By Daniel O. Carroll, Esq.

At the end of 2021, the U.S. Department of Health and Human Services, Office of the Inspector General (“OIG”) issued Advisory Opinion 21-18 in which it rejected a therapy services company’s (“Therapy Company”) proposed joint venture with the owner of long term care facilities (including skilled nursing facilities, assisted living facilities and full service retirement communities (“Facilities”) for the provision of services to rehabilitation programs in the Facilities (“Proposed Joint Venture”).

The Therapy Company proposed to form a new entity and enter into a management services agreement with that new entity to provide clinical and back-office employees, space and equipment necessary for the new entity’s operations in exchange for a fair market value services fee. Then, the owner of the Facilities would acquire a 40% interest in the new entity with the owner retaining a 60% interest (“JV Entity”). The JV Entity would not have its own employees but would lease them all from the Therapy Company. The owner of the Facilities would have representation on the governing board for the JV Entity but would not be involved in any day-to-day operations. The Therapy Company advised that the investment by the owner of the Facilities would be based, in part, on the JV Entity’s expected business with the Facilities though there would be no obligation to contract with or make referrals to the JV Entity. The Therapy Company noted that it is likely that the owner of the Facilities would likely terminate its current therapy services contracts (which may or may not be with the Therapy Company) to enter into new contracts with the JV Entity. The Therapy Company conceded that, at least during the initial phases, all of the JV Entity’s revenue would be generated through business with the Facilities of the JV Entity member. While the JV Entity would bill the Facilities and not Federal health care programs for its services, the Facilities would bill payors, including Federal health care programs, thereby implicating the Federal anti-kickback restrictions.

Analyzing the proposal under the Federal anti-kickback statute, the OIG flatly rejected the Proposed Joint Venture structure on several grounds and concluded that it would present more than a minimum risk of fraud and abuse. First, the OIG determined that the Proposed Joint Venture would not qualify for any regulatory safe harbor. The most relevant safe harbor would appear to be the Small Entity Investment Safe Harbor, but the OIG noted that the Proposed Joint Venture fails several of the safe harbor’s requirements (including the 40% investor test, the 40% revenue test and the investment offer test). Essentially, all the owners of the JV Entity would be doing business with the JV Entity and the Facilities’ owner’s investment would be based, at least in part, on the expected business with the JV Entity. Furthermore, the OIG concluded that the Proposed Joint Venture carried many of the same problematic attributes of suspect contractual joint ventures that the OIG warned against nearly twenty years ago in its 2003 Special Advisory Bulleting on Contractual Joint Ventures. The JV Entity would allow the Therapy Company to do indirectly what it is not permitted to do directly, i.e., pay the Facilities’ owner a share of the profits from the owner’s referrals. It would likely reward the steering of Federal health care program business to the Therapy Company, lock in a stream of referrals to the Therapy Company and block out competition from other therapy service providers.

While OIG Advisory Opinion 21-18 is issued only to the Therapy Company and not binding on the general public, it underscores the OIG’s continuing concern with suspect joint ventures. Those contemplating similar contractual joint ventures and seeking the protection of the Federal anti-kickback safe harbors should take care to ensure they are structured in a manner that satisfies the applicable safe harbor’s requirements to the greatest extent possible. At the same time, it must be recognized that the Advisory Opinion is fact-sensitive and narrowly focuses on the elements of one anti-kickback safe harbor available under Federal regulations. There may be other factors to consider when structuring joint ventures, including statutory requirements, other available regulatory safe harbors and applicable State anti-kickback, self-referral and corporate practice of medicine restrictions.

For more information, contact Daniel O. Carroll at doc@spsk.com or (973) 631-7842.