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CLIENT ALERT: Viewing The Recent OIG Company Model Advisisory Opinion For What It Truly Is: Meaningful Guidance That Must Be Incorporated Into These Arrangements
(But Certainly Not the Death Knell to All Company Models Across the Country)




Abby Pendleton, Esq., Carey Kalmowitz, Esq. and Adrienne Dresevic, Esq.
The Health Law Partners, P.C., Southfield, MI

On June 1, 2012, the Department of Health and Human Services Office of Inspector General (the “OIG”) issued its Advisory Opinion No. 12-06, which provides long-awaited guidance to the health care industry regarding the legal permissibility of an anesthesia delivery service model commonly referred to as the “company model.” Insofar as Advisory Opinion No. 12-06 is the initial OIG guidance that specifically focuses on such an arrangement and determines that the factual paradigms presented implicate risks under the Medicare and Medicaid Antikickback Statute (the “AKS”), this Advisory Opinion understandably is capturing broad attention within the medical and legal communities. While OIG Advisory Opinion 12-06 clarifies the almost-axiomatic observation that company model arrangements, especially those that contain the indicia that the OIG historically has identified as problematic under the AKS, certainly have the potential to violate the AKS, the legal permissibility of each company model arrangement should continue to be analyzed based upon each arrangement’s unique facts and circumstances. Stated otherwise, OIG Advisory Opinion 12-06 should not be interpreted to mean that all company model frameworks necessarily are violative of the AKS; rather, the Advisory Opinion reinforces the consistent guidance provided by The Health Law Partners that these arrangements need to incorporate the requisite structural safeguards.

Broad Overview of Company Model Arrangements and Related Controversy

A significant percentage of ASC procedures involve anesthesia services provided by an anesthesiologist or a certified registered nurse anesthetist (“CRNA”). Due to changes within the health care environment, including, in particular, contraction to reimbursement and an increased emphasis on quality and efficiency of patient care, an increasing number of ASCs around the country have transformed their relationships with the anesthesia providers from the normative arrangement (under which an independent anesthesia group bills fee-for-service for the anesthesia services that it furnishes at the ASC) to “company model” arrangement. Although there are a number of permutations of the structure, the company model generally involves the ASC or some or all of its physician owners (hereafter, in either case, the “ASC Physician Members”) establishing a separate legal entity that will provide anesthesia services to the ASC by employing or contracting with anesthesia providers (the “New Company”). The New Company separately bills for the anesthesia services and then pays the anesthesia providers an agreed-upon rate (or contractual compensation in the case of employed anesthesiologists). As a result, the ASC Physician Members capture a portion of the anesthesia revenue generated from procedures furnished at the ASC (which, under the traditional paradigm, had been exclusively realized by the anesthesiologists).

The company model debate has prompted vigorous discussion within the health care bar. The legal dialogue, in particular, focuses upon the application of the AKS to the company model structure. In pertinent part, the AKS prohibits anyone from knowingly and willfully soliciting, receiving, offering or paying remuneration, in cash or in kind, to induce or in return for referrals of items or services payable by any federal health care program. Liability is imposed upon both parties to an impermissible transaction. The AKS has been interpreted to cover any arrangement where one purpose of the remuneration is to obtain money for referral of services or to induce further referrals, even if other salutary purposes exist. Violation of the AKS constitutes a felony punishable by a maximum fine of $25,000, imprisonment up to five years or both. Conviction will also lead to automatic exclusion from federal healthcare programs, including Medicare and Medicaid and may result in the imposition of civil monetary penalties.

In the company model context, the profit that the ASC Physician Members derive from the anesthesia revenue at the ASC, in an improperly structured arrangement, potentially represents impermissible remuneration in the AKS context. In its most basic terms, the issue is whether, in substance, the ASC Physician Members are “converting their referral stream into a revenue stream.” The theory is that the anesthesiologists would essentially be required to forego the anesthesia profit (in favor of the New Company) in exchange for the ability to provide (or, in the case of a then-current anesthesia provider, continue providing) anesthesia services at the ASC, and the ASC Physician Members would earn such profit, based in part, upon their referrals of such services to the anesthesiologists. As discussed below, the fact that the company model affords the ASC Physician Members the ability to capture anesthesia revenue, by itself, does not violate AKS insofar as the determinative element of any AKS violation is impermissible intent. Further, the Federal government is particularly concerned with arrangements that have the ability to negatively affect patient care and/or to result in overutilization. OIG Advisory Opinion No. 12-06 states “[t]he anti-kickback statute seeks to ensure that referrals will be based on sound medical judgment, and that health care professionals will compete for business based on quality and convenience, instead of paying for referrals.” Any AKS analysis requires consideration of the aggregate facts and circumstances in light of available Federal guidance.

In our view, OIG Advisory Opinion No. 12-06 should be seen as corroborative of the AKS principles that the OIG has articulated in prior guidance. Thus, there is no unique company model jurisprudence. Rather, to the extent that a company model arrangement contains the suspect indicia that the OIG has consistently identified, then such an arrangement will assume a higher level on the risk spectrum, whereas, by contrast, company models that both demonstrate a clearer nexus between the ASC Physician Members and New Company’s business (especially in the form of active participation, particularly focused towards the elevation of clinical care), and which avoid correlations between distributions to the ASC Physician Members and their referrals, the risks will be comparatively lower.

Recent OIG Advisisory Opinion No. 12-06 and HLPHLPHLP Comments

In OIG Advisory Opinion No. 12-06, the OIG reviewed two proposals (i.e., Proposal A and B) (the “Proposed Arrangements”) for modifying the relationship between certain ASCs and their exclusive provider of anesthesia services (the “Requestor”) and determined that both of the Proposed Arrangements could potentially violate AKS and result in administrative sanctions.

At the outset, we note that Proposal A itself is not truly a “company model” arrangement. Proposal A involved the Requestor continuing to serve as the exclusive provider of anesthesia services and to bill and retain collections for its services, subject, however, to the requirement that it would pay the ASCs a per-patient fee for certain “management services” with respect to non-federal health care program patients. The OIG clarified that the proposed “carve out” of federal health care program patients does not insulate the otherwise-defective structure from AKS scrutiny. The Federal government would view the relationship between the Requestor and the ASCs (which also included the provision of services to federal health care program patients) as a whole. The OIG noted that the ASCs were already essentially paid for such management services through the facility fee that the ASCs receive from Medicare and therefore, under Proposal A, the ASCs would be paid twice for the same services. Further, such management fee would have the potential to inappropriately dictate which anesthesia provider was selected by the ASC. The OIG’s disapproval of Proposal A reaffirms the position that HLP has consistently taken that conditioning a provider’s (e.g., an anesthesiologist’s) right to perform services upon entry into a contractual arrangement with a group of physicians who potentially control the referrals to such provider (e.g., ASC Physician Members) can implicate substantial regulatory risks.

In contrast to Proposal A described above, Proposal B represents a more normative variant of company model arrangement (albeit one against which we have counseled). Under Proposal B, the ASC Physician Members would indirectly (through their professional entities or the ASC itself) own a new subsidiary entity (the “Subsidiary”). The Subsidiary would engage the Requestor as an independent contractor to provide a broad (i.e., substantially the full spectrum of required) anesthesia-related administrative services through the new Subsidiary entity in return for a negotiated fee. Further, the Subsidiary would employ anesthesia providers (some or all of whom would be affiliated with Requestor) or contract with the Requestor’s anesthesia providers on a contractor basis. The Subsidiary would furnish and bill for all anesthesia services provided at the ASC and pay the anesthesia providers agreed-upon compensation. Simply stated, insofar as the ASC Physician Members would indirectly own the Subsidiary, there would be a correlation between the number of procedures performed at the ASC that require anesthesia and the profit distributions to the ASC Physician Members from the Subsidiary. (It should be noted, in the context of this discussion, that such correlation between referrals and profit distributions exists in legally permissible in-office ancillary service arrangements, even among single specialty group practices.) Among other factors, the OIG also found it significant that the ASC physicians would not be involved in the operations of the Subsidiary and that substantially all of the operations would be contracted out to Requestor. Further, it is noteworthy that the anesthesia services would be provided by the same provider that historically furnished the anesthesia services before entry into the company model arrangement. Relying heavily upon its previously issued joint venture guidance, the OIG concluded that Proposal B would pose “more than a minimal risk of fraud and abuse.”

The OIG’s conclusions with respect to Proposal B are consistent with the advice that HLP has previously provided: if a company model arrangement (such as Proposal B) is implemented (or appears to be implemented) to convert referrals (by ASC physicians to anesthesiologists) to a revenue stream and to incentivize overutilization and undue influence over choice of anesthesia provider, such company model involves a high level of risk and is likely impermissible. Factors that increase the risk of inappropriate utilization through the ordering of unnecessary procedures and anesthesiology services to generate revenue have the ability to increase costs to the federal health care programs, interfere with clinical decision-making and raise patient safety or quality of care concerns. By contrast, if a company model arrangement is organized and operated for legally permissible goals (i.e., improving quality and efficiency of care), the ASC Physician Members participate actively in the business’ conduct, and the profit distribution mechanism does not bear a connection between distributions and the ability to generate procedures, its legal risk is significantly mitigated and the arrangement is in a far better position to be defensible, especially if all the requisite structural safeguards are included.

Conclusion

OIG Advisory Opinion No. 12-06 reminds us that company model arrangements must include meaningful safeguards to mitigate legal risk and to be defensible from an AKS perspective. That being said, the value of such safeguards depends upon the manner in which they are implemented and the actual intent that underlies their inclusion.

Any company model arrangement must be structured, and most importantly, actually implemented, in a good faith manner and involve circumstances that reflect good intent, such as improving quality, efficiency and coordination of care or other permissible purposes. Meaningful efforts to coordinate care through increased integration and alignment among providers is a favorable factor. Employment of the anesthesiologists and CRNA’s by the new ASC or physician owned anesthesia entity would promote such a nexus. Further, if the objective of the new entity is genuinely to improve quality and efficiency, all the physician owners should be meaningfully engaged in the operations of the Company, especially with regard to the development and continuous refinement to policies and protocols (e.g., “best practices”) designed to enhance the quality and efficiency of services furnished at the ASC.

We also take the opportunity to emphasize that distributions from the new company under a company model arrangement to the physician owners (directly or indirectly) should be made in accordance with such physicians’ respective ownership interests (or some other factor unrelated to referrals) and certainly not based upon the number of procedures they perform at the ASC. Accordingly, it is imperative that such new company not determine the ownership interests of the physicians based upon their anticipated referrals or business generated, not encourage physician investors to divest their ownership interest if they fail to generate a certain level of referrals or business generated, and not track the source of referrals to or business generated for the company.


Abby Pendleton, Esq., is a founding partner of The Health Law Partners, P.C. in Southfield, MI and has been practicing healthcare law since 1996. She regularly provides counsel to healthcare providers and organizations in a number of areas, including but not limited to: compliance, Recovery Audit Contractors (“RAC”), Medicare and other payor audits, fraud and abuse, reimbursement matters, and HIPAA Privacy and Security, and physician staff privilege and licensure matters. Ms. Pendleton also specializes in legal issues impacting billing and management companies, anesthesia and pain management providers, hospice providers and mental health agencies.Ms. Pendleton is a member of the State Bar of Michigan (Member, Health Care Law Section) and State Bar of New York (Member, Health Law Section); the American Bar Association; the American Health Lawyer’s Association; the Health Care Compliance Association; the Medical Group Management Association and the Michigan Medical Group Management Association. apendleton@thehlp.com.

Carey F. Kalmowitz, Esq. is a founding member of The Health Law Partners, P.C. Mr. Kalmowitz practices in all areas of healthcare law, with specific concentration on the corporate and financial aspects of healthcare, including structuring transactions among physician group practices and other healthcare providers, development of diagnostic imaging and other ancillary services joint ventures, physician practice, IDTF and home health provider acquisitions, certificate of need, compliance investigations, and corporate fraud and abuse/Stark analyses. Mr. Kalmowitz can be reached at ckalmowitz@thehlp.com.

Adrienne Dresevic, Esq. is a founding member of The Health Law Partners, P.C. Ms. Dresevic practices in all areas of healthcare law and devotes a substantial portion of her practice to providing clients with counsel and analysis regarding Stark and fraud and abuse. Ms. Dresevic can be reached at adresevic@thehlp.com.