Making Sense of New Legal Guidance on Ancillary Services

Until recently, the regulatory environment surrounding ancillary service arrangements for medical groups was relatively stable. However, two recent advisory opinions issued by the Department of Health and Human Services, Office of Inspector General ("OIG") have substantially changed the regulatory landscape. Both opinions are classic examples of bad facts resulting in bad law. This article provides perspective on what medical groups can, and also cannot, do with respect to ancillary services in light of this recent guidance.

The Path Lab Proposal.

In Advisory Opinion 04-17 (published in December 2004), OIG reviewed an arrangement in which an organization associated with an established laboratory service company (the "Sponsor") proposed to assist medical groups in developing and operating centralized pathology laboratories ("Path Labs"). The Sponsor would provide "turn-key" Path Labs—to include space, equipment, technicians, pathologists and other services—to separate physician groups. All of the physician groups would then operate their centralized Path Labs in a single facility. By doing so, the groups would be able to access the services of a single pathologist and technicians who would support the multiple Path Labs located in the facility.

The arrangement was rejected by OIG on the ground that it could implicate the federal anti-kickback statute, which generally prohibits the offer or payment of anything of value in exchange for federal health care program referrals. Advisory Opinion 04-17 is binding only on the requesting party, but it also indicates OIG's position generally, and is likely to influence the future development of ancillary services by physicians and other health care providers.

OIG's rejection of the Path Lab arrangement should not come as a surprise. The Path Lab business structure involved "suspect" characteristics already identified by OIG in an April 2003 Special Advisory Bulletin dealing with "contractual joint ventures." In that bulletin, OIG explained its views on arrangements in which health care providers expand into a new, but related line of business by creating a contractual "joint venture" with an existing service provider. Under many such arrangements, the existing service provider manages the new business line, and the business risk incurred by the provider entering into the new service line is limited because of the new provider's ability to direct referrals. In addition, the existing and new providers (e.g., a physician group and a laboratory service provider as in Advisory Opinion 04-17) would be referral sources and/or potential competitors if they did not have a joint venture relationship. These and other business structure characteristics were identified by OIG as suspect in the special advisory bulletin.

In Advisory Opinion 04-17, OIG noted that the proposed business structure involved many of the same characteristics identified in the contractual joint ventures bulletin. Indeed, it concluded that the proposed Path Lab arrangement would have allowed the laboratory service affiliate of the Path Lab's Sponsor to effectively pay physicians a share of the profits from their laboratory referrals via the profits the physician groups would receive from their operation of the turn-key Path Labs in a manner that would present issues under the anti-kickback law.

The Shared Therapy Center Proposal.

In Advisory Opinion 04-08 (published in June 2004), OIG rejected an arrangement in which a physician group proposed to create a shared physical therapy center ("Center"). The Center was to be located in the same facility as the clinical practice offices of the Center's owner and several other practices.

Under the shared therapy Center arrangement, individual practices would lease use of the Center under one year leases. The practices would gain unlimited use of the Center to furnish therapy to the practice's patients—but each lessee would pay the same amount of rent regardless of actual usage. The leases were essentially part-time leases providing for as-needed, first come/first serve use of the Center, in contrast to a full-time or part-time arrangement involving use during a defined block of time. Importantly, the Center's owner group and physicians in the prospective medical groups that would lease the Center were also potential referral sources.

OIG rejected the proposal in Advisory Opinion 04-08 in part, because the deal's financial structure increased the likelihood that some lessee practices would pay more or less than fair market value for the space, equipment and services in the Center that they actually used based on the "fixed price for unlimited use" arrangement. Thus, those practices that used the Center extensively likely would pay less than fair market value for the services they obtained, while those that used it sparingly would likely pay more than the actual fair market value of the services they received. The arrangement was also viewed by OIG as providing a guaranteed income stream to the Center's owner group in a way that could indirectly compensate that group's physicians for their referrals.

Implications.

This new guidance yields a number of lessons regarding ancillary service arrangements including the following.

• Stark and anti-kickback are related, but separate laws and OIG will examine compliance with both. The requesters of Advisory Opinion 04-17 appear to have relied heavily on the fact that their turn-key Path Lab arrangement would comply with the Stark law's in-office ancillary services exception. But OIG noted that actual or attempted compliance with the Stark Law does not determine whether an intent to unlawfully pay for referrals—the essence of any anti-kickback law violation—is present.
  
• Competition and arm's-length transactions are good. A fundamental problem with Advisory Opinion 04-17 is the fact that the Sponsor of the turn-key Path Labs was affiliated with an existing provider of laboratory services. This meant that in the absence of the Path Lab deals, the affiliate could expect to receive at least some of the physicians' lab service referrals. These facts were a red flag that the Path Lab arrangement wasn't so much an expansion of the physician practices' cluster of services, but instead constituted a means to enable the Sponsor's affiliated laboratory, to share a portion of its profits with referring physicians.
  
• Joint ventures must be for legitimate purposes. Joint ventures traditionally have been used to develop new products or services, to enhance access to capital, to spread the risk of loss in connection with new product and business lines, and for other legitimate reasons. And, where there's a legitimate reason to do a joint venture, then a legally compliant joint venture arrangement can generally be developed. But where the joint venture involves little more than a redistribution of revenues among referral sources, then its legitimacy is more likely to be questioned.
  
• Business risk must be real. Advisory Opinion 04-17 involved business risk on paper—but not in reality—through its use of turn-key operations, an absence of a significant financial outlay by physicians, percentage based compensation arrangements, and other terms. And even the "risk" that existed could be mitigated by the physicians' ability to make referrals to their own labs. Legitimate service lines involve some level of business risk, and deals should reflect these risks.
  
• Structure financial terms carefully. Financial terms that are consistent with fair market value for items or services actually provided and not based on referrals are one of many essential requirements for compliance with the Stark and anti-kickback laws. The Stark law final rule approved certain percentage-based and "per click" arrangements, but even those types of arrangements must be consistent with fair market value. Arrangements in which different prices are paid for precisely the same services (such as time in a shared therapy Center as proposed in Advisory Opinion 04-08) will be suspect, because a defined cluster of services will generally fall within a defined price range.

Despite this recent OIG guidance, a number of business structures remain available for ancillary services developed by physicians and medical groups.

Traditional models. "Traditional" ancillary service lines that are truly part and parcel of a medical group's normal clinical practice operations remain feasible. The Stark Law's in-office ancillary services exception allows physicians and medical groups to develop in-house clinical laboratory, physical therapy, imaging and other ancillary service lines. Where the group incurs business/financial risk in developing, supporting and operating the business line, then entirely legitimate and appropriate ancillary service activities can be developed and implemented.

Creative and non-traditional models. Apart from the traditional ancillary service business models referenced above, other, more creative, business structures also remain feasible provided there is appropriate attention to compliance. OIG probably could have reached a favorable conclusion in Advisory Opinion 04-17 if the facts would have been slightly different. For example, OIG's conclusion might have been different had the Path Lab deal not involved a Sponsor who was affiliated with an existing provider of laboratory services.

Advisory Opinion 04-17 does not prohibit a medical practice from creating its own centralized laboratory, nor would it bar a practice from contracting with a pathologist and technicians to support such a lab. Under such facts, however, the practice would bear substantial business risk in developing and operating such a laboratory, as consistent with the theme that business risk must be real. Such was not the case in the Path Lab deals described in Advisory Opinion 04-17.

Similarly, "Shared facility" arrangements were not eliminated by the publication of Advisory Opinion 04-08. However, the shared therapy Center arrangement at issue in the opinion re-emphasizes the importance of creating joint ventures for legitimate purposes, and paying close attention to financial terms.

Shared facilities that involve contractual relationships akin to the shared therapy Center may make sense as a means to aggregate capital to purchase expensive equipment, and as a means to spread risk and provide for full use of a new service line. However, all such shared facility arrangements must be crafted with appropriate attention to Stark, the anti-kickback law and other applicable compliance requirements. Advisory Opinion 04-08 probably would have come out differently if the therapy Center's lease and service arrangements involved "block-time" leases at fair market value for the leasing practices' use of the Center during a pre-defined period of time (e.g., Monday mornings). Under such arrangements the practices leasing the Center would incur real business risk associated with lack of use during their assigned time periods.

Conclusion.

In the face of adverse regulatory opinions, many physicians and medical groups have over-reacted by concluding that "the sky is falling" when it comes to the development of ancillary service lines. The recent pronouncements by OIG have clearly influenced the legal and regulatory environment governing new services. But a close review of this new guidance also reveals that OIG continues to base it's conclusions on many of the core themes that have always been at the foundation of federal laws directed at the prevention of health care fraud and abuse. In the context of ancillary services and joint ventures, those include:

• New ancillary service activities are best positioned as part of a medical practice's core business operations, and as an extension of the practice's patient care activities;
  
• True joint venture arrangements are more likely to be acceptable when the JV creates a new service, and when the participants share risk; and
  
• Health care business transactions shouldn't be used as means to split fees or pay for referrals.