Health Law Alert by Lamb McErlane attorneys: Vasilios J. Kalogredis, Esq. and Sonal Parekh, Esq.

On December 28, 2023, the HHS Office of Inspector General (“OIG”) issued Advisory Opinion No. 23-12 (“Opinion”) regarding a proposal to offer a one-time, voluntary redemption to physician partners reaching age 67 to have their partnership units repurchased by the partnership over a 2-year period, contingent upon the physician partners’ agreement to retire from the practice of medicine (the “Proposed Arrangement”). Specifically, the “Requestor” inquired as to whether the Proposed Arrangement would warrant sanctions under Section 1128(b)(7) or 1128A(a)(7) of the Social Security Act (“SSA”), as they relate to the federal Anti-Kickback Statute[1] (“AKS”).

The Opinion concludes that although the Proposed Arrangement, if undertaken, would generate prohibited remuneration under the AKS (if the requisite intent were present), the OIG would not impose administrative sanctions on Requestor in connection with the Arrangement.

Factual Background

Requestor is a limited liability partnership that operates a hospital and wholly owns an entity that operates a second hospital (the “Hospitals”). Requestor has two classes of partners: (i) the Class H unitholder, a medical center entity that is wholly owned by a nonprofit corporation (the “Medical Center”); and (ii) the Class P unitholders, comprised of individual physicians with direct partnership interests (“Units”) in Requestor (“Physician Partners”).

Requestor’s partnership agreement does not limit Physician Partners ability to practice, treat or refer patients to the Hospitals or affiliate facilities, but rather expressly allows them to practice anywhere. While the partnership agreement permits the redemption of Units upon a Physician Partner’s voluntary retirement from the practice of medicine, it does not contain any mandatory retirement clause. As a result, Requestor has difficulty predicting when the redemption-upon-retirement provisions will be exercised and could face a liquidity crisis should a large number of Physician Partners unexpectedly retire in close succession.

Under the Proposed Arrangement, Requestor would offer Physician Partners at the age of 67 the option to have their Units redeemed (i.e., repurchased by Requestor) in 3 equal increments over a 2-year period in return for the Physician Partners agreeing to retire from the practice of medicine within 6 months of receipt of the first redemption payment (the “Redemption Offer”).[2] In 2023 (the initial year of the arrangement), the Redemption Offer includes a one-time, voluntary offer extended to all Physician Partners above the age of 67. Going forward, a Redemption Offer would only be made to Physician Partners attaining the age of 67 in that calendar year. Physician Partners would be given a reasonable amount of time to give an answer. If the Redemption Offer is declined, it cannot be redeemed at a later point. If the Redemption Offer is accepted, the Physician Partner would enter into a “Redemption Offer Agreement” with the Requestor.

The repurchase amount is equal to the fair market value of the Physician Partner’s Units as of each repurchase date. That being said, according to Requestor, the value of the Units generally may increase over the 2-year redemption period such that the Physician Partners accepting the Redemption Offer may receive additional remuneration compared to the one-time payment for Unit-redemption upon retirement pursuant to the partnership agreement.

Those that accept the Redemption Offer are required to sign a document stating that they will not, or will not be in a position to, make a referral of patients to the Hospitals, the Medical Center, or to any other Physician Partner (collectively referred to as the “Requestor Parties”) as of the date they retire or no longer satisfy the partnership agreement’s eligibility requirements, whichever comes first (the “No-Referral Certificate”).

The Units repurchased under a Redemption Offer Agreement are offered equally to existing and new Physician Partners through annual partnership offerings, regardless of age or the volume or value of referrals or business generated.

The Law

Federal Anti-Kickback Statute

The AKS[3] makes it “a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce, or 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 would implicate the AKS because Requestor offers remuneration (i.e., the Redemption Offer) to Physician Partners who refer patients, including Federal health care program beneficiaries, to the Requestor Parties, and who would continue to make such referrals for up to 6 months after the Physician Partners receive the first redemption payment under the Redemption Offer Agreement. No safe harbor applies to the Arrangement. As discussed further below, the OIG ultimately found that the Proposed Arrangement poses a sufficiently low risk of fraud and abuse under the AKS for the OIG to issue a favorable advisory opinion.

First, the OIG reasoned that the Redemption Offer is made on an objective basis unrelated to the volume or value of referrals or other business generated. This reduces the risk that the Redemption Offer could result in steering and increased costs to Federal health care programs from overutilization or inappropriate utilization. Because the Redemption Offer is conditioned on age, the risk of overutilization is also lessened.

Second, the OIG emphasized that remuneration paid pursuant to the Redemption Offer Agreement is not likely to result in unfair competition. The No-Referral Certificate prohibits the Physician Partner from referring patients to the Requestor Parties upon the earlier of (i) the Physician Partner’s retirement date (occurring within 6 months of the first payment under the Redemption Offer Agreement), or (ii) the date the Physician partner no longer meets eligibility requirements under the partnership agreement. Since the period between the first payment under the Redemption Offer Agreement and retirement is time-limited and is necessary to allow the Physician Partners who accept the Redemption Offer to wind down their medical practices consistent with state law requirements, the OIG found it unlikely that the Proposed Arrangement would cause the retiring Physician Partners to change their referral patters to benefit the Requestor Parties during the 6-month period.

Conclusion and Limitations

The OIG concluded that although the Proposed Arrangement, if undertaken, would generate prohibited remuneration under the AKS (if the requisite intent were present), the OIG would not impose administrative sanctions on Requestor under sections 1128A(a)(7) or 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 in mind when considering potential repurchase options.

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*This alert is for educational purposes only and is not intended to be legal advice. Should you require legal advice on this topic or have any questions or concerns, please contact Vasilios J. (Bill) Kalogredis, Esq. or Sonal Parekh, Esq.

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., 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, and is a pharmacist by education and training. Sonal can be reached by email at sparekh@lambmcerlane.com or by phone at 610-701-4416.

[1] See Section 1128B(b) of the SSA.

[2] The Redemption Offer would be completely voluntary and made available to all Physician Partners upon turning 67 years old.

[3] 42 U.S.C. § 1320a-7b(b).