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Summary of OIG Advisory Opinion 11-11 

Issued July 28, 2011, and posted August 4, 2011
Written by Claire Turcotte, reviewed by Julie Kass*


On July 28, 2011, the U.S. Department of Health and Human Services, Office of Inspector General (OIG) issued unfavorable Advisory Opinion 11-11, concluding that two proposals (Proposal A and Proposal B) involving a supplier of medical supplies and equipment (Requestor), as well as certain related services to skilled nursing facilities (SNFs) to a county-operated SNF, could potentially generate prohibited remuneration under the Anti-Kickback Statute (AKS) and result in administrative sanctions.

In conjunction with furnishing medical supplies and equipment to SNFs, Requestor furnishes related services, including emergency delivery of medial supplies and equipment, inventory control, and visits by customer service representatives to check on pending orders and patients' needs for supplies, customized packaging, and product returns.

For supplies and equipment covered by Medicare Part B (Covered Items) Requestor bills Medicare directly. However, if they are not (Non-Covered Items), Requestor bills SNFs directly, including a markup on Non-Covered items, which covers the costs of furnishing the related services, plus Requestor's overhead and profit. For Covered Items, the Medicare Part B reimbursement is sufficient to cover Requestor's cost of furnishing the related services, plus overhead and profit.

Under Proposals A and B, the SNF solicited bids from suppliers, including Requestor, to be the exclusive supplier of Covered Items and related services to the SNF, and also required their bids to include pricing for the Non-Covered items and related services, which the SNF could purchase at its option.

Under Proposal A, Requestor proposes to submit a bid to: (1) be the SNF's exclusive supplier of Covered Items; (2) at the SNF's option, furnish Non-Covered Items at the pricing listed in the bid; and (3) furnish related services for both the Covered Items and any Non-Covered Items purchased by the SNF. Requestor proposes to offer pricing for the Non-Covered Items so that the total cost for the Non-Covered Items and related services would be below Requestor's costs. Requestor believes that if it does not offer the below-cost pricing on the Non-Covered Items and related services, the SNF will not select Requestor's bid to be the exclusive supplier of the Covered Items. Although Requestor's offered pricing on the Non-Covered Items and related services would not be contingent on Requestor's selection as the exclusive supplier for the Covered Items, Requestor (or any other losing bidder) would not be bound by that pricing if not selected as the exclusive supplier of the Covered Items. In addition, Requestor indicated that the Medicare reimbursement from the Covered Items would more than offset any losses it would incur from providing the Non-Covered Items and related services below cost.

Proposal B is identical to Proposal A, except that Requestor would form a new company to furnish Non-Covered Items and related services, and submit a joint bid with the new company to the SNF.

OIG began its analysis by restating its position, which was articulated in the OIG Supplemental Compliance Program Guidance for Nursing Facilities, that "if any direct or indirect link exists between a price offered by a supplier or provider to a nursing facility for items or services that the nursing facility pays for out-of-pocket and referrals of federal business for which the supplier or provider can bill a federal healthcare program, AKS is implicated."1

Proposed Arrangement A

OIG found that in Proposed Arrangement A, a nexus may exist between the below-cost payment rates offered to the SNF for Non-Covered Items and related services and referrals of other federal healthcare program business for the following reasons:

  • The SNF is in a position to direct business to Requestor that is not paid by the SNF under Proposed Arrangement A (Covered Items);

  • Request for proposal solicits pricing information for the Non-Covered Items, along with service information related to both Covered Items and Non-Covered Items, thereby suggesting a nexus between the two; and

  • Both parties have obvious motives for agreeing to trade below-cost payment rates for the Non-Covered Items and related services in exchange for referrals of other federal healthcare program business (i.e., the SNF to minimize out-of-pocket payments for medical supplies and equipment, and Requestor to secure business as an exclusive supplier of the Covered Items in a competitive market).

In its analysis, OIG noted that "prices offered to a skilled nursing facility that are below the supplier's total costs of providing the items and services—as in the facts presented here—give rise to an inference that the supplier and the SNF may be "swapping" the below-cost rates on business for which the SNF bears the business risk (i.e., the Non-Covered Items) in exchange for the profitable non-discounted federal business (i.e., the Covered items), from which the supplier can recoup losses incurred on the below-cost business, potentially through overutilization or abusive billing practices." Of significance was that Requestor acknowledged that the Medicare Part B payments it would receive for the Covered Items would more than offset the losses from providing the Non-Covered Items and related services at prices below cost.

For the above reasons, OIG was unable to exclude the possibility that Requestor may be offering improper discounts to the SNF with the intent to induce referrals of federal business, or that the SNF may be soliciting improper discounts on business for which it bears risk in exchange for referrals of business for which it bears no risk. As a result, OIG found that Proposed Arrangement A posed a substantial risk of improper "swapping that may violate AKS."

Proposed Arrangement B

OIG found that although Proposed Arrangement B used a separate, but commonly owned company, to provide the Non-Covered Items and related services at below-cost prices, it nevertheless reflected the same risk of improper "swapping" as in Proposal A. OIG emphasized that the substance and not the form of the arrangement governs under AKS. Accordingly, OIG found the same issues in Proposal B that it had in Proposal A. Requestor was in a position to: (1) offer below-cost pricing on the Non-Covered Items and related services; and (2) benefit from referrals of the more lucrative federal business. Similarly, no fact or circumstances of
Proposal B minimized the risk of the SNF soliciting improper discounts on business for which it bears risk in exchange for the referrals of business for which it bears no risk.

For the above reasons, OIG concluded that both Proposal A and
Proposal B could potentially generate prohibited remuneration under AKS and potentially result in administrative sanctions.


1 73 Fed. Reg. 56832, 56844 (Sept. 30, 2008).

*The Fraud and Abuse Practice Group Leadership would like to thank Advisory Opinions Task Force members Claire Turcotte, Esquire (Bricker & Eckler LLP, Cincinnati-Dayton, OH), and Julie Kass, Esquire (Ober Kaler, Baltimore, MD), for respectively writing and reviewing this summary.


 
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