Other physicians (e.g. urologists and dermatologists) would be offered the opportunity to invest in the Requestor and receive a share of the profits. All profit distributions would correspond to their percentage membership interests in the company. The investors would have the option, but are not obligated, to refer specimens to the lab for pathology services. Comparatively, the Owner/Manager would not be allowed to refer patients for services from the lab. In effect, the pathology lab functions as a shell entity through which operations pass.
The Requestor was inquiring whether the Proposed Arrangement would violate section 1128(b)(7) of the Social Security Act, or the civil monetary penalty provision at section 1128A(a)(7) of the Act, as those sections relate to section 1128B(b) of the Act, the Federal anti-kickback statute. The anti-kickback statute prohibits healthcare providers from "offering or receiving any remuneration to induce or reward referrals of items or services reimbursable by a Federal health care program." This provision is meant to prevent unscrupulous providers from forming referral arrangements without concern for clinical appropriateness.
The Department of Health and Human Services set forth safe harbor regulations which allofariwed for exceptions to the anti-kickback statute because "such practices would be unlikely to result in fraud or abuse." An arrangement must meet all qualifying criteria to claim safe harbor protection. Four safe harbors may be applicable to the Proposed Arrangement: small entity investments, 42 C.F.R. § 1001.952(a)(2); space rental, 42 C.F.R. § 1001.952(b); equipment rental, 42 C.F.R. § 1001.952(c); and personal services and management contracts, 42 C.F.R. § 1001.952(d).
Regarding the small entity investment safe harbor's criteria, two requirements are of concern: 1) no more than 40 percent of an entity's investment interests may be held by investors who can make referrals and generate business for the entity; and 2) no more than 40 percent of an entity's gross revenue may come from referrals or business otherwise generated from investors. 42 C.F.R. § 1001.952(a)(2)(i) & (vi). In the current case, the Requestor anticipates that both the percent of the company sold to investors and the percent of gross revenue generated by investors would exceed 40 percent. Therefore, the small entity safe harbor would be inapplicable in the Proposed Arrangement, as the noncompliance may result in overutilization and medically unnecessary charges.
The safe harbors for space rental, for equipment rental, and for personal services and management contracts share several elements. For example, the agreement must be written and detailed regarding services planned. More importantly, compensation to parties must be: 1) fixed in advance; 2) consistent with fair market value; and 3) must not take into account the volume of referrals or value of business generated which may be paid in part by Medicare or other government health care programs. Because the usage fees paid to the Requestor (and profit distributions to investors) in the Proposed Arrangement would be calculated as a percentage of the pathology lab's income, these safe harbor requirements are not met.
Finally, the Requestor would be owned by investors who have no clinical pathology experience but who are able to refer patients for such services. As such, the OIG declared that the Proposed Arrangement "appears to have no business purpose other than to permit the physician investors to profit from the business they generate" (i.e. from referrals). Based on the facts provided, the OIG concluded that the Proposed Arrangement would pose some risk of abuse and could potentially generate prohibited remuneration under the anti-kickback statute.
This is an overview of an OIG Advisory Opinion and should not be construed as guidance on any issues including legal, regulatory, and compliance matters.