One of the devices frequently used by physician-Durable Medical Equipment (“DME”) supplier ventures to avoid Stark Law and federal anti-kickback statute exposure in business arrangements with physicians is to “carve out” federal program beneficiaries from the arrangements so that federal jurisdiction would not apply to the proposed arrangement. Assuming the absence of those pesky mini-Stark or mini-anti-kickback statutes extant in some states, “designated health services providers” would be free to introduce all sorts of financial incentives to physicians to refer patients to them for services, equipment and supplies. In OIG Advisory Opinion No. 06-2, the HSS Office Inspector General issued yet another in a series of warnings that for a “carve out” of federal program beneficiaries to work there must be a complete carve out with no federal program referrals whatsoever in play.
In No. 06-2 an anonymous Supplier (“Supplier”) submitted two proposals for a relationship with physician groups for review. Physicians would be free to select either proposal. One involved an arrangement where the Supplier would sell DME to a physician group who would in turn resell it to patients by billing insurance companies for it. Items sold “may be” marked up to their insurer companies. (“May be” – who are they kidding.) The program also provided for rental of Continuous Passive Motion (“CPM”) devices at fair market value with the term, rental amount and appropriate rental amount not determined in advance. Hereto the OIG noted the potential for a mark by physician in the subleasing of the equipment to patients. The Supplier would provide the practice with a technician who for a monthly fee would fit DME and orthotics to patients, monitor patient progress, manage inventory. The Supplier would also provide comprehensive coding, billing and collection services for the DME and orthotic products for a fixed fee. While the physician group would refrain from self dealing with its own federal program patients it would still be able to prescribe the Supplier’s DME and orthotic products for federal program patients from an outside source. The OIG asserted that it could not conclude there would be no connection between federal program beneficiaries and the flow of incentives to the doctors because the physicians may be incentivized to refer federal program beneficiaries to the Supplier in order to influence the Supplier to provide super discounts on its sales to the physician group directly.
The second proposal included both federal and non-federal patients with a more elaborate structure.
The Supplier would rent product storage space in the physician office at fair market value and store its products in the space. The Supplier would pay the doctors a percentage of revenues generated from the sales of the products to non-federal program patients in exchange for “inventory management” and other “administrative services” related to the consignment and storage of the products. None of the compensation would come from sales made to federal program patients. The Supplier would also provide the on site technician on a lease basis for a fixed monthly fee.
The OIG opined that the inventory management piece of the arrangement would not fly because it lacked the fee set in advance requirement for a safe harbor. The percentage of revenues provision is inherently problematic because it rewards utilization. The intent of the payment not the source of the revenues is what counts. It could be relatively easy to manipulate the compensation level to the physicians by using historical data relative to referral of federal patients.
The opinion rejected the “supplied technician” concept for a variety of reasons and particularly because “(i)t is unclear why a physician practice would pay a Supplier to lease a technician to fulfill what largely appears to be, on the face of the contract, to be supplier obligations,” and thus may have purposes not revealed in the contract. It also noted that arrangements whereby manufacturers pay doctors for management services related to its own products must be subject to “close scrutiny” under the fraud and abuse laws because no apparent business purpose appears to exist for these kind of relationships other than “the potential for generating additional business.”
On the facts, this call wasn’t even close – the proposal contains far too tortured a structure and insufficient business risk on the part of the doctors.
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