Moving the HME Industry Forward


Joint Ventures with Hospitals – What the Law Requires Part 3

November 3, 2014

AMARILLO, TX – For years, the health care delivery system operated in silos. Hospitals did their thing, physicians did their thing, pharmacies did their thing, DME suppliers did their thing—you get the idea. There was little coordination among the providers.

When Medicare, Medicaid and commercial insurers were content to pay on a fee-for-service basis, then this model worked. Unfortunately, the country could not afford it. Medicare “grew up” with 23 million of the Greatest Generation. Now, Medicare and other payors are having to deal with 78 million Baby Boomers who are retiring at the rate of 10,000 per day. The “silo” model is no longer financially viable.

Medicare and other payors are squeezing reimbursement and are demanding results (good patient outcomes). These two factors are forcing providers to enter collaborative arrangements to cut costs and achieve successful patient outcomes. One example of this is the hospital/DME supplier joint venture. In its most simplistic terms, a “joint venture” is when two or more people or companies own something together. Increasingly, hospitals and DME suppliers are forming new DME suppliers, partially owned by the hospital and partially owned by the DME supplier.

One of the reasons why a hospital would be interested in forming a new DME company, owned by the hospital and an existing DME supplier, is to help insure “continuum of care” for the patient when he is discharged from the hospital. The hospital wants the discharged patient to stay healthy; the hospital does not want to see the patient readmitted within 30 days. By co-owning a DME supplier, the hospital will indirectly have “touches” with the patient upon discharge. The hospital, through the DME supplier that the hospital partially owns, will help facilitate the use by the discharged patient of equipment and supplies that will assist in keeping the patient healthy.

In putting together such a joint venture, it is important to keep in mind that the hospital will be a referral source to the joint venture. As an owner of the joint venture, the hospital will be entitled to profit distributions. Because of this, the joint venture cannot be a subterfuge to funnel remuneration to the Hospital for referrals of patients. Such a subterfuge would violate the Medicare anti-kickback statute.

In determining whether the joint venture is a legitimate arrangement, or is a violation of the anti-kickback statute, the three principal sources of guidance are (i) the Small Investment Interest safe harbor to the anti-kickback statute, (ii) the OIG’s 1989 Special Fraud Alert entitled “Joint Ventures” and (iii) the OIG’s April 2003 Special Advisory Bulletin entitled “Contractual Joint Ventures.”

Part 1 of this three part series discussed the Small Investment Interest safe harbor to the anti-kickback statute. Part 2 discussed the OIG’s 1989 Special Fraud Alert (“Joint Ventures”). This Part 3 will discuss the OIG’s April 2003 Special Advisory Bulletin (“Contractual Joint Ventures”).

Over the years, the OIG has published a number of fraud alerts and advisory bulletins. These publications educate health care providers on arrangements that the OIG believes are vulnerable to fraud.” If a joint venture does not meet all of the elements of the Small Investment Interest safe harbor, then it is important that the joint venture comply with the OIG’s fraud alerts and advisory bulletins.

The OIG’s 1989 Special Fraud Alert (“Joint Venture”), discussed in Part 2, focused on how a joint venture should be properly set up. The OIG’s April 2003 Special Advisory Bulletin (“Contractual Joint Ventures”), which is the subject of Part 3, focuses on how a joint venture should be operated.

The advisory bulletin discusses “questionable contractual arrangements where a health care provider in one line of business (“Owner”) expands into a related health care business by contracting with an existing provider of a related item or service (“”Manager/Supplier”) to provide the new item or service to the Owner’s existing patient population, including federal health care program patients.”  

The advisory bulletin goes on to say that the “Manager/Supplier not only manages the new line of business, but may also supply it with inventory, employees, space, billing, and other services.  In other words, the Owner contracts out substantially the entire operation of the related line of business to the Manager/Supplier – otherwise a potential competitor – receiving in return the profits of the business as remuneration for its federal program referrals.”

The advisory bulletin then gives some examples of “potentially problematic contractual arrangements,” including the following:

• “A hospital establishes a subsidiary to provide DME.  The new subsidiary enters into a contract with an existing DME company to operate the new subsidiary and to provide the new subsidiary with DME inventory.  The existing DME company already provides DME services comparable to those provided by the new hospital DME subsidiary and bills insurers and patients for them.”

• “A DME company sells nebulizers to federal health care beneficiaries.  A mail order pharmacy suggests that the DME company form its own mail order pharmacy to provide nebulizer drugs.  Through a management agreement, the mail order pharmacy runs the DME company’s pharmacy, providing personnel, equipment, and space.  The existing mail order pharmacy also sells all nebulizer drugs to the DME company’s pharmacy for its inventory.”

The advisory bulletin then states that problematic arrangements typically exhibit the following common elements:

• “The Owner expands into a related line of business, which is dependent on referrals from, or other business generated by, the Owner’s existing business.  The new business line may be organized as a part of the existing entity or as a separate subsidiary.  Typically, the new business primarily serves the Owner’s existing patient base.”
• “The Owner neither operates the new business itself nor commits substantial financial, capital, or human resources to the venture. Instead, it contracts our substantially all of the operations of the new business.  The Manager/Supplier typically agrees to provide not only management services, but also a range of other services, such as the inventory necessary to run the business, office and health care personnel, billing support, and space.”
• “The Manager/Supplier is an established provider of the same services as the Owner’s new line of business.  In other words, absent the contractual arrangement, the Manager/Supplier would be a competitor of the new line of business, providing items and services in its own right, billing insurers and patients in its own name, and collecting reimbursement.”
• “The Owner and the Manager/Supplier share in the economic benefit of the Owner’s new business.  The Manager/Supplier takes its share in the form of payments under the various contracts with the Owner; the Owner receives its share in the form of the residual profit from the new business.”
• “Aggregate payments to the Manager/Supplier typically vary with the value or volume of business generated for the new business by the Owner…..In other words, the aggregate payment to the Manager/Supplier from the whole arrangement will vary with referrals from the Owner.”

The advisory bulletin then describes characteristics that, taken separately or together, potentially indicate a prohibited arrangement:

• “New Line of Business – The Owner typically seeks to expand into a health care service that can be provided to the Owner’s existing patients…..[E]xamples include…..hospitals expanding into DME services.”
• “Captive Referral Base – The newly-created business predominantly or exclusively serves the Owner’s existing patient base (or patients under the control or influence of the Owner).  The Owner typically does not intend to expand the business to serve new customers (i.e., customers not already served in its main business) and, therefore, makes no or few bona fide efforts to do so.”
• “Little to No Bona Fide Business Risk – The Owner’s primary contribution to the venture is referrals; it makes little or no financial or other investment in the business, delegating the entire operation to the Manager/Supplier, while retaining profits generated from its captive referral base.”
• “Status of the Manager/Supplier – The Manager/Supplier is a would-be competitor of the Owner’s new line of business and would normally compete for the captive referrals.  It has the capacity to provide virtually identical services in its own right and bill insurers and patients for them in its own name.”
• “Scope of Services Provided by the Manager/Supplier – The Manager/Supplier provides all, or many, of the following key services: (i) day-to-day management; (ii) billing services; (iii) equipment; (iv) personnel and related services; (v) office space; (vi) training; and (vii) health care items, supplies, and services.  In general, the greater the scope of services provided by the Manager/Supplier, the greater the likelihood that the arrangement is a contractual joint venture.”
• “Remuneration – The practical effect of the arrangement, viewed in its entirety, is to provide the Owner the opportunity to bill insurers and patients for business otherwise provided by the Manager/Supplier.  The remuneration from the venture to the Owner (i.e., the profits of the venture) takes into account the value and volume of business the Owner generates.”
• “Exclusivity – The parties may agree to a non-compete clause, barring the Owner from providing items or services to any patients other than those coming from Owner and/or barring the Manager/Supplier from providing services in its own right to the Owner’s patients.”

The bulletin goes on to say that “The presence or absence of any one of these factors is not determinative of whether a particular arrangement is suspect.”

In a typical hospital-DME supplier joint venture, (i) at least initially most of the referrals to the joint venture entity will come from the hospital-owner and (ii) the DME supplier-owner, not the joint venture entity itself, will have the expertise to run a DME operation. In order to avoid kickback issues, the following guidelines must be met:

• The hospital must insure patient choice. Initially, the hospital should ask a patient (about to be discharged and for whom DME has been ordered) who he wants to receive the DME from. Only if the patient expresses no preference is it appropriate for the hospital to recommend the joint venture entity.
• The joint venture entity must be an independent operating entity.  For example, it should have intake personnel, inventory, a delivery vehicle, and a delivery driver.
• The DME supplier-owner can provide some services for the joint venture entity, for which the joint venture entity must pay fair market value compensation. These services can include billing (on behalf of the joint venture entity and under the joint venture entity’s PTAN) and repair and maintenance of equipment. However, the DME supplier owner cannot run (or “manage”) the joint venture entity on a turnkey basis. The joint venture entity must have financial risk and operational responsibilities. In short, the joint venture entity must have “skin in the game.”

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Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato P.C., a law firm based in Amarillo, Tex. He represents pharmacies, HME companies, and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization. He can be reached at (806) 345-6320 or