AMARILLO, TX – Back in the nineties, a number of hospitals entered the DME space by either owning 100% of a DME operation or co-owning a DME supplier with an unrelated DME company. This latter arrangement is known as a joint venture. Simply put, a joint venture arises when two or more parties own something together.
Most of the time, this incursion into the DME space did not work out for the hospitals. The hospitals found that running a DME operation is totally different from running a hospital. Most of these DME businesses lost money and many of the operations closed down.
Fast forward to today. We are again witnessing hospitals entering the DME arena for a different reason. Instead of desiring to turn a profit off of the DME business, hospitals are focused on providing value added care to recently discharged patients. When patients are discharged from the hospital, it financially benefits the hospital for the patients not to be readmitted anytime soon. Said another way, hospitals want to decrease the number of “frequent flyers.”
Even if the DME operation only breaks even financially, the hospital comes out ahead if the number of frequent flyers decreases. As occurred in the nineties, hospitals are entering the DME space by either (i) owning 100% of a DME operation or (ii) jointly owning a DME operation with an unrelated DME company. This article focuses on the latter scenario.
Let’s say that St. Mary’s Hospital and ABC Medical Equipment, Inc. desire to jointly own a new DME operation called “St. Mary’s Medical Equipment.” Here are the steps that the hospital and ABC will take:
- They will establish a new legal entity. For purposes of this article, the new entity will be called “St. Mary’s Medical Equipment, Inc. (“SMME”).”
- Assume that the ownership breakdown will be 50-50.
- Because SMME is a legal entity separate from the hospital, then notwithstanding that the hospital will be a “participating” provider, SMME can be a “nonparticipating” supplier.
- SMME will become accredited, obtain state DME licensure, obtain a surety bond, obtain a PTAN, obtain a Medicaid provider number, and obtain third party payor (“TPP”) contracts.
It will be important that SMME be set up and operated so as not to violate the federal anti-kickback statute (“AKS”). Over the years, the Office of Inspector General (“OIG”) has made it clear that a joint venture, if set up and operated improperly, can be a subterfuge designed to funnel remuneration to a referral source. Looking at SMME, it is obvious that the hospital will be a referral source to the joint venture. As such, the joint venture cannot be a “sweetheart deal” for the hospital. The hospital needs to be treated the same way as though it does not have the ability to refer patients.
Ideally, SMME will comply with the Investment Interest safe harbor to the AKS. By way of background, the AKS has a number of “safe harbors.” If an arrangement complies with all of the elements of a safe harbor, then as a matter of law the arrangement does not violate the AKS. If an arrangement does not comply with a safe harbor, it does not mean that the arrangement violates the AKS; rather it means that the parties must examine the arrangement carefully under the language of the AKS, court decisions, and OIG guidance.
In our example, it will be difficult for SMME to comply with the Investment Interest safe harbor. Of the eight elements of the safe harbor, two of the elements are particularly difficult to meet. These two elements are referred to as the “60-40 tests.” The 60-40 tests state the following:
- No more than 40% of the value of the investment interests of each class of investment interests may be held … by investors who are in a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the entity.
- No more than 40% of the entity’s gross revenue related to the furnishing of health care items and services in the previous fiscal year or previous 12 month period may come from referrals or business otherwise generated from investors.
The SMME joint venture will not comply with the 60-40 test because (i) the hospital will own more than 40% of SMME and (ii) at least at the beginning, SMME’s business will largely come from hospital referrals.
Because the SMME joint venture will not meet the elements of the Investment Interest safe harbor, it will be important that the joint venture comply with the guidance set out in (i) the OIG’s 1989 Special Fraud Alert entitled “Joint Ventures” and (ii) the OIG’s April 2003 Special Advisory Bulletin entitled “Contractual Joint Ventures.”
OIG’s 1989 Special Fraud Alert (“Joint Ventures”)
- As previously mentioned, the OIG recognizes that a joint venture can be a subterfuge designed to funnel money to a referral source.
- Assume that the initial capital to fund SMME will be $300,000. At the beginning, each party will need to write a check for $150,000. If future capital infusions are necessary, then each will be required to pay its pro rata share of the contribution. Let’s say that at the outset, ABC puts up the full $300,000, and the hospital’s pro rata share of the contribution ($150,000) is paid by the hospital in the form of offsets against future profit distributions to the hospital. This will be a “sweetheart deal” for the hospital…which is the referral source. The law will construe ABC to be providing something of value (a “sweetheart deal”) to the hospital in exchange for future referrals to the joint venture…hence, a kickback.
- Profit distributions to St. Mary’s need to be based on its percentage ownership interest in SMME. The profit distributions to St. Mary’s cannot be based, in whole or in part, on the number of referrals by the hospital to SMME.
OIG’s April 2003 Special Advisory Bulletin (“Contractual Joint Ventures”)
- The OIG expresses the importance of a joint venture (i) being independent of its owners, (ii) having operational responsibilities and (iii) having financial risk. According to the OIG, while an owner of the joint venture can provide a number of services, the owner cannot run the joint venture on a turnkey basis.
- In our example, if ABC operates SMME on a turn key basis, then even though the joint venture is billing Medicare for the products, in the eyes of the OIG it is ABC (not SMME) that is providing the products and services. Hence, SMME will likely be construed to be billing for items it did not provide. The claims submitted by the joint venture will likely be construed to be false claims. Further, the arrangement might be construed to be a kickback. The argument is that the hospital is referring patients to ABC (even though the referrals are technically going to the joint venture, in reality the referrals are going to ABC that is performing all of the work). In exchange for the referrals, the hospital is receiving 50% of the profits of the joint venture.
- In our example, SMME will need to (i) handle intake, assessment and coordination of care; (ii) purchase its own inventory; and (iii) have its own delivery driver. ABC can provide billing services, after hours delivery and repair services, and similar services. The joint venture will need to pay ABC fair market value compensation for its services.
AAHOMECARE’S EDUCATIONAL WEBINAR
How to Properly Utilize Telehealth to Provide Cost-Effective Services
Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato, P.C.
Tuesday, January 19, 2021
1:30-2:30 p.m. CENTRAL TIME
Over the past several years, telehealth has methodically become a part of health care. The pandemic changed this. The pandemic has shoved telehealth to the forefront and the law is quickly adapting to give telehealth a much more prominent place in health care. Many restrictions have been lifted during the pandemic…and a number of these restrictions will remain lifted after the pandemic. This program will discuss federal and state laws governing telehealth during the pandemic and the expected changes in the law after the pandemic is over. Specifically for the DME supplier, this program will discuss whether Medicare will pay the supplier for a product when (i) the physician’s order results from a telehealth encounter, (ii) the patient lives in a non-rural area, and (iii) the patient has the telehealth encounter from his home. The program will then change directions and discuss how the DME supplier can utilize video technology to (i) provide required services to patients, (ii) provide “value-added” services to patients, and (iii) educate patients, caregivers and physicians regarding the array of products and services offered by the supplier.
Jeffrey S. Baird, JD, is Chairman of the Health Care Group at Brown & Fortunato, PC, a law firm with a national health care practice based in Texas. He represents pharmacies, infusion companies, HME companies, manufacturers and other health care providers throughout the United States. Mr. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization and can be reached at (806) 345-6320 or firstname.lastname@example.org.