OIG to Anesthesia Practices: Think Again Before You Pay Your ASC for the “Franchise”

Owners of ambulatory surgical centers (ASCs) often wish to receive a share of the professional fees paid to their anesthesiologists and nurse anesthetists.  ASC owners and anesthesiologists and CRNAs have adopted—or at least proposed—numerous corporate and contractual structures over the last few decades to accomplish this transfer of revenues.  The federal Anti-Kickback Statute (AKS), which prohibits a broad range of payments for referrals, has generally caused conservative lawyers to advise against such arrangements.  Some attorneys and other advisors who are less risk-averse have helped their clients to go ahead.

The HHS Office of the Inspector General (OIG) has just provided some guidance on the issue.  The guidance takes the form of an Advisory Opinion (No. 12-06) (posted June 1, 2012), which means that the decision is not binding on any parties, including the OIG.  Nevertheless, the Advisory Opinion spells out how the OIG would apply the AKS principles to two common scenarios.  It equips anesthesia practices with solid new arguments for why they should not pay a “franchise fee” to the ASC or other facility.  This may be a good thing or a bad thing, depending on how much you want the ASC business and on just how willing the ASC owners—and your competition—might be to risk violating the AKS.

The criminal penalties for violating the AKS include fines of up to $25,000 and/or imprisonment of up to five years.  On the civil side, those found guilty of giving or receiving illegal kickbacks may be excluded from the Medicare and Medicaid programs and also face financial consequences under the Civil Monetary Penalties statute. 

Advisory Opinion No. 12-06 – The Two Scenarios

The anesthesiology group that requested the Opinion presented two fact patterns:

Proposed Arrangement A.   The anesthesiologists would pay the physician-owned ASC a per-patient “Management Services” fee for each patient covering preoperative nursing assessments, space for the anesthesiologists and for the group’s records in the ASC, and the transfer of billing information.  The ASC would charge the group the fair-market value fee only for non-Medicare and other non-federal patients.

Proposed Arrangement B.  The physician owners of the ASC would create subsidiary companies to furnish and bill for anesthesia services to patients.  The subsidiaries would hire the anesthesiologists at a negotiated rate either as independent contractors or as employees of what were, in essence, shell companies.  Anesthesia-related services that the group would contract to supply to the subsidiaries on an exclusive basis were:

• recruiting, credentialing, and scheduling anesthesia personnel;
• ordering and maintaining supplies and equipment;
• assisting the Subsidiaries 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 Subsidiaries in structuring independent contractor or employment relationships with anesthesia personnel and assisting in establishing a separate anesthesia corporation).

This is the “company model” that the ASA asked the OIG to condemn in its letter to IG Daniel R. Levinson dated February 27, 2012.  The sole purpose of the model is to allow the owners of the ASC or other facility to increase their revenue stream for anesthesia services.

The anesthesiology group, aka “the Requestor,” also stated “that it is under pressure to enter into the Proposed Arrangements to compete with other anesthesia groups in its area that are engaging in similar practices and to stem the loss of its business.”

Review of Basic Anti-Kickback Law

The AKS makes it a felony to knowingly and willfully offer, pay, solicit or receive any remuneration to induce or reward referrals of services or items reimbursable by a federal health care program, including Medicare, Medicaid, Tricare and the Federal Employees Health Benefit Plan.  (Social Security Act section 1128B (b).) There are several major points to note about the statute:

1. There must be an intent to induce or reward referrals;

1. Both parties to the transaction will be liable, if they have the requisite intent;

1. The courts have interpreted the AKS to cover any arrangement where one purpose was to pay for past or future referrals, and
2. The term “remuneration”—like the AKS as a whole—is very broad.  For purposes of the statute, “remuneration” includes the transfer of anything of value, directly or indirectly, overtly or covertly, in cash or in kind. 

There are several safe harbors that define conduct that might otherwise violate the AKS but that will immunize the conduct if certain conditions, specific to each safe harbor, are met.  In the context of remuneration from anesthesia groups to facilities, the parties frequently invoke either the bona fide employment safe harbor or the safe harbor for personal services and management contracts.  Payments for patient care services made by an employer to a genuine employee are not illegal under the AKS.  Nor are such payments when they are made to an independent agent who might refer Medicare business to the principal (e.g., a pain physician in an ASC) if the aggregate compensation is set in advance, represents fair market value and is not based on the volume or value of referrals.

A third safe harbor of interest here allows investors in Medicare-certified ASCs to obtain a return on their investment under certain conditions that indicate lack of intent to pay for referrals. 

The OIG’s Analysis

Proposed Arrangement A would involve a per-patient payment from the anesthesiology group to the ASC.  Federally-insured patients would be carved out and the group would not pay a Management Services fee for them. 

The OIG decided that Proposed Arrangement A “presented a risk” under the AKS because the Requestor could be paying the Management Services fees to induce the ASCs to refer all of patients, including federal health care program patients, to their group.  Even if there were no fees associated with federal health care program patients, the carve out would not reduce the risk.  Indeed, the OIG noted its “long-standing concern” that payments for non-federal health care program business may disguise remuneration for referrals of federal health care program business.

Proposed Arrangement B, as noted above, was a company model, pure and simple.  The Requestor argued that the ASC safe harbor should apply.  The OIG disagreed, noting that the ASC safe harbor only covers investments in Medicare-certified ASCs and that the “defines the term ‘ASC’ as “any distinct entity that operates exclusively for the purpose of providing surgical services …. the Subsidiaries would be established for the sole purpose of providing anesthesia services to the [ASCs’] patients. Because the Subsidiaries would not provide surgical services, they could not qualify as Medicare-certified ASCs for purposes of the ASC safe harbor and, thus, the Subsidiaries’ income would not be protected by the ASC safe harbor.”

The employment and personal services safe harbors were equally unavailing because the payment was to flow from the service providers (the anesthesiologists) to the ASC owners rather than vice versa:

To the extent any anesthesia personnel were bona fide employees of the Subsidiaries, the Subsidiaries’ payments to such employees could be protected by the employee safe harbor, if all of the other requirements of the safe harbor were satisfied. Likewise, the Subsidiaries’ payments to the Requestor or independent contractor anesthesia personnel might be protected by the personal services and management contracts safe harbor, if all of the requirements of that safe harbor were satisfied. However, neither of these safe harbors would protect the Subsidiaries’ profits that would be distributed to the Centers’ physician-owners under Proposed Arrangement B, 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.

Finally, as the OIG opinion makes clear, failure to qualify for a safe harbor does not by itself make the arrangement illegal under the AKS.  If the risk of fraud and abuse is minimal, the OIG generally will not issue a negative opinion.  Here, however, many of the elements of suspect joint venture arrangements identified in the OIG’s 2003 Special Advisory Bulletin were present in Proposed Arrangement B, including the facts that:

• the ASCs’ physician-owners would be expanding into a related line of business—anesthesia services—that would be wholly dependent on the ASCs’ referrals;
• the ASCs’ physician-owners would not actually operate the Subsidiaries, but would contract out the operations exclusively to the Requestor; and
• the ASCs’ physician-owners would have minimal business risk because they would control the amount of business they would refer to the Subsidiaries.

Accordingly, the OIG determined that “based on the facts presented here, it appears that Proposed Arrangement B is designed to permit the Centers’ physician-owners to do indirectly what they cannot do directly;  that is, to receive compensation, in the form of a portion of the Requestor’s anesthesia services revenues, in return for their referrals to the Requestor.”

Impact of Advisory Opinion No. 12-06

The Advisory Opinion’s verbatim conclusion was “that the Proposed Arrangements could potentially generate prohibited remuneration under the anti-kickback statute and that the OIG could potentially impose administrative sanctions.”  The conditional formulation “could potentially” should not mislead anyone.   Although the OIG did not explicitly prohibit the Requestor from proceeding, and although the Opinion contained the usual disclaimers about its applicability to any arrangements or parties other than those at issue, no one is likely to test out whether a similar arrangement does bring down criminal or administrative penalties on the heads of the ASC owners or the anesthesiologists.

A number of our clients who were looking at potential ventures in which the ASC might be remunerated one way or another for the anesthesia franchise pulled the plug on discussions as soon the Advisory Opinion appeared.  We are quite certain that others found themselves in the same position, with the same outcome.
We urgently recommend that our clients, and other readers, if they are even arguably transferring something of value to their ASCs and hospitals in exchange for anesthesia privileges (exclusive or otherwise), obtain a legal opinion from their attorneys on the appropriateness of the arrangement.  Any future invitations from the facility to share anesthesia’s revenue stream should be analyzed in light of Advisory Opinion No. 12-06 as well.