In an advisory opinion posted June 13 (Advisory Opinion 13-03), the U.S. Department of Health and Human Services, Office of the Inspector General (OIG) stated that a laboratory services leasing arrangement between an independent clinical laboratory and physician practices could potentially violate the Anti-Kickback Statute (AKS) even if the leased laboratories did not serve federal health care patients. The OIG stated that arrangements that carve out federal health care programs “implicate, and may violate, the Anti-Kickback Statute by disguising remuneration for federal health care program business through the payments of amounts purportedly related to non-federal health care program business.”

The advisory opinion noted the OIG’s “long-standing concern” about arrangements where parties exclude federal health care referrals or business from “otherwise questionable financial arrangements.” This is consistent with previous OIG advisory opinions, which have held that carving out Medicare and Medicaid patients from a business model does not insulate the arrangement from AKS liability.

The Anti-Kickback Statute

The AKS is a criminal statute that prohibits the knowing and willful exchange or offer to exchange of remuneration in order to induce or reward referrals of federal health care program business. “Remuneration” is defined broadly and includes the transfer of anything of value, directly or indirectly, in cash or in kind. Significantly, the AKS is an intent-based statute. Several circuits, including the U.S. Court of Appeals for the Third Circuit, have interpreted the AKS to cover transactions where “one purpose” of the transaction was to induce or reward federal health care business, even if there was also a valid purpose for the transaction.

Conviction under the AKS carries heavy penalties. A single violation is a felony punishable by a fine of up to $25,000, five years of imprisonment, or both. Further, conviction under the AKS results in automatic exclusion from federal health care programs, including Medicare and Medicaid.

The Patient Protection and Affordable Care Act of 2010 (PPACA) expanded the reach of the AKS in two ways. First, the PPACA clarified that defendants need not have actual knowledge of the AKS or specific intent to violate the AKS in order to meet the intent requirement. Second, the PPACA linked the False Claims Act to the AKS by providing that a violation of the AKS is a per se violation of the False Claims Act. This increases the cost of such violations, as the False Claims Act carries penalties of between $5,500 and $11,000 per false claim, plus treble the damages sustained by the government.

The OIG provides several specific “safe harbors,” or arrangements that are not treated as violations of the AKS although they might otherwise implicate the statute. For example, if they meet the regulatory requirements and are properly structured, the following transactions will not be treated as prohibited remuneration: payments on investment interests, payments for space and equipment rental, employment and independent contractor arrangements, and discounts on services reimbursable by federal health care programs.

In addition, the OIG provides advisory opinions on whether certain arrangements violate the AKS. The arrangement must be in existence already or one that the requestor specifically plans to undertake. Further, the requestor must be a party to the arrangement or proposed arrangement.

The Proposed Business Model in Advisory Opinion 13-03

A clinical laboratory company requested Advisory Opinion 13-03 from the OIG. Under the proposed arrangement, an independent clinical laboratory (parent laboratory) would help physician groups set up their own clinical laboratories. Each physician group would own and operate its own laboratory, and each physician group would be responsible for its own laboratory’s billing for laboratory services.

The parent laboratory would accomplish this by creating a management company to enter into the contracts with the physician groups. The management company would either be owned by the parent laboratory or by the parent laboratory’s owners. However, the management company would have a separate board of directors from the parent laboratory.

The management company would enter into the following contracts with the physician groups. First, the management company would lease laboratory suites, on a full-time and exclusive basis, to the physician groups. Such laboratory suites would be in a building operated by the management company.

Second, the management company would provide laboratory management services to the physician groups. These services would include assistance in selecting and installing laboratory equipment and supplies, waste collection, and the operation of a “shared business center” that would include a fax machine, printer and copier.

Third, the management company would provide the physician groups with options to contract for additional support. Physician groups could lease laboratory personnel and equipment from the management company. In addition, the physician groups could license proprietary methods of laboratory operation from the management company. The license fee for these methods would be a fixed amount, based on the number of specimens tested under the methodology and not on federal health care program referrals.

The physician groups and management company would enter into written contracts for all of these benefits at rates consistent with fair market value negotiated in an arm’s length transaction. All of the contracts would be for terms of at least one year and would describe fully the content of the agreements.

The physician laboratories would not handle any federal health care business. The physician laboratories would segregate specimens from patients of federal health care programs, which would be sent to another laboratory of the physician group’s choice, which could include the parent laboratory. The physician laboratories would also send out specimens of private pay patients that required testing that the physician laboratory did not perform. While the specimens for tests not performed by the physician laboratories could be sent to the parent laboratory, the requestor certified that there would be no requirement, pressure or inducement to send such specimens to the parent laboratory or to any health care entity owned by the parent laboratory.

The OIG’s Conclusion

The OIG advisory opinion concluded that the proposed arrangement could violate the AKS. The OIG found remuneration in the “potentially lucrative opportunity to expand into the clinical laboratory business with little or no business risk.” Participation in the arrangement may make the physician groups more likely to refer federal health care services to the parent laboratory for a variety of reasons, including convenience and to demonstrate commitment to the parent laboratory, the OIG found. “Thus, we cannot conclude that there would be no nexus between the potential profits the physician groups may generate from the private pay clinical laboratory business, on one hand, and orders of the parent laboratory’s services for federally insured patients on the other.” The analysis of the OIG in this advisory opinion is consistent with the previous positions that the OIG expressed in its Special Advisory Bulletin on Contractual Joint Ventures, which was issued in April 2003.

In addition, the OIG expressed concern that the financial incentives of this arrangement for private pay laboratory business would impact physicians’ decisions for all of their patients. This could result in overusing laboratory services for all beneficiaries, including federal health program patients, the OIG stated.

Note that the OIG advisory opinion simply declined to issue a favorable opinion to protect this arrangement. The OIG did not offer a definitive conclusion on whether this particular business model violated the AKS because the AKS is an intent-based statute, and the parties’ intent cannot be determined through the advisory opinion process.

This advisory opinion was issued only to the requestor and expressly has no application to, and cannot be relied upon, by any other individual or entity. It is also limited in scope to the specific arrangement described and has no applicability to other arrangements, even those that appear to be similar in nature or scope.

Vasilios J. Kalogredis is the president and founder of Kalogredis, Sansweet, Dearden and Burke, a health care law firm in Wayne, Pa. He can be reached at 610-687-8314 or at BKalogredis@KSDBHealthlaw.com.