OIG Raises Concerns in Management Contracts for Sleep Labs and Beyond

22 November 2010 Publication
Authors: Lawrence W. Vernaglia

Legal News Alert: Health Care

In two advisory opinions issued on October 28, 2010, the Department of Health & Human Services, Office of Inspector General (OIG) has fired a couple of shots across the bow — at health care managers providing marketing services and also at the entire sleep lab industry. Advisory Opinion Nos. 10-23 and 10-24 also continue to raise the specter of the “contractual joint venture,” a legal theory that potentially brings risk even to transactions that conform to Anti-Kickback “safe harbors.”

In the two advisory opinions, the OIG addressed the application of the Anti-Kickback Statute (42 U.S.C. § 1320-7b(b)) and related laws to certain sleep laboratory arrangements. These opinions are particularly notable with respect to the OIG’s position regarding marketing fees, specifically that a marketing fee that reflects the degree to which the marketer has actually generated referrals poses an increased risk of abuse.

The facts in the two opinions are similar in most respects, except as to the manner in which the marketing fees are paid. In each arrangement, an entity with no physician ownership (Supplier) provides equipment, technology, supplies, and staff necessary to operate a sleep testing laboratory owned by a hospital (Hospital). Additionally, the Supplier provides marketing, including a part-time marketing manager who visits offices of physician referral sources. In the first opinion, the Hospital pays a per-test fee that covers all items and services by the Supplier, including marketing services. In the second opinion, the Hospital pays a fixed, annual fee consisting of three separate components, including one for Supplier’s marketing services.

Although the Supplier can not refer patients directly to the Hospital (because it has no physician involvement), the OIG stated that the Supplier was still in a position to generate referrals by virtue of its marketing services and that payments for marketing warrant close scrutiny under the Anti-Kickback Statute. The OIG declined to provide a favorable opinion on the scenario in which the Supplier received a per-test fee, reasoning that “because the Supplier receives a fee each time its marketing efforts are successful, the Supplier’s financial incentive to arrange for or recommend the Hospital’s sleep testing facility is heightened.” We note that the Supplier receives the same fee regardless of whether its marketing efforts generated the referral or the referral came completely irrespective of the Supplier’s efforts. Nonetheless, the OIG focused on the fact that the more test orders the Supplier generates, the more fees the Supplier receives. The OIG also stated that packaging the marketing compensation into an all-inclusive per-test fee prevented “the transparent assessment of the marketing services provided and the compensation paid for them.”

Conversely, in the second opinion, the OIG stated that it would not impose sanctions because the annual, set-in-advance fee structure (including the marketing fee) does not vary based on the value or volume of referrals or tests performed and therefore would “mitigate against any undue or additional incentive to generate unnecessary or an increased volume of sleep tests.”

It is important to keep in mind that the OIG’s refusal to approve the per-test fee scenario does not necessarily indicate the OIG has concluded the arrangement is unlawful. Rather, as the OIG stated, sufficient concerns existed such that the OIG could not “conclude that the Arrangement poses a sufficiently low level of risk that [the OIG] should protect it.” In any event, the OIG’s analysis raises significant concerns as to marketing fees that reflect the degree to which the marketer has actually generated referrals.

The opinions also are notable in three other respects:

First, the OIG indicates a concern that sleep laboratory testing services “may be particularly susceptible to the risk of overutilization.” This is not a change in direction for the OIG. The OIG has had sleep labs on its annual “Work Plan” for several years, including the recently issued 2011 Work Plan, promising that it “will also examine the factors contributing to the rise in Medicare payments for sleep studies and assess provider compliance with Federal program requirements.”

Second, the OIG expressed (in the first opinion) potential concerns as to scenarios in which Medicare is billed on an “under arrangements” basis. Although recent amendments to the federal Stark law (42 U.S.C. § 1395nn) significantly limited the ability of physicians to provide services to hospitals on this basis, the Supplier here had no physician-owners, and therefore Stark would not apply. Not surprisingly, the OIG cited situations in which the hospital’s payment to the “under arrangements” entity is not consistent with fair market value, but the OIG also expressed concerns if the hospital owns an interest in the entity, or if the transaction involves the furnishing of items and services ancillary or additional to the services being furnished under arrangements.

Third, although the OIG concluded that the arrangements did not possess the suspect features of what it has characterized as a “contractual joint venture,” it appears that the OIG will still pursue this theory in assessing arrangements where a party furnishes services that enable a provider to offer a new line of services to its existing patient population. (See the OIG’s Special Advisory Bulletin on Contractual Joint Ventures, 68 Fed. Reg. 23148 (April 30, 2003).) This is an interesting note and reflects the OIG’s continued interest in the theory despite extensive criticism of the contractual joint venture approach in the organized health care bar.

What Should Providers and Managers Do?

In light of these coordinated advisory opinions, providers considering entering into management contracts should strongly consider (1) whether marketing services will be provided, (2) whether the financial structure could be perceived to incentivize the manager to steer referrals to the hospital in order to increase fees, and (3) the possible application of the contractual joint venture theory. The OIG has not provided a “bright line” in terms of permissible versus impermissible transactions. However, providers should acknowledge this warning shot and consider increased compliance controls and assessments in new and renewed transactions.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our health care clients and colleagues. If you have any questions about this alert or would like to discuss this topic further, please contact your Foley attorney or any of the following individuals:

Lawrence C. Conn
Los Angeles, California

Lawrence W. Vernaglia
Boston, Massachusetts

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