The Department of Health and Human Services’ Office of Inspector General (“OIG”) issued an unfavorable advisory opinion (the “Opinion”) last Friday in which it refused to bless a proposed arrangement involving an intraoperative neuromonitoring (“IONM”) company (the “Requestor”) and various surgeons who perform procedures for which IONM is used, desiring to form a physician-owned entity (“Newco”) that would arrange to provide both the technical and professional components of IONM services (the “Proposed Arrangement”).

The Proposed Arrangement would essentially create a “turn-key” entity owned by the surgeons (the “Surgeon Owners”) that would subcontract to the Requestor and its affiliated physician practice (the “Practice”) “virtually all of the day-to-day requirements of an IONM business.” The Surgeon Owners would be responsible for forming Newco, preparing Newco’s internal governance documents, and determining the methodology for distribution of Newco’s profits amongst themselves. However, the Surgeon Owners would be passive investors, with limited involvement in Newco’s day-to-day operations.

Instead, Newco would contract with: (i) the Requestor for billing services in exchange for a fee and (ii) the Practice for the professional services of the Practice’s neurologists and neurophysiologists in exchange for a fee. The Requestor anticipated substantial Newco profits (i.e., the difference between the reimbursement received from third parties and the fees paid to the Requestor and Practice), including from the Surgeon Owners’ utilization of Newco to provide IONM services for their own patients.

The Requestor also anticipated that, notwithstanding the fees paid by Newco, the Requestor and Practice would generate substantially reduced profits under the Proposed Arrangement as compared to their existing business model. The OIG determined that the Proposed Arrangement would implicate the Anti-Kickback Statute and, if entered into with the requisite intent, could lead to sanctions.

Purpose of the Proposed Arrangement

Interestingly, the Requestor, an IONM supplier that serves various hospitals and ambulatory surgical centers, expressly cited competitive reasons as its purpose for the Proposed Arrangement. Specifically, the Requestor sought the OIG’s opinion after experiencing threats to its existing surgeon client relationships, including competitors approaching its clients with proposals similar to the Proposed Arrangement.

The Requestor had devised the Proposed Arrangement solely to retain business from existing clients that may otherwise be lost to competing IONM companies, and certified that it would adopt the Proposed Arrangement only in specific situations where existing surgeon clients wished to use their own IONM company and might cease doing business with the Requestor otherwise.

Anti-Kickback Concerns

Ultimately, the OIG concluded that the multiple streams of remuneration contemplated under the Proposed Arrangement could unlawfully induce the Surgeon Owners’ referrals of IONM services, including those paid for by a federal health care program (“FHCP”). The OIG first noted that certain streams of remuneration—namely, the opportunity for Newco to generate a significant profit—would not be protected by any safe harbor. In proceeding to consider the Proposed Arrangement’s totality of facts and circumstances, the OIG noted that the Proposed Arrangement would present a “host” of fraud and abuse risks, including patient steering, unfair competition, inappropriate utilization, and increased costs to FHCPs. 

In reaching that conclusion, the OIG invoked its 2003 Special Advisory Bulletin pertaining to contractual joint ventures, noting the agency’s “longstanding and continuing” concerns over these types of arrangements and underscoring the OIG’s view that the Proposed Arrangement resembles those problematic joint ventures. To that end, the OIG highlighted the following features as contributing to the Proposed Arrangement’s “significant risk” of fraud and abuse:

• The Surgeon Owners would be in a position to control or influence the amount of business they direct to Newco;
• The Surgeon Owners’ actual financial and business risk associated with the venture would be minimal or nonexistent;
• The Surgeon Owners would be expanding into a related line of business (i.e., IONM) that would be dependent on referrals and business generated by the Surgeon Owners; and
• Both the Requestor and Practice are established IONM service providers that would otherwise be competitors of Newco.

The OIG concluded that the Proposed Arrangement would enable the Requestor and Practice to do indirectly what they could not do directly: pay the Surgeon Owners a share of the profits from their referrals for IONM services.

The OIG also indicated that even if the Requestor was able to completely carve-out all FHCP beneficiaries from the Proposed Arrangement (which the Requestor acknowledged would be impracticable), the remuneration to Newco could induce Surgeon Owners to refer their federally reimbursable IONM services to the Requestor and Practice, thereby disguising remuneration for FHCP beneficiary referrals through the payment of amounts purportedly related to non-FHCP business. This conclusion was underscored, in the OIG’s view, by the fact that the Requestor was seeking to enter into the Proposed Arrangement purely due to competitive pressures and the desire to retain surgeon clients who might otherwise take their business elsewhere.

Key Takeaways

The Opinion reflects the OIG’s continued and longstanding concern over joint ventures, contractual or otherwise, where the parties control a majority of business to the joint venture and therefore are not at meaningful risk in establishing it. The OIG’s commentary also reinforces its well-established view that excluding FHCP business from an otherwise suspect arrangement will not insulate that arrangement from scrutiny.

Notably, unfavorable advisory opinions are rare and typically only invited by requesting parties for their sentinel effect in curbing perceived problematic or abusive practices within the industry. While advisory opinions are only binding on the requesting party, in this case, it is possible that the Requestor structured its request for an advisory opinion in a manner that it expected would lead to an unfavorable opinion and potentially lead to scrutiny of its competitors. It is unclear whether the Requestor’s competitors have implemented a structure similar to what is certified by the Requestor as the operative structure of any joint venture with surgeons who refer IONM services.

As a result, though the OIG’s Opinion may spawn close scrutiny of comparable joint ventures and potentially serve as the impetus for future enforcement actions under the False Claims Act or Civil Monetary Penalties Law, companies who have entered into such joint ventures may have defenses and/or mitigating factors that were neither presented by the Requestor nor analyzed by the OIG in issuing this unfavorable advisory opinion. Notwithstanding, the Opinion is a good reminder to practitioners and those considering such ventures to seek advice of counsel and carefully consider structure from the outset.

For more information on this Opinion or the impact of the OIG’s guidance on your business, please contact one of the authors or a member of your Reed Smith health care team.