OIG Rejects Joint Venture Between Long-Term Care Facilities Owner and Therapy Provider

Health Care Law Update

Date: December 08, 2021

The Department of Health and Human Services Office of Inspector General (OIG) issued an unfavorable Advisory Opinion on November 17 regarding a proposal by a therapy services company (Therapy Provider) to form a joint venture (Joint Venture) with the owner (JV Partner) of various long-term care facilities (Affiliated Facilities) that would allow the Joint Venture to contract with the Affiliated Facilities to provide therapy services at the Affiliated Facilities. The Therapy Provider would hold a 60% ownership interest in the Joint Venture and would enter into a management services agreement with the Joint Venture to provide the clinical and back-office employees, space and equipment necessary for the Joint Venture’s operations. The JV Partner would purchase a 40% ownership interest in the Joint Venture which, while fair market value, would be based in part on the Joint Venture’s expected business with the Affiliated Facilities. The JV Partner would not be required to make referrals to the Joint Venture for therapy services, but the Therapy Provider expected that the JV Partner would do so. As an owner of the Affiliated Facilities, the JV Partner would be in a position to control or influence the amount of business the Affiliated Facilities directed to the Joint Venture. The Therapy Provider certified that the Joint Venture initially would contract only with the Affiliated Facilities, and therefore all of the Joint Venture’s revenue likely would be generated by therapy services agreements with the Affiliated Facilities.

The OIG first analyzed the proposed arrangement under the Anti-Kickback Statute’s Small Entity Investment Safe Harbor (Safe Harbor), which requires, among other things, that

  • no more than 40% of an entity’s investment interests are held by investors in a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the entity (Investor Test);
  • no more than 40% of an entity’s gross revenue comes from referrals or business otherwise generated from investors (Revenue Test); and
  • the terms on which an investment interest is offered to an investor who is in a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the entity are not related to the previous or expected volume of referrals, items or services furnished, or the amount of business otherwise generated from that investor to the entity (Investment Offer Test).

Key to the Safe Harbor is that both investors who provide items and services to a joint venture and those who make or influence referrals to the joint venture are “tainted” investors for purposes of the Safe Harbor.

The OIG concluded that the Safe Harbor would not protect any payments that are a return on an investment interest in the Joint Venture because the arrangement did not satisfy the Safe Harbor’s elements. Specifically, the Investor Test failed because more than 40% of the Joint Venture would be owned by tainted investors, the Revenue Test failed because more than 40% of the Joint Venture’s revenues would be derived from referrals from the Affiliated Facilities, and the Investment Offer Test failed because the JV Partner’s investment in the Joint Venture would be based on the Joint Venture’s expected business with the Affiliated Facilities. The OIG also found that there would be no safe harbor protection for other remuneration, including the JV Partner’s opportunity to profit from the difference between the fees the Affiliated Facilities pay the Joint Venture for the provision of therapy services and the reimbursement the Affiliated Facilities receive from federal health care programs and other payors for the services.

Because the Safe Harbor did not protect the Joint Venture, the OIG next analyzed the risk of fraud and abuse based on all the facts and circumstances, observing that the proposed joint venture raised many concerns, including patient steering, unfair competition, inappropriate utilization and increased costs to federal health care programs. Moreover, the proposed arrangement exhibited many of the attributes of a problematic contractual joint venture the OIG identified in its 2003 Special Advisory Bulletin on Contractual Joint Ventures (Special Advisory Bulletin), including:

  • the JV Partner would be expanding into a related line of business (therapy services for patients of the Affiliated Facilities) that would depend on referrals and business generated by the JV Partner through the Affiliated Facilities;
  • the JV Partner would contract out substantially all of the Joint Venture’s operations to the Therapy Provider;
  • the JV Partner’s actual financial and business risk would be minimal or nonexistent because the JV Partner would be in a position to control or influence the amount of business the Affiliated Facilities directed to the Joint Venture;
  • the Therapy Provider was an established provider of the same services that the Joint Venture would provide and, absent the proposed arrangement, would be a competitor of the Joint Venture, providing therapy services in its own right; and
  • by creating a joint venture with the JV Partner, the Therapy Provider would be agreeing to forego a portion of the profit that it would realize if it provided the therapy services directly to the Affiliated Facilities while providing the JV Partner the opportunity to share in those profits.

Based on the totality of the circumstances, the OIG concluded that there was a risk that the proposed joint venture was designed to permit the Therapy Provider to pay the JV Partner a share of the profits from the JV Partner’s referrals, thus rewarding the JV Partner for directing business to the Therapy Provider, locking in a referral stream to the Therapy Provider, and blocking out potential competitor therapy services providers.

The OIG’s analysis of the proposed arrangement was straightforward, consistent with previous advisory opinions and guidance, and offered nothing new to the analysis of facts that on their face failed to satisfy the Safe Harbor and substantially mirrored the problematic attributes of a contractual joint venture described in the Special Advisory Bulletin. In a time when health care business models are evolving and providers are evaluating ways to partner to deliver health care, the Advisory Opinion is a good reminder of the regulatory framework that applies to joint ventures between service providers and entities or persons in a position to refer or generate business for the joint venture. Clients considering the formation of joint ventures should ensure that they are structured to comply with the Anti-Kickback Statute and OIG guidance.

FOR MORE INFORMATION

For more information, please contact:

Cori R. Haper
937.443.6856
Cori.Haper@ThompsonHine.com

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