AMARILLO, TX – For years, the health care delivery system operated in silos. Hospitals did their thing, physicians did their thing, pharmacies did their thing, DME suppliers did their thing……..you get the idea. There was little coordination among the providers. 

When Medicare, Medicaid and commercial insurers were content to pay on a fee-for-service basis, then this model worked. Unfortunately, the country could not afford it. Medicare “grew up” with 23 million of the Greatest Generation. Now, Medicare and other payors are having to deal with 78 million Baby Boomers who are retiring at the rate of 10,000 per day. The “silo” model is no longer financially viable. 

Medicare and other payors are squeezing reimbursement and are demanding results (i.e., good patient outcomes). These two factors are forcing providers to enter collaborative arrangements in order to cut costs and achieve successful patient outcomes. One example of this is the hospital – DME supplier joint venture. 

In its most simplistic terms, a “joint venture” is when two or more people or companies own something together. Increasingly, hospitals and DME suppliers are forming new DME suppliers, partially owned by the hospital and partially owned by the DME supplier. One of the reasons why a hospital would be interested in forming a new DME company, owned by the hospital and an existing DME supplier, is to help insure “continuum of care” for the patient when he is discharged from the hospital. 

The hospital wants the discharged patient to stay healthy; the hospital does not want to see the patient readmitted within 30 days. By co-owning a DME supplier, the hospital will indirectly have “touches” with the patient upon discharge. The hospital, through the DME supplier that the hospital partially owns, will help facilitate the use by the discharged patient of equipment and supplies that will assist in keeping the patient healthy.

In putting together such a joint venture, it is important to keep in mind that the hospital will be a referral source to the joint venture. As an owner of the joint venture, the hospital will be entitled to profit distributions. Because of this, the joint venture cannot be a subterfuge to funnel remuneration to the Hospital for referrals of patients. Such a subterfuge would violate the Medicare anti-kickback statute. 

In determining whether the joint venture is a legitimate arrangement, or is a violation of the anti-kickback statute, the three principal sources of guidance are (i) the Small Investment Interest safe harbor to the anti-kickback statute, (ii) the OIG’s 1989 Special Fraud Alert entitled “Joint Ventures” and (iii) the OIG’s April 2003 Special Advisory Bulletin entitled “Contractual Joint Ventures.”

Part 1 of this three part series discussed the Small Investment Interest safe harbor to the anti-kickback statute. This Part 2 discusses the OIG’s 1989 Special Fraud Alert (“Joint Ventures”). Part 3 will discuss the OIG’s April 2003 Special Advisory Bulletin (“Contractual Joint Ventures”).

Over the years, the OIG has published a number of fraud alerts and advisory bulletins. These publications educate health care providers on arrangements that the OIG believes are vulnerable to fraud. In 1989, the OIG published a Special Fraud Alert entitled “Joint Ventures.” 

If a joint venture does not meet all of the elements of the Small Investment Interest safe harbor, then it is important that the joint venture comply with (i) the OIG’s 1989 Special Fraud Alert (“Joint Venture”) and (ii) the OIG’s April 2003 Special Advisory Bulletin (“Contractual Joint Ventures”).

The 1989 Special Fraud Alert lists characteristics of a joint venture that indicate that the arrangement is not a legitimate arrangement, but rather, is a subterfuge to funnel remuneration to the referral source. The italicized print is the author’s comments to the characteristics listed by the OIG.

• “Investors are chosen because they are in a position to make referrals.”

• “Physicians who are expected to make a large number of referrals may be offered a greater investment opportunity in the joint venture than those anticipated to make fewer referrals.”  Substitute “Hospital” for “Physicians.”

• “Physician investors may be actively encouraged to make referrals to the joint venture, and may be encouraged to divest their ownership interest if they fail to sustain an ‘acceptable’ level of referrals.”  Substitute “The Hospital” for “Physician investors.”  To avoid triggering this characteristic, the Hospital will need to implement a protocol in which the Hospital offers patient choice.  Additionally, the joint venture entity cannot have the right to demand that the hospital divest its interest based on the number of referrals, or lack thereof, to the joint venture entity.

• “The joint venture tracks its sources of referrals, and distributes this information to the investors.”

• “Investors may be required to divest their ownership interest if they cease to practice in the service area, for example, if they move, become disabled or retire.”  This characteristic should not apply to a hospital.

• “Investment interests may be nontransferable.”  The investment interests held by each owner must be transferable.  It would, however, be appropriate to give each investor a standard right of first refusal.

• “The structure of some joint ventures may be suspect.  For example, one of the parties may be an ongoing entity already engaged in a particular line of business.  The party may act as the reference laboratory or DME supplier for the joint venture.  In some of these cases, the joint venture can be best characterized as a ‘shell.’”  One of the owners of the joint venture is an existing DME supplier.  It will be important that the DME supplier investor not be a provider/supplier for the joint venture entity.  In other words, the joint venture entity must be a free-standing provider; it must have operational responsibilities and financial risk.  At a minimum, the joint venture entity needs to have intake personnel; it needs to have one or more delivery drivers (and one or more vans for the delivery drivers); and it needs to purchase and store inventory.  It is acceptable for the DME supplier investor to provide some services for the joint venture entity such as (i) billing services, (ii) delivery and set-up services if the joint venture entity’s delivery drivers are overloaded, and (iii) maintenance and repair services.  The joint venture entity will need to pay fair market value compensation for these services.  At the end of the day, while the DME supplier investor can provide some services to the joint venture entity, the DME supplier investor cannot run the joint venture on a turnkey basis.  If the joint venture entity has “skin in the game,” then the joint venture should not be characterized as a “shell.”

• “In the case of a shell DME joint venture, for example: — It owns very little of the DME or other capital equipment; rather, the ongoing entity owns them. – The ongoing entity is responsible for all day-to-day operations of the joint venture, such as delivery of the DME and billing.”  See the preceding bullet. The joint venture entity needs to own delivery vehicles, non-inventory property, and inventory.  The joint venture entity needs to handle intake and assessment. The joint venture entity needs to provide delivery and patient set-up services.  This should result in the joint venture entity having sufficient operational responsibilities and financial risk.  If the joint venture entity has these responsibilities, then the DME supplier investor services such as billing, overflow delivery and set-up, and maintenance and repair should be appropriate.

• “The amount of capital investment by the physician may be disproportionately small and the returns on investment may be disproportionately large when compared to a typical investment in a new business enterprise.” Substitute “hospital” for “physician.”  This is a difficult characteristic to address.  As to when an investment is “disproportionately small” as compared to a return on investment is subject to interpretation.  This characteristic should normally not be an issue so long as (i) the hospital invests risk capital in proportion to its percentage ownership interest and (ii) the joint venture entity generates the types of profits that similar providers normally generate.

• “Physician investors may invest only a nominal amount, such as $500 to $1500.”  Substitute “The Hospital” for “Physician investors.”  This characteristic should not be an issue so long as the hospital invests risk capital in proportion to its percentage ownership interest.

• “Physician investors may be permitted to ‘borrow’ the amount of the ‘investment’ from the entity, and pay it back through deductions from profit distributions, thus eliminating even the need to contribute cash to the partnership.”  Substitute “The Hospital” for “Physician investors.”  This characteristic should not be an issue if the Hospital will contribute its risk capital up front.

• “Investors may be paid extraordinary returns on the investment in comparison with the risk involved, often well over 50 to 100 percent per year.”  Normally, the joint venture entity will generate the types of profits that similar providers generate. If so, then this characteristic should not be an issue.

Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato PC, a law firm based in Amarillo, Tex. He represents pharmacies, HME companies, and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization. He can be reached at (806) 345-6320 or [email protected].