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Summary of OIG Advisory Opinion 11-08 

Issued June 14, 2011, and posted June 21, 2011

Written by Heather Deixler; reviewed by Joseph Kahn*

On June 14, 2011, the U.S. Department of Health and Human Services, Office of Inspector General (OIG) issued Advisory Opinion 11-08, an unfavorable opinion addressing both an existing and a proposed arrangement involving contracts between a durable medical equipment (DME) supplier and various independent diagnostic testing facilities (IDTF). Under these arrangements, IDTF staff members perform, or would perform certain services on behalf of the DME supplier (Existing Arrangement and Proposed Arrangement, respectively, and, together, Arrangements). OIG concluded that the Existing Arrangement potentially generates, and the Proposed Arrangement could potentially generate prohibited remuneration under the Anti-Kickback Statute, and OIG could impose administrative sanctions in connection with either Arrangement, provided the requisite intent existed.

The Arrangements involve a DME supplier, which provides among other things continuous positive airway pressure blower units, masks, and supplies (CPAP) (Requestor). The CPAP may be prescribed by a physician for patients diagnosed with obstructive sleep apnea after such patients have undergone an overnight sleep study, which can be performed at IDTFs. A patient prescribed the CPAP must select a DME supplier to supply such equipment.

The Existing Arrangement

Under the Existing Arrangement, Requestor has entered into contracts with several IDTFs, at least some of which have physician investors. Each contract between Requestor and an IDTF is in writing, for a term of at least a year and is non-exclusive. While the IDTF may terminate the contract at any time, Requestor may only terminate for breach or for cause. The Existing Arrangement carves out federal healthcare program beneficiaries, and applies only to non-federally insured patients.

The IDTFs involved in the Existing Arrangement are permitted to display and provide equipment from multiple DME suppliers. The IDTFs furnish patients with a written list of local DME suppliers, and advise them of their right to select a DME supplier. If a non-federally insured patient opts for DME supplied by Requestor, a licensed IDTF staff member will perform services that include preparing the CPAP for the patient, and educating the patient on its use. In exchange for these services, Requestor pays the IDTF a per-patient fee, which Requester has certified reflects fair market value for such services.

The Proposed Arrangement

The Proposed Arrangement would be identical to the Existing Arrangement, except for the following distinguishing factors: (1) Proposed Arrangement would include federal healthcare program beneficiaries;
(2) IDTF would be paid a flat monthly or flat annual fee, which Requestor cannot certify will be fair market value for the services provided; and
(3) Requestor would have the right to terminate contract if unsatisfied with the number of patients receiving the services.

In analyzing the Arrangements, OIG first noted its long-standing concern with arrangements whereby parties "carve out" federal healthcare program beneficiaries or business generated by such programs from "otherwise questionable financial arrangements." Thus, although Requestor has excluded federal healthcare program beneficiaries under the Existing Arrangement, OIG nonetheless found that the participating IDTFs may still influence referrals of federal healthcare program beneficiaries to Requestor for DME.

OIG also noted its concerns with aggressive marketing by DME suppliers, especially when the marketing practices include in-person sales pitches or "informational" sessions that are aimed at senior citizens, Medicaid beneficiaries, and other particularly vulnerable patients. Of particular concern to OIG is "white coat" marketing, where physicians are themselves involved in the marketing activities, thereby blurring the lines between professional medical advice and a commercial sales pitch.

Although safe harbors exist that could be applicable to this type of joint venture, OIG concluded that the Arrangements fail to meet the qualifications for the personal services and management contracts safe harbor, in part because the Arrangements do not specify the exact schedule, precise length, and exact charge for the intervals of services performed.

OIG analyzed the Arrangements on a facts-and-circumstances basis and determined that the Arrangements could create more than a minimal risk of fraud and abuse for the following reasons:

  • Direct Payments to IDTFs. Subcontracting of duties by Requestor to the IDTFs, and direct payments to the IDTFs for such services may be problematic where the IDTF staff members are potentially in a position to influence federal healthcare program beneficiaries to select Requestor's products—especially where physicians in a position to prescribe Requestor's products may have a financial interest in the IDTFs.

  • Marketing Practices. The Arrangements present opportunities for Requestor to obtain in-person contacts with patients, including federal healthcare program beneficiaries, through healthcare professionals who are in a position of trust. Where these contacts occur prior to the patient's selection of a DME supplier, this raises concern that the IDTF staff members and, potentially, physicians with financial interest in the IDTF, could inappropriately influence a beneficiary's section of Requestor as his or her DME supplier.

  • Consignment Component. Even though Requestor has certified that it would not make separate payments for rental of space and consignment services, the consignment component of the Arrangements comprises at least a portion of the fees paid to the IDTF.

*The Fraud and Abuse Practice Group leadership would like to thank Advisory Opinion Task Force members Heather Deixler, Esquire (Morgan Lewis & Bockius LLP, San Francisco, CA), and Joseph Kahn, Esquire (Nexsen Pruet PLLC, Greensboro, NC) for respectively authoring and reviewing this summary.

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