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Fall 2012


Update on the Company Model and Other Schemes—OIG Issues Advisory Opinion




Mark F. Weiss, J.D.
The Advisory Law Group, Los Angeles, CA

[Author’s Note: A version of this article originally appeared in the August 2012 issue of Anesthesiology News.]

In a much awaited pronouncement, on June 1, 2012, the U.S. Department of Health and Human Service’s Office of Inspector General issued Advisory Opinion 12-06 addressing the propriety of two popular schemes to extract money from anesthesiologists, the so-called “company model” and the purported “management fee.”

The advisory opinion could not be more welcome: Just as Willie Sutton, the bank robber, targeted banks “because that’s where the money is,” owners of ambulatory surgery centers continue seek a share of anesthesia fees.

According to a survey conducted by the American Society of Anesthesiologists, 41% of the responding anesthesia practices (125 out of 308) reported being requested by an ASC or its referring physician practice to adopt a company model. Not surprisingly, those 125 practices reported that out of the total 332 requests to participate in a company model entity, the group lost the contract in at least 159 instances.

Company Model Refresher

If an ASC or its owner approached you and flat out demanded a kickback, “Bob, if you want to provide anesthesia at Greenacres ASC, you’ve got to pay us 30 cents on the referred dollar,” it’s clearly illegal.

But what if, instead, the conversation goes like this: “Bob, if you want to provide anesthesia at Greenacres ASC, you’ve got to become an employee of our entity, Greenacres Anesthesia Services, owned by my surgical group. We’ll even pay you commensurately with your production. In fact, we’ll pay you the lion’s share, 70 cents on the dollar!”

These entities become the “companies” of the company model. Of course, demanding 30% as a direct kickback has the same economic effect as forcing the anesthesiologists into an entity that rewards them with a 70% share. But is the company model structure legal? That’s the $25,000 fine plus five years in jail plus exclusion from Medicare and Medicaid question. And don’t forget possible civil monetary penalties.

The Company Model Business Model

In its most direct form, the company model involves the formation, by the surgeon owners of an ASC, of an anesthesia services entity to serve as the “company” that provides all of the anesthesia services at those surgeons’ ASC.

Prior to the formation of the company, all anesthesia services were provided by the anesthesiologists working at the ASC, either for their separate accounts or for the account of their anesthesia group. However, after the formation of the company model entity, those anesthesiologists, or others if they are unwilling to play ball, are employed or engaged as subcontractors by the company, with a significant share of the anesthesia fee being redirected to the company model’s owners, the surgeons.

Management Fee Model

In the management fee model, the ambulatory surgery center charges the anesthesiologists a fee in respect of their “use” of portions of the ASC facility in the context of providing anesthesia to the patients of that facility, or for services rendered by the ASC’s staff, or, for the “rent” of space within the facility for their delivery of anesthesia services to the ASC’s patients.

Key Compliance Issussussues

The federal anti-kickback statute (AKS) prohibits remuneration—that is, the transfer of anything of value—for referrals. State laws differ in their treatment, scope and interpretation, but generally contain similar provisions barring remuneration for referrals, sometimes expressed as anti-kickback or fee-splitting prohibitions. Because of the variations in state laws, this article focuses on the federal concepts applicable to patients covered under Medicare and Medicaid.

Courts have interpreted the AKS to apply even when an arrangement may have many legitimate purposes; the fact that one of the purposes is to obtain money for the referral of services or to induce further referrals is sufficient to trigger a violation of the law.

Certain exceptions, known as safe harbors, define permissible practices not subject to the anti-kickback statute because regulators believe they are unlikely to result in fraud or abuse. The failure to fit within a safe harbor does not mean that an arrangement violates the law; there’s just no free pass.

The question, then, for the company model or for management fee deals is whether the arrangement runs afoul of federal anti-kickback law. To be sure, each deal must be analyzed carefully.

Prior OIG Guiuidance

The U.S. Department of Health and Human Services Office of Inspector General (OIG) previously issued two fraud alerts applicable to the analysis of company model deals: its 1989 Special Fraud Alert on Joint Venture Arrangements, which was republished in 1994,and a 2003 Special Advisory Bulletin on Contractual Joint Ventures.

The OIG considers a joint venture to mean any arrangement, whether contractual or involving a new legal entity, between parties in a position to refer business and those providing items or services for which Medicare or Medicaid pays.

The OIG has made clear in its safe harbor regulations and other documents that compliance with both the form and the substance of a safe harbor is required in order for it to provide protection. In other words, even if planners generally work to fit a company model deal into the confines of a safe harbor, the OIG demands that if an underlying intent is to obtain a benefit for the referral of patients, the safe harbor would be unavailable and the AKS would be violated.

Fraud Alert and Advisory Bulletin

The fraud alert states: “Under these suspect joint ventures, physicians may become investors in a newly formed joint venture entity. The investors refer their patients to this new entity, and are paid by the entity in the form of ‘profit distributions.’ These subject joint ventures may be intended not so much to raise investment capital legitimately to start a business, but to lock up a stream of referrals from the physician investors and to compensate them indirectly for these referrals. Because physician investors can benefit financially from their referrals, unnecessary procedures and tests may be ordered or performed, resulting in unnecessary program expenditures.”

In describing questionable features of suspect joint ventures, the fraud alert provides several examples, including:

  • Investors are chosen because they are in a position to make referrals (e.g., the surgeon-owners of the ASC who become the owners of the company model entity);
  • One of the parties may be an ongoing entity already engaged in a particular line of business (e.g., the anesthesiologists); and
  • The referring physician’s investment may be disproportionately small and the returns on investment may be disproportionately large compared with a typical investment in a new business enterprise (e.g., the company model, which requires only nominal start-up capital).

Notice that the features of the company model include many of those stated by the OIG in the alert to be questionable.

The 2003 Special Advisory Bulletin sheds even more light on the analysis of company-model structures. It focuses on questionable contractual arrangements in which a health care provider in an initial line of business, termed the “owner,” expands into a related health care business by contracting with an existing provider of the related item or service, the “manager/supplier,” to provide the new item or service to the owner’s existing patient population. Note that the term “existing provider” is not limited to situations in which anesthesiologists have an existing relationship with the ASC at the time the company model joint venture is formed.

The advisory bulletin lists some of the common elements of these problematic structures:

  • The owner expands into a related line of business that is dependent on direct or indirect referrals from, or on other business generated by, the owner’s existing business.
  • The owner does not operate the new business—the manager/supplier does—and does not commit substantial funds or human resources to it.
  • Absent participation in the joint venture, the manager/supplier would be a competitor in the new line of business, providing services, billing and collecting in its own name. The anesthesiologists working for the captive entity would otherwise be engaged in the business of providing anesthesia for their own account.
  • The owner and the manager/supplier share in the economic benefit of the owner’s new business.
  • The aggregate payments to the owner vary based on the owner’s referrals to the new business.

Those elements hint at a company model structure in which an ASC (or some or all of its surgeon-owners) forms an anesthesia company solely for the purpose of providing anesthesia services to itself. Little capital is required. The anesthesiologists, not the owners, provide the services. But for their engagement by the company, they would be providing anesthesia services for their own account. The company’s owners capture a share of the anesthesia revenue. And, importantly, the more cases the ASC or its surgeons refer to the company, the more money those company owners make.

The bulletin states that despite attempting to fit the contracts creating these joint venture relationships into one or more safe harbors, such protection might not be available. The OIG views the discount given within the joint venture’s common business enterprise (e.g., the anesthesiologists agree to be paid less by the company than they would receive if they billed independently of the joint venture) as not qualifying for the safe harbor applicable to discounts.

Even if the contracts could fit within one or more safe harbors, the bulletin states that they would protect only the payments from the owner to the manager/supplier for actual services rendered, not the “payment” from the manager/supplier back to the owner in the form of its agreement to provide services to the joint venture for less than the available reimbursement—that is, the “discount” given within the joint venture.

Again, the failure to qualify for safe harbor protection does not mean that a venture is illegal; it does mean that it might receive additional scrutiny that could lead to prosecution.

In 2009, the American Society of Anesthesiologists (ASA) requested that the OIG issue a special advisory bulletin on the company model. The ASA renewed that request in June 2010. More recently, the ASA responded in February 2011 to a public invitation by the OIG for comments on additional Special Fraud Alerts, urging an expedited alert on the company model. The OIG has yet to issue a special advisory.

Advisory Opinion 11-03

In response to requests from one or more parties to a particular proposed or existing arrangement, the OIG will issue an advisory opinion as to that specific situation. Although only binding in respect to the requestor, advisory opinions provide a window into the OIG’s analysis of how the anti-kickback statute applies in particular instances.

In 2011, the OIG issued its Advisory Opinion 11-03, not in respect a company model anesthesia deal, but as to a very similar pharmacy company. In the proposed facts disclosed to the OIG, a pharmacy providing products and services to long-term care facilities would form a new long-term care pharmacy to be owned in common with one or more long-term care facilities. The long term care facilities would, of course, now share in the profits of pharmacy services.

The OIG found the proposed arrangement problematic, focusing on the similarity between the proposed deal and the suspicious arrangement outlined in the 2003 Special Advisory Bulletin, with the long-term care facility owners doing nothing to operate the new venture but receiving a share of the profits. Those facility owners would have little or no business risk and the payment to the new joint venture would vary with the volume or value of referrals from the facilities to the new business.

2012 Advisisory Opinion 12-06

Although Advisory Opinion 11-03 addressed an analogous situation, the OIG’s June 1, 2012, Advisory Opinion 12-06 was that agency’s first pronouncement directly on the propriety of the company model. And, importantly, that advisory opinion also addresses a prevalent alternative method of extracting money from anesthesiologists, the management fee arrangement.

In Advisory Opinion 12-06, the requestor, an anesthesia group, set out two alternative proposed scenarios in regard to its relationship with a group of ASCs owned by surgeons.

Alternative “A:” The Management Fee

In alternative “A,” the anesthesia group would continue to serve as the ASC’s exclusive anesthesia provider of anesthesia and to bill and collect for its own account. However, the group would begin paying the ASCs for “management services,” including pre-operative nursing assessments, adequate space for all of the group’s physicians, including their personal effects, adequate space for the group’s physicians’ materials, including documentation and records, and assistance with transferring billing documentation to the group’s billing office.

Although both Medicare and private payors set their reimbursement to the ASCs taking into account the expenses of the type included with the management fee, the ASCs would continue to bill Medicare and private payors in the same amount as currently billed.

The management fee would be at fair market value and determined on a per patient basis. No management fee would be charged in connection with federal health care program patients.

Consistent with its longstanding viewpoint, the OIG found that carving out federally funded patients was ineffective to remove the proposed arrangement from within the purview of the AKS, because the payment of the fee in connection with private payors would influence the decision to refer all cases, thereby not reducing the risk that their payment is made to induce the referral of the federally funded ones.

The OIG stated that the AKS seeks to ensure that referrals will be based on sound medical judgment, and competition for business based on quality and convenience, instead of paying for referrals. But under the management fee proposal, the ASCs would be paid twice for the same services, by Medicare or by the private payor via the facility fee, and then also by the anesthesiologists via the management fee. That double payment would could unduly influence the ASCs to select the requestor as the ASCs’ exclusive provider of anesthesia services.

Alternative “B:” The Company Model

In alternative “B,” the surgeon owners of the ASCs would set up a series of entities to provide anesthesia services, on an exclusive basis, at each of the ASCs. Those entities, commonly known as the “anesthesia companies” of the company model, would be wholly owned either directly by the surgeon’s entities or by the ASCs.

Those anesthesia companies would, in turn, engage the requestor anesthesia group on an exclusive basis as an independent contractor to provide the actual anesthesia care and certain related services, described in the Opinion as including:

  • recruiting, credentialing, and scheduling anesthesia personnel;
  • ordering and maintaining supplies and equipment;
  • assisting the anesthesia companies in selecting and working with a reputable anesthesia billing company;
  • monitoring and overseeing regulatory compliance;
  • providing financial reports;
  • implementing quality assurance programs; and
  • providing logistics (including, if necessary, assisting the anesthesia companies in structuring independent contractor or employment relationships with anesthesia personnel and assisting in establishing a separate anesthesia corporation).

In turn, the anesthesia companies would pay the requestor a negotiated rate for the services. The fees for the services would be paid out of the anesthesia related collections, with the anesthesia companies retaining any profits.

In analyzing the proposed company model arrangement, the OIG stated that even if one assumed that the surgeon investors qualified for the ASC safe harbor in respect of their investment in the surgery center, there was no safe harbor available in respect of the distributions that they would receive from their anesthesia company. The ASC safe harbor protects returns on investments only in circumstances where the investment entity itself is a Medicare certified ASC, which is an entity that operates exclusively for the purpose of providing surgical service, and anesthesia services are not surgical services.

Additionally, even if the safe harbor for payment to employees applied (if the anesthesiologists were employed) or if the safe harbor for personal services contracts applied (if the anesthesiologists were subcontractors), and, therefore, the payments to the anesthesiologists were protected by a safe harbor (note that this means that the payments to the anesthesiologists were at fair market value, which is what many “experts” think is the magic bullet in terms of all compliance—it is not), neither of those safe harbors would apply to the company model profits that would be distributed to the ASC’s physician-owners, and such remuneration would be prohibited under the anti-kickback statute if one purpose of the remuneration is to generate or reward referrals for anesthesia services.

After stating that the failure to qualify for a safe harbor does not automatically render an arrangement a violation of the anti-kickback statute, the OIG then turned to an analysis pursuant to the 2003 Special Advisory Bulletin on Contractual Joint Ventures, discussed above, and found that the physician owners of the proposed company model entity would be in almost the exact same position as the suspect joint venture described in the Bulletin: That is, in a position to receive indirectly what they cannot legally receive directly—a share of the anesthesiologists’ fees in return for referrals.

Therefore, the OIG stated that the proposed company model venture would pose more than a minimal risk of fraud and abuse.

In total, the OIG concluded that either of the proposed arrangements, the management fee arrangement or the company model arrangement, could potentially generate prohibited remuneration under the anti-kickback statute and the OIG could potentially impose administrative sanctions on the requestor.

The Bottom Line …

The bottom line is that both company model ventures and management fee arrangements are fraught with kickback danger for all parties involved. Additionally, note that there is no requirement that there be a third entity, the so-called anesthesia company, involved for the analysis applied by the OIG to apply: Similar arrangements directly between an ASC and the anesthesiologists trigger the same concerns.

Each situation must be analyzed carefully as there is a high chance of an AKS violation leading to criminal fines, civil penalties, exclusion as a provider and even imprisonment.


Mark F. Weiss, J.D., is an attorney who specializes in the business and legal issues affecting anesthesia and other physician groups. He holds an appointment as clinical assistant professor of anesthesiology at USC’s Keck School of Medicine and practices nationally with the Advisory Law Group, a firm with offices in Los Angeles and Santa Barbara, Calif. Mr. Weiss provides complementary educational materials to our readers at www.advisorylawgroup.com. He can be reached by email at markweiss@advisorylawgroup.com.