On July 16, the U.S. Department of Health and Human Services, Office of the Inspector General (OIG) issued an unfavorable advisory opinion (OIG Advisory Opinion No. 13-09) concerning equity interests in the parent company of a group purchasing organization (GPO). The OIG declined to protect an arrangement under which GPO members would gain equity interests in the GPO’s parent company in return for extending their contracts, committing to maintaining their purchasing volume and relinquishing a portion of their administrative fees. The arrangement could violate the federal Anti-Kickback Statute (AKS) by generating prohibited remuneration for federal health care business, the OIG concluded.

The requestor of the advisory opinion is a publicly traded company that provides financial and performance-improvement technology-based products to clients, which are chiefly hospitals and health systems. The requestor’s wholly-owned subsidiary operates a GPO that serves primarily hospitals and integrated delivery systems.

The GPO negotiates discounts with its vendors, such as manufacturers and distributors, on behalf of its members. Vendors pay administrative fees to the GPO, which are passed on to the GPO members under two different methods.

Under the first method, known as the fee-for-service model, the GPO member receives 100 percent of the administrative fees that the GPO receives from the vendors for that member’s purchases. The GPO member pays the GPO a negotiated fee for the GPO’s services, but there are no minimum purchase requirements.

Under the second method, known as the shareback model, the GPO member receives a percentage (usually 50 percent) of the administrative fees that the GPO collects from vendors for that member’s purchases. Unlike the first method, the member does not pay any fees to the GPO in the shareback model, but the member often does have minimum purchase requirements. If there is a minimum purchase requirement and if the member does not meet this requirement, the amount of the administrative fees is reduced pro rata (i.e., if the GPO member purchases 75 percent of what it contracted to purchase, the member receives 75 percent of the administrative fees it would have received if it had met the purchasing requirement). The GPO treats the passed-through administrative fees as discounts under both models.

The OIG noted that it had not been asked for an opinion on the permissibility of the current arrangements and did not express any such opinion.

Proposed Arrangement

Under the proposed arrangement, the requestor would offer an equity interest in the requestor (the parent company of the GPO) to both current and new GPO members. In return, current GPO members would extend their contracts for a term of five to seven years, and new members would enter into such a contract. Existing members would commit to not decrease the volume of their GPO purchases. In addition, GPO members who accepted the equity interest would give up a percentage of the administrative fees they otherwise would have received.

There would be two options for those accepting the equity interest: (1) the GPO member would keep 66 percent of the current administrative fees under the shareback model and receive an equity interest equal to the market value of the forfeited 34 percent of administrative fees; or (2) the GPO member would keep 33 percent of the current administrative fees under the shareback model and receive an equity interest equal to the market value of the forfeited 67 percent of the administrative fees. GPO members who currently contract with the GPO under fee-for-service arrangements would be permitted to enter into a shareback arrangement under these options as well.

The OIG provided the following example to illustrate: “Member A agreed to forfeit 33 percent of its shareback [administrative fees], which, based on Member A’s past purchasing history, would equate to approximately $1,000. If Member A agreed to extend the contract by five years, then Member A would be agreeing to forfeit $5,000. Member A would receive a number of shares in the requestor’s company that equate in value to $5,000.”

The requestor would also allow GPO members to maintain their current arrangement.

Anti-Kickback Statute and Safe Harbors

The AKS is a criminal statute that prohibits the knowing and willful exchange or offer to exchange, pay, solicit or receive any 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. The AKS ascribes criminal liability to parties on both sides of an impermissible “kickback” 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.

Certain practices, known as safe harbors, are exempt from AKS prosecution if specific conditions are met. The OIG stated that two such safe harbors might apply to the proposed arrangement: the GPO safe harbor and the discount safe harbor.

The OIG first examined the GPO safe harbor and found that the proposed arrangement did not fall under this exception. The GPO safe harbor excludes fees paid by vendors to GPOs from the definition of remuneration if they meet certain requirements. However, the OIG noted that the proposed arrangement would include fees paid by GPO members to the GPO, not just from vendors to the GPO, and fees from parties other than vendors are not protected by this safe harbor. Thus, the OIG found that the GPO safe harbor does not apply to the proposed arrangement.

The OIG then examined the discount safe harbor and found that it did not apply to the proposed arrangement. The Centers for Medicare and Medicaid Services (CMS) requires administrative fees paid by GPOs to the GPO members to be treated as discounts or rebates. Such distributions could reduce costs to federal health care programs, the OIG explained. However, under the proposed arrangement, GPO members would reduce their distributions in exchange for stock in the parent company. This would not benefit payors, including federal health care programs. Thus, OIG held that the discount safe harbor would not apply to the proposed arrangement.

Analysis of the Proposed Arrangement

Since no safe harbor applied, the OIG analyzed the risk of fraud and abuse in the proposed arrangement. The OIG first noted concerns about GPOs in general, such as a 2002 report by the U.S. Government Accountability Office (then the U.S. General Accounting Office) that found that GPOs might not offer hospitals lower prices on drugs and medical devices.

Next, the OIG analyzed the elements of the proposed arrangement and determined that there was an increased risk of fraud and abuse. The OIG was particularly concerned that: (1) members would be “locked-in” to a contract for five to seven years, regardless of whether members were getting lower prices as a result of their membership; (2) the equity interest offered would be tied to past purchases; and (3) members would be required to maintain at least the same purchasing level going forward. Further, the GPO would retain more administrative fees, which could boost the parent company’s revenue and result in higher returns for investors, including referral source investors.

In conclusion, the OIG found that the proposed arrangement was problematic and declined to protect it. Specifically, the OIG noted that the proposed arrangement would allow the requestor to reward past referrals and induce continued purchases, including purchases that are reimbursable by federal health care programs, at equal or higher volume as they had purchased in the past and for an extended time period.

The OIG opinion stated only that the proposed arrangement could violate the AKS. Because the AKS is an intent-based statute, the OIG cannot make a definitive determination without analyzing the parties’ intent.

Limitations

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.