The 'SAB': Back to the Future

The SAB begins by describing three different scenarios in which a supplier enters into one or more contracts with a provider to furnish the provider with health care items and services at a discounted price, essentially on a subcontract basis, such that the provider is able to bill for the items and services and make a profit. The following example is illustrative:

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. (SAB at 2.)

Problematic Elements

The OIG lists five common elements that, in its view, make these types of arrangements problematic:

• The hospital expands into a related line of business that is dependent on referrals from the hospital's existing business;
• The hospital contracts out substantially all of the operations of the new business and the hospital's business risk is minimal because of its ability to influence referrals to the business;
• The supplier is an established provider that would otherwise be a competitor of the hospital;
• The hospital and supplier share in the economic benefit of the new business, with the hospital receiving its share in the form of the residual profit from the new business; and
• The aggregate payments to the supplier vary with the value or volume of business generated by the hospital. (SAB at 3-4.)

These 'suspect' factors, however, are common to many business arrangements within and without the health care world and should not render an arrangement suspect.

Factor One

The expansion of a hospital into an outpatient area of health care is nothing new and there is nothing suspect about it. Hospitals have long chosen to vertically integrate to provide health care at various points on the spectrum of care. As stated by the OIG, such expansion by hospitals is undesirable regardless of whether a supplier or other company contracts with the hospital to facilitate such expansion. The concern underlying this comment is that hospitals are in a position to self-refer patients upon their discharge. This is a self-referral-type concern, not a kickback concern. If it is a legitimate policy concern, it is properly addressed through civil legislation, not administrative fiat. Indeed, the Balanced Budget

Act of 1997 (the BBA) did exactly that with respect to home health agencies. A hospital discharge planner must give a list of available home health agencies to patients and must disclose any financial relationships between the hospital and the listed agencies. 42 U.S.C. ' 1395x(ee)(2)(D), (H). If the OIG is concerned with hospitals expanding into other lines of health care, it should seek legislation extending the BBA provisions, not stretch the AKS beyond its intended reach

Factor Two

The second suspect factor is really two in one. The fact that the hospital chooses to contract out substantially all of the operations of the new business is not inherently suspect. Many providers have long provided care 'under arrangements,' as expressly permitted by statute and regulations. See eg, 42 U.S.C. ' 1395x(w), 42 C.F.R. ' 413.106. Similarly, the standards for DME suppliers expressly permit suppliers to contract with others for inventory and repair functions. 42 C.F.R. ' 424.57(c) (4), (14). Likewise, contracting out the billing and related functions to third parties is a well-established and accepted practice. See OIG Compliance Guidance for Third Party Billing Companies, 63 Fed. Reg. 70,138. The real concern is found in the second half of this stated factor: The hospital faces little or no business risk because of its ability to influence referrals to the new business. This concern, however, adds nothing to the analysis because it is simply a restatement of the self-referral concerns listed in the first factor. Laws such as the so-called Stark II, 42 U.S.C. ' 1395nn, are the proper means of addressing these concerns.

Factor Three

The third factor is an odd consideration under the AKS. The fact that the supplier would otherwise be a competitor of the hospital appears to raise anti-competition considerations. While the SAB does list competition among the AKSs' stated objectives, this author is unaware of any legislative history to support attributing this motive to Congress. The AKS was enacted to protect the Medicare program from the financial harm and beneficiaries from medical harm that can result when providers and medical decision-makers are motivated by personal financial benefit, rather than patient welfare. While the Medicare program theoretically could benefit financially from competition among providers, most reimbursement methodologies (fee schedules, per diems, etc.) stifle competition on the basis of price.

Factor Four

The fourth factor actually weighs in favor of finding that the arrangements are not joint ventures in a legal or economic sense. (The SAB states that its reach is not limited to 'joint ventures' as defined under state law. The SAB, however, attempts to define a joint venture so broadly as to render the term largely meaningless from a legal or economic perspective.) Contrary to the characterization in the SAB, the parties do not 'share' in the economic benefits of the arrangement. The supplier derives its profit, if any, from the sale of goods and services to the hospital. This potential profit inures solely to the benefit of the supplier just like the profit derived by any other vendor of goods and services. Along the chain of commerce beginning with a manufacturer and ending with the retail seller, each party has the opportunity to make a profit from its handling and sale of the goods. The logical extension of the SAB's rationale would characterize the supplier's purchase of goods from a manufacturer as giving rise to shared economic benefits by the manufacturer and supplier. In truth, each party to the transaction derives its own economic benefit; there is no 'common' economic benefit to be shared.

The second part of the fourth factor demonstrates this point quite succinctly in describing the hospital's economic benefit: '[T]he hospital receiv[es] its share in the form of the residual profit from the new business.' The right to the residual profit of an enterprise is the essence of ownership. There should be nothing suspect about a business owner receiving the residual profit from its commercial activities. Moreover, because only the hospital receives the residual, only the hospital should be viewed as the owner of the business. If the hospital chooses to purchase beds and construct a hospital, it will receive the residual profit, if any, from thereafter selling hospital services to the public. Such a circumstance does not mean that the hospital is engaged in a joint venture, suspect or otherwise, with the bed wholesaler or the building contractor. The same conclusion is warranted with respect to the ventures described in the SAB.

Simply put, the SAB's fourth suspect factor is factually wrong and internally inconsistent. The parties do not share in the economic benefit. The supplier derives its own, separate benefit from its sales to the hospital and, as the SAB admits, only the hospital is entitled to any residual profits from its sales to patients.

Factor Five

The SAB's fifth factor is equally unconvincing. The fact that the aggregate payments to the supplier vary with the value or volume of business generated by the hospital indicates nothing more than the hospital uses the supplier as a vendor. The same could be said of the supplier's relationship with its vendors; the aggregate amount that the supplier pays to its wheelchair vendor varies with the volume of business that the supplier generates. This fact, however, does not mean that the supplier and its vendor are engaged in a joint venture or in a suspect venture.

Safe Harbors Allegedly Unavailable

In the most disturbing portion of the SAB, the OIG also asserts two reasons that the regulatory Safe Harbors, 42 C.F.R. ' 1001.952, may not be available to the parties in these suspect arrangements. The OIG's analysis suggesting that the Safe Harbors may not be available carries forward many of the same mistakes in logic described above and is, therefore, itself suspect.

Discount Safe Harbor

The OIG argues that the Discount Safe Harbor does not apply in these circumstances because:

'[W]here a discount is given as part of an overarching business arrangement, it cannot qualify for protection under the discount safe harbor. Simply put, the discount safe harbor does not protect ' and has never protected ' prices offered by a seller to a buyer in connection with a common enterprise ' As we expressly stated in the preamble to the 1991 safe harbor regulations, the provision of items or services to a joint venture by a participant in the venture is not an 'arms length' transaction ' In short, a discount is not based on arms [sic] length transaction if it is provided by a seller to a purchaser in connection with a common venture, regardless of whether the venture is memorialized in separate contracts.' (SAB at 4-5.)

The OIG relies on its 1991 statements regarding 'the provision of items or services to a joint venture by a participant in the venture' to conclude that the sale of items from a supplier to a hospital cannot be at arm's length.' The 1991 preamble, however, addresses a situation where two parties form an entity that contracts with one of the parties to purchase goods or services. By definition, the party purchasing the goods and services (ie, the joint venture) is affiliated with the vendor of those items and the transaction does not appear to be at arm's length. In contrast, in the circumstances described in the SAB, there is no jointly owned entity that purchases items. Indeed, the OIG attempts to characterize the very agreement to purchase items as one of the agreements creating the 'contractual' joint venture. The SAB appears to define 'common enterprise' and 'joint venture' so expansively that they would cause an unspecified but broad range of contractual relationships to create a contractual joint venture. The OIG's rationale would effectively preclude any sale pursuant to a contract from being considered an arms length transaction because the underlying contract could be viewed as creating a 'common enterprise' between the contracting parties.

The OIG's characterization of multiple contractual relationships creating an 'overarching' relationship that renders the Discount Safe Harbor unavailable also runs contrary to the very terms of the Discount Safe Harbor, which imposes different obligations on the buyer and seller depending on whether the seller submits a Medicare claim 'on behalf of' the buyer. Compare 42 C.F.R. ' 1001.952(h)(1)(iii)(B) with ' 1001.952(h)(2)(B). Thus, the Dis-count Safe Harbor clearly envisions something more than a bare vendor/purchaser relationship and arguably contemplates the type of combined vendor and billing agent relationship described in the SAB.

The SAB also attacks relationships in which the aggregate payments to the supplier vary with the volume or value of business generated by the hospital. While 'volume or value' restrictions on remuneration are common in various Safe Harbors, such a limitation is notably absent from the Discount Safe Harbor for obvious reasons. Assuming a fixed discount per item purchased ' the type of price reduction encouraged by the Discount Safe Harbor, the aggregate amount of discounts earned by a buyer will always vary with the volume of purchases.

Remuneration Flowing to the Hospital

The OIG also makes a broader second argument regarding the inapplicability of the Safe Harbors generally: Even if the various contracts could fit in one or more safe harbors, they would only protect the remuneration flowing from the [hospital] to the [supplier] for actual services rendered ' [H]owever, the illegal remuneration is often the difference between the money paid by the [hospital] to the [supplier] and the reimbursement received from the federal health care program. By effectively agreeing to provide services it could otherwise provide in its own right for less than the available reimbursement, the [supplier] is providing the [hospital] with the opportunity to generate a fee and a profit. The opportunity to generate a fee is itself remuneration that may implicate the anti-kickback statute. (SAB at 5.)

This second argument is equally flawed. The OIG contends that even if the contracts in one of these arrangements could fit into a safe harbor, such safe harbors would only protect remuneration flowing from the hospital to the supplier for services actually rendered. The OIG adds that a supplier that effectively agrees to provide services 'for less than the available reimbursement' has provided the hospital with 'the opportunity to generate a fee,' which is itself remuneration.

These statements ignore the existence and provisions of the Discount Safe Harbor. By definition, the discounted sale of a good or service will often involve providing that good or service at less than the available reimbursement. Moreover, contrary to the OIG's assertion, the Discount Safe Harbor by its very nature and terms covers remuneration flowing from the supplier to its purchaser, the hospital. See 42 C.F.R. ' 1001.952(h) (”remuneration' does not include a discount'). Any sale at less than the reimbursement amount can be characterized as an 'opportunity to generate a fee.' Thus, if the OIG's interpretation in the SAB were accepted, it would eliminate the Discount Safe Harbor anytime a sale was made to a provider at less than the ultimate reimbursement amount.

Conclusion

The OIG's assertions in the SAB would create vague and elusive rules for treating contracts between unrelated parties as something other than arm's length transactions. This approach, if accepted at face value, would largely eliminate the very certainty that the Safe Harbors were supposed to provide. As the discussion above reveals, many of the OIG's concerns actually relate to the self-referral potential available to hospitals and other providers.

John F. Wester practices in the Washington, DC, offices of Sidley Austin Brown & Wood LLP.

The Special Advisory Bulletin on Contractual Joint Ventures (SAB) is the OIG's latest reiteration in a series of missives that invoke the Federal anti-kickback statute, 42 U.S.C. ' 1320a-7b(b) (AKS). It's all part of an attempt to chill the proliferation of business arrangements between companies that are in the business of supplying medical equipment, pharmacy items, and/or services to patients (generically, 'suppliers') and providers such as hospitals and physicians (generically, 'providers') who are in a position to refer or 'steer' patients to a supplier. On April 23, 2003, the Office of Inspector General (OIG) for the Department of Health and Human Services (DHHS) issued the SAB, which describes various arrangements as 'potentially problematic.' See http://oig.hhs.gov/fraud/docs/alertsandbulletins/042303SABJointVentures. While many suppliers and providers may choose to alter or terminate their arrangements as a pragmatic reaction to the SAB, the conceptual underpinnings of the SAB are suspect themselves.

Background

In 1989, the OIG issued a special fraud alert challenging arrangements between durable medical equipment (DME) suppliers and physicians who refer patients for DME. Apparently concerned that the fraud alert had not had the desired effect, the OIG reprinted the fraud alert, along with several others, in 1994. See 59 FR 65372 (Dec. 19, 1994). Nine years later, the SAB expounds upon the same types of arrangements as the fraud alert, but expands the factual scenarios in which they arise as well as the discussion of the purported evils of such arrangements.

The SAB begins by describing three different scenarios in which a supplier enters into one or more contracts with a provider to furnish the provider with health care items and services at a discounted price, essentially on a subcontract basis, such that the provider is able to bill for the items and services and make a profit. The following example is illustrative:

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. (SAB at 2.)

Problematic Elements

The OIG lists five common elements that, in its view, make these types of arrangements problematic:

• The hospital expands into a related line of business that is dependent on referrals from the hospital's existing business;
• The hospital contracts out substantially all of the operations of the new business and the hospital's business risk is minimal because of its ability to influence referrals to the business;
• The supplier is an established provider that would otherwise be a competitor of the hospital;
• The hospital and supplier share in the economic benefit of the new business, with the hospital receiving its share in the form of the residual profit from the new business; and
• The aggregate payments to the supplier vary with the value or volume of business generated by the hospital. (SAB at 3-4.)

These 'suspect' factors, however, are common to many business arrangements within and without the health care world and should not render an arrangement suspect.

Factor One

The expansion of a hospital into an outpatient area of health care is nothing new and there is nothing suspect about it. Hospitals have long chosen to vertically integrate to provide health care at various points on the spectrum of care. As stated by the OIG, such expansion by hospitals is undesirable regardless of whether a supplier or other company contracts with the hospital to facilitate such expansion. The concern underlying this comment is that hospitals are in a position to self-refer patients upon their discharge. This is a self-referral-type concern, not a kickback concern. If it is a legitimate policy concern, it is properly addressed through civil legislation, not administrative fiat. Indeed, the Balanced Budget

Act of 1997 (the BBA) did exactly that with respect to home health agencies. A hospital discharge planner must give a list of available home health agencies to patients and must disclose any financial relationships between the hospital and the listed agencies. 42 U.S.C. ' 1395x(ee)(2)(D), (H). If the OIG is concerned with hospitals expanding into other lines of health care, it should seek legislation extending the BBA provisions, not stretch the AKS beyond its intended reach

Factor Two

The second suspect factor is really two in one. The fact that the hospital chooses to contract out substantially all of the operations of the new business is not inherently suspect. Many providers have long provided care 'under arrangements,' as expressly permitted by statute and regulations. See eg, 42 U.S.C. ' 1395x(w), 42 C.F.R. ' 413.106. Similarly, the standards for DME suppliers expressly permit suppliers to contract with others for inventory and repair functions. 42 C.F.R. ' 424.57(c) (4), (14). Likewise, contracting out the billing and related functions to third parties is a well-established and accepted practice. See OIG Compliance Guidance for Third Party Billing Companies, 63 Fed. Reg. 70,138. The real concern is found in the second half of this stated factor: The hospital faces little or no business risk because of its ability to influence referrals to the new business. This concern, however, adds nothing to the analysis because it is simply a restatement of the self-referral concerns listed in the first factor. Laws such as the so-called Stark II, 42 U.S.C. ' 1395nn, are the proper means of addressing these concerns.

Factor Three

The third factor is an odd consideration under the AKS. The fact that the supplier would otherwise be a competitor of the hospital appears to raise anti-competition considerations. While the SAB does list competition among the AKSs' stated objectives, this author is unaware of any legislative history to support attributing this motive to Congress. The AKS was enacted to protect the Medicare program from the financial harm and beneficiaries from medical harm that can result when providers and medical decision-makers are motivated by personal financial benefit, rather than patient welfare. While the Medicare program theoretically could benefit financially from competition among providers, most reimbursement methodologies (fee schedules, per diems, etc.) stifle competition on the basis of price.

Factor Four

The fourth factor actually weighs in favor of finding that the arrangements are not joint ventures in a legal or economic sense. (The SAB states that its reach is not limited to 'joint ventures' as defined under state law. The SAB, however, attempts to define a joint venture so broadly as to render the term largely meaningless from a legal or economic perspective.) Contrary to the characterization in the SAB, the parties do not 'share' in the economic benefits of the arrangement. The supplier derives its profit, if any, from the sale of goods and services to the hospital. This potential profit inures solely to the benefit of the supplier just like the profit derived by any other vendor of goods and services. Along the chain of commerce beginning with a manufacturer and ending with the retail seller, each party has the opportunity to make a profit from its handling and sale of the goods. The logical extension of the SAB's rationale would characterize the supplier's purchase of goods from a manufacturer as giving rise to shared economic benefits by the manufacturer and supplier. In truth, each party to the transaction derives its own economic benefit; there is no 'common' economic benefit to be shared.

The second part of the fourth factor demonstrates this point quite succinctly in describing the hospital's economic benefit: '[T]he hospital receiv[es] its share in the form of the residual profit from the new business.' The right to the residual profit of an enterprise is the essence of ownership. There should be nothing suspect about a business owner receiving the residual profit from its commercial activities. Moreover, because only the hospital receives the residual, only the hospital should be viewed as the owner of the business. If the hospital chooses to purchase beds and construct a hospital, it will receive the residual profit, if any, from thereafter selling hospital services to the public. Such a circumstance does not mean that the hospital is engaged in a joint venture, suspect or otherwise, with the bed wholesaler or the building contractor. The same conclusion is warranted with respect to the ventures described in the SAB.

Simply put, the SAB's fourth suspect factor is factually wrong and internally inconsistent. The parties do not share in the economic benefit. The supplier derives its own, separate benefit from its sales to the hospital and, as the SAB admits, only the hospital is entitled to any residual profits from its sales to patients.

Factor Five

The SAB's fifth factor is equally unconvincing. The fact that the aggregate payments to the supplier vary with the value or volume of business generated by the hospital indicates nothing more than the hospital uses the supplier as a vendor. The same could be said of the supplier's relationship with its vendors; the aggregate amount that the supplier pays to its wheelchair vendor varies with the volume of business that the supplier generates. This fact, however, does not mean that the supplier and its vendor are engaged in a joint venture or in a suspect venture.

Safe Harbors Allegedly Unavailable

In the most disturbing portion of the SAB, the OIG also asserts two reasons that the regulatory Safe Harbors, 42 C.F.R. ' 1001.952, may not be available to the parties in these suspect arrangements. The OIG's analysis suggesting that the Safe Harbors may not be available carries forward many of the same mistakes in logic described above and is, therefore, itself suspect.

Discount Safe Harbor

The OIG argues that the Discount Safe Harbor does not apply in these circumstances because:

'[W]here a discount is given as part of an overarching business arrangement, it cannot qualify for protection under the discount safe harbor. Simply put, the discount safe harbor does not protect ' and has never protected ' prices offered by a seller to a buyer in connection with a common enterprise ' As we expressly stated in the preamble to the 1991 safe harbor regulations, the provision of items or services to a joint venture by a participant in the venture is not an 'arms length' transaction ' In short, a discount is not based on arms [sic] length transaction if it is provided by a seller to a purchaser in connection with a common venture, regardless of whether the venture is memorialized in separate contracts.' (SAB at 4-5.)

The OIG relies on its 1991 statements regarding 'the provision of items or services to a joint venture by a participant in the venture' to conclude that the sale of items from a supplier to a hospital cannot be at arm's length.' The 1991 preamble, however, addresses a situation where two parties form an entity that contracts with one of the parties to purchase goods or services. By definition, the party purchasing the goods and services (ie, the joint venture) is affiliated with the vendor of those items and the transaction does not appear to be at arm's length. In contrast, in the circumstances described in the SAB, there is no jointly owned entity that purchases items. Indeed, the OIG attempts to characterize the very agreement to purchase items as one of the agreements creating the 'contractual' joint venture. The SAB appears to define 'common enterprise' and 'joint venture' so expansively that they would cause an unspecified but broad range of contractual relationships to create a contractual joint venture. The OIG's rationale would effectively preclude any sale pursuant to a contract from being considered an arms length transaction because the underlying contract could be viewed as creating a 'common enterprise' between the contracting parties.

The OIG's characterization of multiple contractual relationships creating an 'overarching' relationship that renders the Discount Safe Harbor unavailable also runs contrary to the very terms of the Discount Safe Harbor, which imposes different obligations on the buyer and seller depending on whether the seller submits a Medicare claim 'on behalf of' the buyer. Compare 42 C.F.R. ' 1001.952(h)(1)(iii)(B) with ' 1001.952(h)(2)(B). Thus, the Dis-count Safe Harbor clearly envisions something more than a bare vendor/purchaser relationship and arguably contemplates the type of combined vendor and billing agent relationship described in the SAB.

The SAB also attacks relationships in which the aggregate payments to the supplier vary with the volume or value of business generated by the hospital. While 'volume or value' restrictions on remuneration are common in various Safe Harbors, such a limitation is notably absent from the Discount Safe Harbor for obvious reasons. Assuming a fixed discount per item purchased ' the type of price reduction encouraged by the Discount Safe Harbor, the aggregate amount of discounts earned by a buyer will always vary with the volume of purchases.

Remuneration Flowing to the Hospital

The OIG also makes a broader second argument regarding the inapplicability of the Safe Harbors generally: Even if the various contracts could fit in one or more safe harbors, they would only protect the remuneration flowing from the [hospital] to the [supplier] for actual services rendered ' [H]owever, the illegal remuneration is often the difference between the money paid by the [hospital] to the [supplier] and the reimbursement received from the federal health care program. By effectively agreeing to provide services it could otherwise provide in its own right for less than the available reimbursement, the [supplier] is providing the [hospital] with the opportunity to generate a fee and a profit. The opportunity to generate a fee is itself remuneration that may implicate the anti-kickback statute. (SAB at 5.)

This second argument is equally flawed. The OIG contends that even if the contracts in one of these arrangements could fit into a safe harbor, such safe harbors would only protect remuneration flowing from the hospital to the supplier for services actually rendered. The OIG adds that a supplier that effectively agrees to provide services 'for less than the available reimbursement' has provided the hospital with 'the opportunity to generate a fee,' which is itself remuneration.

These statements ignore the existence and provisions of the Discount Safe Harbor. By definition, the discounted sale of a good or service will often involve providing that good or service at less than the available reimbursement. Moreover, contrary to the OIG's assertion, the Discount Safe Harbor by its very nature and terms covers remuneration flowing from the supplier to its purchaser, the hospital. See 42 C.F.R. ' 1001.952(h) (”remuneration' does not include a discount'). Any sale at less than the reimbursement amount can be characterized as an 'opportunity to generate a fee.' Thus, if the OIG's interpretation in the SAB were accepted, it would eliminate the Discount Safe Harbor anytime a sale was made to a provider at less than the ultimate reimbursement amount.

Conclusion

The OIG's assertions in the SAB would create vague and elusive rules for treating contracts between unrelated parties as something other than arm's length transactions. This approach, if accepted at face value, would largely eliminate the very certainty that the Safe Harbors were supposed to provide. As the discussion above reveals, many of the OIG's concerns actually relate to the self-referral potential available to hospitals and other providers.

John F. Wester practices in the Washington, DC, offices of Sidley Austin Brown & Wood LLP.