The U.S. Department of Health and Human Services Office of Inspector General issued an Advisory Opinion in December which should put the kibosh on new efforts to financially reward physicians for patient referrals. The OIG determined that a plan to essentially rent pathology labs to physician groups may violate the federal antikickback statute and, if the requisite intent were proven, serve as the basis for felony criminal convictions as well.

The OIG provides advisory opinions to “requestors” who voluntarily provide information about their planned financial relationships. The OIG makes clear that the resulting advisory opinion only applies to the requestor and can't be relied upon by any other individual or entity. The health care community watches OIG advisory opinions carefully, though, because they serve as a window into the federal government's enforcement mind.

The requestor in OIG Advisory Opinion 04-17 was a company that arranges for the provision of pathology laboratory services. Although this company didn't bill Medicare, Medicaid or other health insurance carriers for its services, it had a sister corporation that was a Medicare-certified pathology laboratory.

Under the proposal submitted to the OIG, the requestor planned to set up as many as five independent and self-contained pathology labs within a single building. The company would then enter into a series of contracts with one physician group per pathology lab. Physician groups would only be eligible to enter into the contracts with the company if the groups specialized in urology, gastroenterology or dermatology - essentially, types of medical group practices likely to utilize pathology lab services.

Each physician group would enter into four separate contracts with the company; a Management Agreement, a Sub-Lease Agreement, a Technical Personnel Agreement, and a Pathology Services Agreement. Under the terms of the Management Agreement, the company would lease equipment to the physicians necessary for the operation of a pathology lab. Under the terms of the Sub-Lease Agreement, the company would lease to the physicians the physical space in which the lab would operate. Under the terms of the Technical Personnel Agreement, the company would lease all of the lab technicians and other personnel who would provide the lab services. Finally, under the terms of the Pathology Services Agreement, the company would provide the part-time services of a pathologist (who was also employed by the company's sister corporation) to supervise the operations of the lab, and to provide the professional analysis of the specimens sent to the lab.

The physicians' contractual obligations were simple. They were to pay the company for the services provided under the terms of the four agreements. They were contractually obligated to keep up their credentials as physicians. Finally, the physicians were required to bill government and private insurance carriers for the lab services.

So why would the company rent out all of the space, equipment and people necessary to operate a lab to a group of physicians? And why would a group of physicians decide it wanted to operate a pathology lab - but in someone else's space with someone else's technicians and equipment?

The answers to these questions form the basis of the OIG's legal concerns.

As with most questionable financial relationships, the probable motive can be discerned by following the money - looking to see who makes money BEFORE the relationship and who makes money AFTER the relationship.

If these physician groups never entered into these contracts with the company, they presumably would continue treating their patients, and continue ordering laboratory tests when medically necessary. However, since the physicians would not have their own pathology lab, those tests would be rendered at an outside lab. The laboratory that performed the tests would bill Medicare, Medicaid and other insurance companies for those tests, and the laboratory would keep the money. If the physician groups entered into these series of contracts with the company, however, the physician groups would be viewed by Medicare and Medicaid as the “provider” of the laboratory tests, and the physician groups would be able to bill insurance carriers for those tests and keep the proceeds. And, the amount the physician groups would receive from Medicare, Medicaid and other insurance carriers would exceed the amounts the physicians would have to pay the company under the terms of the four contracts. So, the physicians would make a profit on the provision of lab services.

The federal antikickback statute makes it a criminal offense knowingly and willfully to offer, pay, solicit, or receive any remuneration to induce or reward referrals of items or services reimbursable by a federal health care program.

If the remuneration is paid purposefully to induce or reward referrals of items or services payable by a federal health care program, the anti-kickback statute is violated. The OIG noted that “by agreeing effectively to provide services it could otherwise provide in its own right for less than the available reimbursement, the [company] would potentially be providing a referral source - a physician group - with the opportunity to generate a fee and a profit”. The OIG determined that providing a physician group with the opportunity to generate a fee and a profit was providing “remuneration” within the meaning of the antikickback statute. The OIG noted that “based on the facts presented here, we are unable to exclude the possibility that the parties' contractual relationship is designed to permit the Requestor to do indirectly what it cannot do directly; that is, pay the physician groups a share of the profits from their laboratory referrals”.

The company likely submitted its request for an OIG advisory opinion at least in part because it thought it had landed on a series of contractual relationships with the physician groups that complied with the so-called “Stark” law, and therefore should be permissible. In very general terms, the “Stark” law prohibits referrals by a physician to entities in which the physician or a member of her family has a financial interest. Conduct prohibited under Stark is similar in many ways to conduct prohibited under the federal antikickback statute. Both bodies of law have exceptions (Stark) or safe harbor regulations (antikickback) which protect financial relationships that would otherwise run afoul of the law. Many of the Stark “exceptions” have antikickback safe harbor equivalents. There are Stark law exceptions and antikickback safe harbors protecting certain types of space rental, equipment rental and personal services and management contract agreements.

Here, the company argued with the OIG that each of its four contracts with the physicians would fit within an applicable Stark “exception” and therefore the entire financial relationship between the company and the docs should pass federal muster. The OIG disagreed. First, the Centers for Medicare & Medicaid Services (the agency with authority to issue opinions about the application of the Stark law) has repeatedly taken the position that just because conduct complies with Stark is no guarantee that it also complies with the antikickback law. Second, the OIG noted that even if each of the four contracts complied with some Stark exception and near-equivalent antikickback safe harbor, that would only protect the remuneration paid under each of those contracts (i.e., the actual rent paid for the equipment under the equipment rental agreement). None of those exceptions or safe harbors would protect the physician groups' retained profit from the pathology services.

OIG Advisory Opinion 04-17 may have particular relevance here in the Upper Midwest, where contractual joint ventures similar to this one have sprouted up in recent years in a variety of health care fields, including oncology services and diagnostic imaging. Some of these newly minted joint venturers attempt to avoid the reach of the federal antikickback statute by excluding services rendered to federally insured patients, such as Medicare beneficiaries and Medicaid recipients. In Minnesota, those efforts may succeed in avoiding attention from the federal cops, but not from state law enforcement. Minnesota has a state law prohibiting all conduct which would violate the federal antikickback statute no matter which insurer pays the bill. Therefore, state enforcers (including Attorney General Mike Hatch) will likely have legal concerns about rent-a-lab and similar schemes even if only privately insured patients are referred for services.

Founded in Saint Paul in 1943, Felhaber, Larson, Fenlon and Vogt, P.A. has offices in Minneapolis and Saint Paul. With over 55 attorneys, the firm serves clients in the areas of corporate and commercial law, employee benefits, employment law, estate planning, health care, intellectual property, labor law representing management, litigation, real estate, transportation law, and workers' compensation.