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Summary of OIG Advisory Opinion 11-15 

Issued October 3, 2011, and posted October 11, 2011
Written by Catherine Martin; reviewed by Claire Turcotte*

On October 3, 2011, the U.S. Department of Health and Human Services, Office of Inspector General (OIG) issued unfavorable Advisory Opinion 11-15, relating to a proposal involving physician investment in a pathology laboratory management services company. OIG concluded that the Proposed Arrangement could potentially generate prohibited remuneration resulting in the imposition of administrative sanctions.

The Requestor is a physician-owned company that would contract with another third party that either owns or operates an anatomical pathology laboratory (Path Lab). The Path Lab would enter into a management services contract with the Requestor, and the Requestor would provide the full array of Path Lab services and the necessary space and equipment to run the Path Lab. The Requestor would also provide marketing and billing services and essential non-physician staff to the Path Lab. As compensation for the services provided by Requestor, the Path Lab would pay a usage fee based upon a percentage of the Path Lab's income for a term of twelve months, which would correspond generally to the volume of services used by the Path Lab and would represent fair market value for Requestor's services. The Requestor would offer investment opportunities to additional physicians, including urologists, gastroenterologists, and dermatologists--physicians in a position to generate referrals to the Path Lab. Physician investors could refer specimens to the Path Lab, but would not be required to do so. Physician investors would purchase interests in Requestor based on Requestor's book value times the percentage purchased and receive profit distributions based on their percentage ownership.

OIG began its analysis by noting the similarities of the Proposed Arrangement to questionable joint venture arrangements involving clinical laboratory services upon which OIG has previously issued a significant amount of guidance. Interestingly, the Proposed Arrangement is the converse of the situations discussed in OIG guidance where a physician-owned entity enters into a turn-key arrangement with an existing laboratory services provider that allows the physician-owned entity to bill for the laboratory services. Here, the Requestor (physician-owned) is contracting to provide laboratory services to an entity that would in turn bill for the laboratory services. Under either scenario, however, the income of the physician-owned entity varies with the volume or value of referrals from its physician investors.

OIG continued by evaluating the Proposed Arrangement under the potentially applicable safe harbors--small entity investments, equipment rental, space rental, and personal services and management investments--and concluded that safe harbor protection was not available. Because more than 40% of the Requestor's investment interests are held by physicians in a position to make or influence referrals to the Path Lab, and more than 40% of the Path Lab's gross revenue also comes from the Requestor's physician investors, the Proposed Arrangement and the related profit distributions to the physician investors would not be afforded protection by the small entity investment safe harbor. With respect to the remaining available safe harbors, the Proposed Arrangement fails to satisfy the set in advance requirement found in each safe harbor because the usage fees would be calculated based on a percentage of the Path Lab's income. Without safe harbor protection, OIG concluded the Proposed Arrangement posed more than a minimal risk of fraud and abuse--including risk of overutilization of laboratory services, distorted medical decision-making, and increased costs to the federal healthcare programs. OIG also noted that the Proposed Arrangement appeared to have no purpose other than to allow physician investors with no experience in operating a clinical laboratory to profit from business they generate for the Path Lab via referrals. Finally, OIG found the fact that the Path Lab and not the Requestor would bill for the services immaterial.

*The Fraud and Abuse Practice Group Leadership would like to thank Advisory Opinions Task Force members Catherine Martin (Adelman Sheff & Smith LLC, Annapolis, MD), and Claire Turcotte (Bricker & Eckler LLP, Cincinnati-Dayton, OH) for respectively writing and reviewing this summary.

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