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The Department of Health and Human Services Office of Inspector General (OIG) issued an unfavorable&nbsp;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.

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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

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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&nbsp;<a href="https://oig.hhs.gov/documents/special-advisory-bulletins/885/042303SABJointVentures.pdf" target="_blank" rel="noopener">Special Adviso</a>ry Bulletin on Contractual Joint Ventures (Special Advisory Bulletin), including:

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.

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Cori R. Haper 937.443.6856 <a href="mailto:Cori.Haper@ThompsonHine.com">Cori.Haper@ThompsonHine.com</a>

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

This document may be considered attorney advertising in some jurisdictions.

https://admin.thompsonhine.com/wp-content/uploads/2022/04/Health_Care_Law_Update_-_OIG_Rejects_Joint_Venture_Between_Long-Term_Care_Facilities_Owner_and_Therapy_Provider.pdf

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

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