By Alan E. Reider, Allison W. Shuren and Adil Daudi of Arnold & Porter, LLP
On June 1, 2012, the Department of Health and Human Services Office of Inspector General (“OIG”) released Advisory Opinion 12-06 in which it considered two proposed arrangements under which an anesthesia services provider (the “Requestor”) would contract with physician-owned ambulatory surgical centers (“ASC”) to provide anesthesia services. The OIG concluded that the two proposed arrangements would potentially violate the federal Anti-Kickback Statute (“AKS”), thereby subjecting the Requestor to possible administrative sanctions and civil monetary penalties.
The Requestor is a fairly large anesthesia services provider, with 31 physician members, and 10 physician employees. The Requestor provides anesthesia services on an exclusive basis at several outpatient ASCs that are physician-owned professional corporations or limited liability companies. The Requester informed the OIG that the ASCs were certified for Medicare reimbursement purposes and that, to the Requestor’s knowledge, they were formed and operate in compliance with the AKS safe harbor for ASCs.
Under Medicare regulations, ASCs receive payment through Medicare Part B. ASC facility services are packaged into the ASC payment for a covered surgical procedure; however, any ancillary items and services integral to a covered surgical procedure may be separately billed. Pursuant to its existing agreements with ASCs, the Requestor assumes responsibility for employing personnel to staff the ASCs for the provision of anesthesia services, and the Requestor independently bills patients and third party payors, including federal health care programs, for the professional fees associated with those ancillary services. The Requestor pointed to financial risk with these existing arrangements because of its obligation to balance its staffing needs against revenue received from its anesthesia services, which is entirely controlled by the ASCs’ physician owners.
The Requestor proposed to adopt two new business models in order to — in its assessment — better compete in the anesthesia market. Under Proposed Arrangement A, the Requestor would continue to serve as the ASCs’ exclusive provider of anesthesia services. The Requestor would, however, pay the ASCs a per-patient fee for certain management services that it certified would be at fair market value. These management fees would be in addition to, and not in lieu of, the facility fees that the ASCs would continue to charge to Medicare and other payors. The proposed management services would include pre-operative nursing assessments and personal and storage space for Requestor’s physicians. The Requestor certified that federal health care program beneficiaries would be excluded from the per-patient management fee calculation.
In its discussion of Proposed Arrangement A, the OIG noted that it “has a long-standing concern about arrangements under which parties ‘carve out’ Federal health care program beneficiaries or business generated by Federal health care programs from otherwise questionable financial arrangements.” Specifically, the OIG is concerned that such arrangements may “disguise” remuneration for federal health care program business through the payment of amounts “purportedly related to non-Federal health care program business.” In addition, the OIG found that the facility fees that are paid by Medicare to the ASCs already include those fees that the Requestor would pay on a per-patient basis to the ASCs. As a result, the ASCs would be “paid twice for the same services,” which could have the effect of inducing the ASCs to select or maintain the Requestor as its exclusive provider of anesthesia services.
Under Proposed Arrangement B, the ASCs’ physician-owners would establish separate companies for the purpose of providing anesthesia-related services to outpatients. The separate companies would be owned by the physicians through PCs or the ASCs, and the Requestor would then serve as an independent contractor to the ASCs and would be paid for its services. The subsidiary companies would bill for and furnish all anesthesia services provided at the ASCs, and the Requestor would be paid for services, including recruiting and credentialing, supplies management, and overseeing regulatory compliance.
As with Proposed Arrangement A, the OIG determined that Proposed Arrangement B would potentially implicate prohibited remuneration under the AKS. The OIG noted that there were several safe harbors that could potentially apply to Proposed Arrangement B — including the ASC safe harbor, the personal services safe harbor, and the employee safe harbor — however the OIG concluded that none would apply. With regard to the ASC safe harbor, the OIG found that because the subsidiary companies “would be established for the sole purpose of providing anesthesia services” to ASC patients, they would not qualify for ASC status under Medicare rules because they would not themselves provide surgical services. The personal services and employee safe harbors would be inapplicable in relation to Proposed Arrangement B because, in the OIG’s opinion, they could not protect remuneration distributed by the subsidiary companies to the ASCs’ physician owners if one purpose of the remuneration was to generate or reward referrals for anesthesia services.
Failure to meet the requirements of a safe harbor does not necessarily indicate that payment or receipt of prohibited remuneration under the AKS has occurred. The OIG typically applies other prudential factors where a safe harbor does not apply to determine whether a proposed arrangement violates the AKS. In the case of Proposed Arrangement B, the OIG determined that there was “more than a minimal risk of fraud and abuse.” The OIG noted that it has had long-standing concerns about joint ventures between those in a position to refer business, such as the ASC physician owners, and those furnishing items or services for which Medicare or Medicaid pays, such as the Requestor. In reiterating those concerns, the OIG pointed to a Special Advisory Bulletin regarding such contractual joint ventures, issued in April 2003, in which it expressed concern related to health care providers expanding into related health care businesses by contracting with existing providers. In the case of Proposed Arrangement B, the ASC physician owners would be expanding into a related area — anesthesia — by contracting with the Requestor. This relationship would pose very minimal business risk for the ASC owners, and the anesthesia services would be dependent entirely on referrals from the ASC. As a result, the OIG concluded that Proposed Arrangement B appeared designed “to permit the [ASCs’] physician-owners to do indirectly what they cannot do directly” — i.e., receive compensation in return for their referrals to the requestor.
Practical Considerations for Anesthesia Service Contracting
Though the specific facts and circumstances of any referral arrangement must be analyzed independently to ensure compliance with the AKS, there are some practical lessons that may be drawn from Advisory Opinion 12-06. It is clear, for example, that the Advisory Opinion addresses certain conduct that is obviously prohibited by the AKS; other conduct addressed in the opinion is not as clearly improper. The broad wording in the Advisory Opinion and its detailed discussion of ASC anesthesia joint ventures has caused significant concern in the industry regarding what practices are acceptable. But, the various business relationships and referral structures that exist regarding anesthesia services cannot be reduced to a simple formula.
The OIG appears principally concerned with medical practices, including physician-owners of an ASC, bringing in service providers in a manner that does not reflect a bona fide business arrangement. As discussed in relation to Proposed Arrangement A, the OIG will consider any arrangement suspect where it is apparent that there is no business risk for the ASC and where the ASC would essentially be paid by anesthesiologists for patient referrals. In this regard, any per-patient fee paid by the service providers to the ASC will almost surely appear suspect, particularly if those fees are described as pertaining to some particular management or other service that will be provided by the ASC, yet they relate to services for which the ASC is compensated by its facility fee.
In the OIG’s view, by effectively reducing compensation paid to the anesthesiologists, Proposed Arrangement A implicates conduct that could jeopardize patient care and medical judgment, and it creates a situation in which ASCs would essentially be “paid twice” for the same services. ASCs clearly may not contract for services that Medicare reimburses as part of the typical ASC facility payment. As noted in the Advisory Opinion, ASC facility services for which payment is packaged into the ASC payment for a covered surgical procedure include:
• Nursing, technician, and related services;
• Use of the facility where surgical procedures are performed;
• Administrative, recordkeeping, and housekeeping items and services;
• Materials, including supplies and equipment for the administration and monitoring of anesthesia; and
• Supervision of the services of an anesthetist by the operating surgeon.
Any attempt to contract for services already included in the Medicare ASC facility payment will likely be considered suspect by the OIG.
Proposed Arrangement B, however, presents a different situation, and the OIG’s failure to grant a favorable opinion should be read narrowly, to the facts presented. As noted above, Proposed Arrangement B would have created a series of new entities by the physician owners of the ASC, which would, in turn, contract for the provision of anesthesia for a discounted fee. It is clear that these new practices were merely shells, whose purpose was to capture a portion of the fees for the anesthesia services performed. The practices employed no professionals, nor did they incur any risk. The only basis for their ability to profit was the referrals that its owners controlled. Such arrangements, regardless how technically correct, are not likely to be blessed by the OIG.
The Advisory Opinion should not be read, however, to prohibit physician contracting for anesthesia services. Where a separate corporate entity is established for legitimate business or legal reasons, and the financial relationship is structured correctly, the AKS should not be implicated. Unlike Proposed Arrangement B, if physicians established an independent medical practice for the purpose of providing anesthesiology services, and the practice employed anesthesiologists and CRNAs, paid them a fixed fee, thereby maintaining business risk and are not merely entering into what might appear to be sham agreements, the relationship should not trigger AKS liability. In fact, such an arrangement may be required by limitations in state law. For example, state law may prohibit physician employment by an ASC, which would provide a reason to establish a separate physician practice to employ or contract with an anesthesiologist to provide anesthesia services at an ASC. Similarly, insurance considerations also may serve as the basis for establishing a separate medical practice, rather than employing the anesthesiologist in the surgeons’ practice. As long as the arrangement is structured so that the anesthesiologists are compensated by the practice in a manner that reflects fair market value, particularly at a fixed salary so that the practice assumes risk, the risk of triggering the AKS should be minimized.
In the event that an anesthesia service provider contacts an ASC seeking to terminate a services agreement in light of Advisory Opinion 12-06, it would be prudent to assess carefully those services that were originally contracted for in order to determine whether the relationship remains viable. A thoughtful restructuring of the relationship may permit the parties to continue doing business together in a mutually-beneficial way so long as the arrangement does not implicate management or other services already paid for by Medicare or otherwise appear to involve payments for referrals.