed or contracted by a physician practice (the “Practice”) pursuant to a management services agreement (“MSA”) with the Requestor.

1. Proposed Arrangement

Under the Proposed Arrangement, the Requestor would assist physicians who perform surgeries with IONM services, and who currently make referrals to the Requestor for IONM services, with the formation and operation of a turnkey entity that would perform IONM services (“Newco”) and that would be owned by such physicians (the “Surgeon Owners”). Neither the Requestor nor the Practice would have an equity interest in Newco. It is anticipated that the Surgeon Owners would receive distributions of Newco’s profits in return for their investment interests in Newco.

Because the Surgeon Owners would have limited-to-no participation in Newco’s daily operations, (1) the Requestor, pursuant to a Billing Services Agreement, would provide Newco with billing, collection, and certain other administrative services in exchange for a fee; and (2) the Practice, pursuant to a Personal Services Agreement, would provide Newco with the services of its neurologists and neurophysiologists (which the Practice would lease from the Requestor under the MSA) in exchange for a fee. Newco would then contract with various hospitals and ASCs under an IONM Services Agreement to provide the Technical and Professional Components of IONM services for surgeries. The hospital or ASC would be billed for the Technical Component, and the surgical patient or insurer for the Professional Component.

The Requestor intends to enter the Proposed Arrangement for competitive reasons and to retain its existing surgeon clients. The Requestor further anticipates Newco to earn substantial profits due to the difference in fees paid to the Requestor and Practice under the services agreements and reimbursement received from third parties.

Under the Proposed Arrangement, the Surgeon Owners would refer the patients of their own surgical practices to Newco for IONM services when a surgery requires it, as determined in the discretion of the referring surgeon. The Requestor certified that it would attempt to ensure the Surgeon Owners would not refer their Federal health care program surgical patients to Newco, but could not guarantee it or enforce any restrictions relating to the Surgeon Owner’s own patient referrals. If the Surgeon Owners do not refer their Federal health care program patients to Newco for IONM services, it is likely they would instead refer these patients directly to the Requestor and Practice.

1. The Law: Federal Anti-Kickback Statute

The AKS[2] makes it “a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce, or in in return for, the referral of an individual to a person for… any item or service reimbursable under a Federal health care program.” The prohibition extends to remuneration to induce, or in return for, the purchasing, leasing, or ordering of, or arranging for or recommending the purchasing, leasing, or ordering of, any good, facility, service, or item reimbursable by a Federal health care program. Here, remuneration includes the transfer of anything of value. The statute applies to any arrangement where at least one purpose of the remuneration is to induce referrals for items or services reimbursable by a Federal health care program. Violations of the AKS constitute a felony punishable by a maximum fine of $100,000 and/or up to 10 years of jail time, as well as exclusion from Federal health care programs and potential imposition of fines by the OIG.

• Legal Analysis

The Proposed Arrangement described herein would violate the AKS because it would involve several forms of remuneration, which could induce the Surgeon Owners to make referrals of IONM services that could be reimbursable by a Federal health program. These include without limitation: (i) discounts under the Personal Services Agreement provided by the Practice to Newco; (ii) the opportunity for Newco to generate a profit through the differences between the fees paid by Newco to each of the Requestor and Practice under the services agreements and the reimbursement Newco would receive for such services from third parties; and (iii) returns on investment interests in Newco to the Surgeon Owners. The arrangement contains several indicia of suspect contractual joint ventures.

1. No Safe Harbor Protection

The OIG concluded that at least some remuneration that would be exchanged under the arrangement would not qualify for protection under any safe harbor. One example of such is the opportunity for Newco to generate a profit through the difference between the fees paid by Newco to each of the Requestor and Practice under the services agreements and the reimbursement Newco would receive for such services. Because the Proposed Arrangement would not qualify for safe harbor protection, the OIG next considered the totality of the facts and circumstances to assess the risk of fraud and abuse presented by the Proposed Arrangement.

1. Significant Risk of Fraud and Abuse

The OIG determined that the Proposed Arrangement would present a multitude of risks of fraud and abuse under the AKS, including patient steering, unfair competition, inappropriate utilization, and increased costs to Federal health care programs.

The OIG further recognized the possibility that the arrangement could enable the Requestor and Practice to indirectly pay the Surgeon Owners a share of the profits from their referrals for potentially-reimbursable IONM services.

First, the Arrangement could be used as a method to induce referrals of Federal health care program business from the Surgeon Owners to Newco. While the Requestor certified that it would attempt to ensure that Surgeon Owners would not refer their Federal health care program surgical patients to Newco for IONM services, the fact that the Requestor could not enforce restrictions, or otherwise guarantee, this with respect to the Surgeon Owners referring their own patients, is problematic. Noting the Surgeon Owners limited-to-no participation in the operation of Newco, the OIG, referencing the OIG’s 2003 Special Advisory Bulletin on Contractual Joint Ventures[3] (the “2003 SAB”), found the Proposed Arrangement to be akin to an owner contracting out substantially the entire operation of a related line of business to an entity (that would otherwise be a potential competitor) in exchange for the profits of the business as remuneration for its Federal program referrals. Here, the Surgeon Owners would have minimal or nonexistent actual financial and business risk because they could control or influence the amount of business that is directed to Newco. Further, the Surgeon Owners would be expanding into a related line of business (i.e., IONM services) which would be dependent on referrals and business generated by the Surgeon Owners. Therefore, by entering into the Proposed Arrangement, the Requestor and Practice would effectively be agreeing to forego a portion of the profits that they would realize if they provided those services directly, while providing the Surgeon Owners the opportunity to share in such profits. Accordingly, these financial incentives could corrupt the Surgeon Owners’ medical decision-making and result in overutilization or inappropriate utilization of IONM services and improper steering to Newco.

Second, the Arrangement could be used as a method to induce referrals of Federal health care program business from the Surgeon Owners to the Requestor and Practice. The OIG reasoned that even if the Requestor could ensure that the Surgeon Owners would not refer their Federal health care program patients to Newco, it would still be likely that the Surgeon Owners would instead refer these patients directly to the Requestor, for the Technical Component, and Practice, for the Professional Component. Accordingly, this so-called “carve out” of Federal health care program business would not guarantee immunity from liability under the AKS because it could be perceived as a vehicle to disguise remuneration for Federal health care program beneficiary referrals through the payment of amounts allegedly related to non-Federal health care program business.

This is only furthered by the Requestor’s certifications that it is under competitive pressure to enter the Proposed Arrangement in an effort to retain business from its existing surgeon clients that would otherwise be lost to competing IONM companies, which presents risks of unfair competition and unfair steering.

1. Conclusion and Limitations

Based on the facts provided, the OIG concluded that the Proposed Arrangement, if undertaken, would generate prohibited remuneration under the AKS, if the requisite intent were present, which would warrant sanctions under Sections 1128A(a)(7) and 1128(b)(7) of the SSA. It is important to note that the Opinion is limited in scope to the specific Proposed Arrangement and is not to be relied upon by any person other than the Requestor. While the Opinion may not be specifically relied upon for other arrangements, the reasoning stated therein is useful to keep as a consideration when structuring a business or engaging with other businesses to provide, or arrange for the provision of, certain services.

Read the article online on Law.com/Legal Intelligencer.

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[1] A turnkey entity or business is a business that is ready to use, existing in a condition that allows for immediate operation. The arrangement centers around a provider assuming responsibility for all required setup and ultimately providing the business to the new operator only upon completion. See Adam Hayes, Turnkey Business: Definition, How it Operates with Examples, Investopedia, Dec. 17, 2022, https://www.investopedia.com/terms/t/turnkeybusiness.asp.

[2] 42 U.S.C. § 1320a-7b(b).

[3] OIG, Special Advisory Bulletin: Contractual Joint Ventures (2003), https://oig.hhs.gov/documents/special-advisory-bulletins/885/042303SABJointVentures.pdf.

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Vasilios J. (Bill) Kalogredis, Esq. has been advising physicians, dentists, and other healthcare professionals and their businesses as to contractual, regulatory and transactional matters for over 45 years. He is Chairman of Lamb McErlane PC’s Health Law Department. Bill can be reached by email at bkalogredis@lambmcerlane.com or by phone at 610-701-4402.

Sonal Parekh, Esq., who contributed to this article, is an associate at Lamb McErlane PC who focuses on healthcare transactional matters and a broad range of healthcare regulatory-related issues on behalf of healthcare systems, physicians, dentists, and other healthcare providers. Sonal can be reached by email at sparekh@lambmcerlane.com or by phone at 610-701-4416.