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Forming a Joint Venture – Legal Guidelines

April 25, 2016

AMARILLO, TX A number of factors are pushing DME suppliers to enter into arrangements with other health care providers. These factors include:

• Third party payers, hospitals, and physician groups want “one stop shopping” from the ancillary providers that they refer their patients to. Said another way, the payers and others want the provider to be handle a variety of services for the patients. This motivates DME suppliers to enter into arrangements with other providers in order to provide multiple services to patients.

• Related to the preceding bullet, Accountable Care Organizations (“ACOs”) desire to utilize ancillary providers that can provide multiple services to patients.

• Third party payers are moving quickly to the “patient outcome model,” meaning that the payers do not want to pay unless health care providers (hospitals, physicians, DME suppliers, etc.) are able to demonstrate that patients’ health is improving. Reimbursement is tied to “patient outcome.” This motivates health care providers to work together to achieve the best possible results for patients.

• In order to set itself apart from its competitors, the DME supplier wants to offer “value added services” to payers and referral sources. As a result of entering into a joint venture (or other type of strategic alliance) with another provider, the DME supplier can offer a variety of services.

A “joint venture” occurs when two or more individuals/entities own something together. Increasingly, we are seeing hospitals and DME suppliers create joint ventures. These take the form of the hospital and the DME supplier creating and owning a separate legal entity (“Newco”) that is a DME supplier. Newco will become accredited and obtain a PTAN. Profits will be distributed to Newco’s owners in accordance with each owner’s percentage ownership interest in Newco.

The hospital’s intent in creating the joint venture is for the hospital to be involved in the post discharge recovery of the patient. It is in the hospital’s best financial interest for the discharged patient not to be readmitted any time soon. In creating a joint venture, it is important that the parties be aware of, and operate within the constraints of, federal anti-fraud guidelines.

The federal Anti-Kickback Statute, 42 U.S.C. § 1320a7b(b), prohibits the offer, payment, solicitation or receipt of any remuneration in exchange for referring a patient for an item or service that may be paid for by a federal health care program, or in exchange for purchasing, leasing or ordering, or arranging for or recommending purchasing, leasing or ordering, an item or service that may be paid for by a federal health care program. The statute has been interpreted and applied very broadly.

In particular, if an investor in an entity refers patients to that entity, distributions of profits to the investor may in some cases be considered to violate the statute. The Office of Inspector General (the “OIG”) and the Department of Justice have an extraordinary degree of discretion in enforcing the statute, and it is seldom possible to give definite assurance that a particular arrangement will not be found to violate the statute. However, it is possible to make an informed estimate of the risk of a particular venture on the basis of published guidance and past enforcement experience.

Participation in joint ventures by physicians and others who are in a position to refer patients is a longstanding concern of the OIG. In 1989, the OIG issued a Special Fraud Alert about joint ventures that it viewed as abusive and potentially violative of the Anti-Kickback Statute. The agency has continued to emphasize its concern with these ventures since that time in advisory opinions and other guidance documents.

The regulations issued under the Anti-Kickback Statute include a safe harbor that protects certain investments in small entities. However, the requirements of that safe harbor are so restrictive that it is rare for a real-world venture to meet all of the criteria for safe harbor protection. Nevertheless, the safest course in structuring a joint venture is to come as close as possible to compliance with the safe harbor. The safe harbor contains the following eight requirements:

• No more than 40% of the total value of the investment interests in the venture may be held by investors who are in a position to make or influence referrals to the entity, furnish items or services to the entity, or otherwise generate business for the entity.

• No more than 40% of the entity’s gross revenue from health care items and services may come from investor referrals or business otherwise generated by investors.

• The terms on which an investment interest is offered to investors who are in a position to generate business for the entity may not be different from the terms offered to other investors.

• The terms on which an investment interest is offered to an investor may not be related to the previous or expected volume of referrals or business generated from that investor.

• An investor who is in a position to refer patients to the entity may not purchase the investment interest with funds borrowed from the entity or with a loan guaranteed by the entity.

• The entity may not market or furnish the entity’s services to investors and non-investors differently.

• The entity may not require investors to make referrals to the entity.

• The amount of payment to an investor in return for the investment interest must be directly proportional to the amount of the investor’s capital investment.

The first two of these requirements, sometimes referred to as the “40 percent rules,” are the ones that most often prevent ventures from qualifying for protection under the safe harbor. It is important to remember that a venture that does not qualify for a safe harbor is not necessarily illegal. In general, the closer the venture comes to meeting the safe harbor requirements, the less likely it is to be found to violate the Anti-Kickback Statute.

To further reduce the risks to investors under the Anti-Kickback Statute, it is helpful to consider the factors identified by the OIG as characteristic of abusive ventures in the 1989 Special Fraud Alert referred to above, the 2003 Special Advisory Bulletin on Contractual Joint Ventures, and Advisory Opinion Number 11-03.

In the Special Fraud Alert, the OIG’s main focus was on ventures in which physician investors took very little risk and received large returns on very small investments. According to the OIG, physicians would often invest as little as $500 to $1500 and would receive returns exceeding 100 percent per year. In the OIG’s view, the ventures were intended only as a mechanism to compensate physicians for referrals.  The OIG identified three areas of concern with respect to joint ventures: (1) the selection and retention of investors, (2) the business structure of the joint venture, and (3) the financing and profit distributions.  To assist in identifying suspect joint ventures, the OIG identified certain “questionable features” of joint ventures.

With respect to investors, the questionable features include selecting investors based on the potential to make referrals, offering investors that are expected to make a large number of referrals larger investment opportunities, and tracking referrals from investors. The OIG also showed concern with joint ventures in which one of the parties is an entity already engaged in a particular line of business and that party acts as a referral source to the joint venture, or one of the parties is an entity already engaged in the venture’s business, and contracts with the entity to perform all or most of the entity’s responsibilities. Finally, questionable features related to financing and profit distribution include nominal investments, extremely large returns on investments, and allowing investors to borrow the amount of their investment from the entity and pay it back through deductions from profit distributions.

A joint venture should be structured to avoid as many as possible of the questionable features identified in the Special Fraud Alert. Specifically, investors should be required to pay fair market value for their ownership interests and any distributions from the venture should be made in proportion to each investor’s ownership interest. Neither the venture nor other investors should loan money to an investor in a position to influence referrals to the venture to enable him or her to purchase an interest in the venture, and no investor should be required to divest his or her interest because of relocation, retirement, or a low number of referrals. The more questionable features that are avoided in establishing this pharmacy venture, the less likely it will be found to violate the Anti-Kickback Statute.

In the Special Advisory Bulletin, the OIG described the characteristics of an abusive contractual joint venture as follows. A business owner seeks to expand into a health care service by entering into a management contract with an existing provider of that service (i.e. a potential competitor to the new venture). The newly-created business primarily serves the owner’s existing patient base.

The owner’s financial investment is small; its primary involvement in the venture is making referrals of its existing patients. The owner delegates substantially the whole operation to the manager. The services are provided by the manager, but are billed by the owner, who pays the manager a fee and retains the balance of the payment. The OIG views the manager as the real supplier of the services, although claims are submitted in the name of the owner. The OIG reasons that the illegal remuneration is the difference between the amount the owner receives from Medicare and the amount it pays the manager.

Another source of guidance is Advisory Opinion Number 11-03. In this case, the requestor was a pharmacy providing services to long-term care facilities and one of the pharmacy’s employees (the “Employee”) proposed to form a new long-term care pharmacy that the Employee would own with the owners of long-term care facilities in the area.

The requestor certified that shares in the new pharmacy would be issued in proportion to the amount of capital invested, except for the Employee who would receive shares at a nominal price as an incentive to bring in new investors and obtain contracts with other long-term care facilities. The new pharmacy would engage in the same business as the requestor, and the requestor would provide all staff and run the day-to-day operations at the pharmacy.

The OIG declined to offer protection to the proposed arrangement, citing the Special Advisory Bulletin, and finding that the long-term care facility owners and the requestor were in the same position as the owner and manager described in the Special Advisory Bulletin. The OIG was concerned that the long-term care facility owners had minimal financial and business risk because they were in a position to influence referrals to the pharmacy. Additionally, the OIG found it problematic that the pharmacy would be entering into the exact same line of business as the requestor and that pharmacy proposed to contract out substantially all of the pharmacy’s operations to the requestor.

It is usually not possible to categorically state that a particular business structure will not be found to violate the Anti-Kickback Statute. Most business arrangements that involve referral of patients or generation of business for a health care provider involve at least a small degree of risk. However, if the venture is structured appropriately in light of the guidance above, the risk that it will be found to violate the Anti-Kickback Statute will be low.

The Stark Law analysis of a joint venture is much simpler. The Stark Law, 42 U.S.C. § 1395nn, provides that if a physician or an immediate family member of a physician has a financial relationship (as defined in the statute and related regulations) with an entity, then the physician may not refer a Medicare or Medicaid beneficiary to the entity for the furnishing of certain designated health services.

If none of the investors are physicians or immediate family members of physicians in a position to refer Medicare or Medicaid beneficiaries to the venture, then the Stark Law is inapplicable.

Joshua Skora will be presenting the following webinar:

After the Purchase is Complete:  Transfer of Patient Files, Calling the Seller’s Patients, and Other Hot Button Issues
Presented by: Joshua I. Skora, Esq., Brown & Fortunato, P.C.
Monday, May 16, 2016
2:30-4:00 p.m. EASTERN TIME
Buying and selling a DME supplier is not simple.  In addition to the standard transactional issues (e.g., specific provisions in the Asset Purchase Agreement or Stock Purchase Agreement), there are a number of federal and state regulatory issues that must be addressed. For example, can a Medicare Part B supplier number be transferred?  What about a Medicaid provider number? Must the purchaser obtain new physician orders?  New AOBs?  How do the WOPD and face-to-face rules fit in? What type of notice must be given to the seller’s patients?  Can the purchaser simply pick up the phone and call the patients who are transferred to the purchaser?  The answers to these questions are impacted by whether the sale is a “stock” sale or an “asset” sale. This program will discuss the multiple regulatory issues that must be addressed when a DME supplier is sold.

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