AMARILLO, TX – Under the Hospital Readmissions Reduction Program, if a hospital discharges a Medicare patient who was treated for a specified disease (e.g., COPD), and if the patient is readmitted within 30 days, then Medicare payments to the hospital during the next year will be reduced. This provides an incentive to hospitals to take steps to prevent discharged Medicare patients from becoming “frequent flyers.” A mechanism for a hospital to work with patients post-discharge is for the hospital to establish a joint venture with an existing DME supplier, in which a new joint venture entity (a DME supplier owned by the hospital and the existing DME supplier) will provide value-added services to patients on a post-discharge basis.

Such value-added services can include the following:

• Placing a monitoring device in the patient’s home.
• Communications with the patient and his caregivers about the importance of (i) the patient seeing his treating physician at the appointed time, and (ii) the patient taking his prescription medications as prescribed.

Assume that St. Joseph’s Hospital and XYZ Medical Equipment, Inc. desire to jointly own a new DME operation. Here are the steps that the hospital and XYZ will take:

• They will establish a new legal entity. For purposes of this article, the new entity will be called “St. Joseph’s Medical Equipment, Inc. (“SJME”).”
• Assume that the ownership breakdown will be 50-50.
• Because SJME is a legal entity separate from the hospital (i.e., SJME and the hospital have separate Tax ID #s), then notwithstanding that the hospital will be a “participating” provider, SJME can be a “nonparticipating” supplier.
• SJME 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 SJME 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 SJME, 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, SJME 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 SJME 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 SJME joint venture will not comply with the 60-40 test because (i) the hospital will own more than 40% of SJME and (ii) at least at the beginning, SJME’s business will largely come from hospital referrals.

Because the SJME 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 SJME will be $500,000. At the beginning, each party will need to write a check for $250,000. If future capital infusions are necessary, each will be required to pay its pro rata share of the contribution. Let’s say that at the outset, XYZ puts up the full $500,000, and the hospital’s pro rata share of the contribution ($250,000) 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 XYZ 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 the hospital need to be based on its percentage ownership interest in SJME. The profit distributions to the hospital cannot be based, in whole or in part, on the number of referrals by the hospital to SJME.

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 XYZ operates SJME on a turnkey basis, then even though the joint venture is billing Medicare for the products, in the eyes of the OIG it is XYZ (not SJME) that is providing the products and services. Hence, SJME 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 XYZ (even though the referrals are technically going to the joint venture, in reality the referrals are going to XYZ 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, SJME will need to (i) handle intake, assessment and coordination of care; (ii) purchase its own inventory; and (iii) have its own delivery driver. XYZ can provide billing services, after hours delivery and repair services, and similar services. The joint venture will need to pay XYZ fair market value compensation for its services.

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. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization and can be reached at (806) 345-6320 or [email protected].