HME joint ventures risk prosecution

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Saturday, May 31, 2003

WASHINGTON — The OIG issued a tough Special Bulletin on April 23, warning HMEs that if they enter or have entered into joint ventures with hospitals they may be asking for trouble.

“This is a signal that if you continue a joint venture past the date of this bulletin or if you enter into one after this date, then you are on notice that you may be prosecuted,” said retired healthcare attorney Tom Antone.

What’s more, the bulletin seems to indicate that many joint ventures may be illegitimate even if designed to fit into one or more safe harbors. On the bright side, if hospitals and DMEs begin to back out of joint ventures, it frees up business for other providers, say industry sources.

As an example of the kind of joint ventures the OIG doesn’t like, the bulletin offered the following:

— A hospital establishes a subsidiary to provide DME. The new subsidiary enters into a contract with an existing DME to operate the new subsidiary and to provide the new subsidiary with DME inventory. The existing DME company already provides DME services comparable to those provided by the new hospital subsidiary and bills insurers and patients for them.

Characteristics of potentially problematic joint ventures, according to the OIG, include: 1. the owner is expanding into a related business that is wholly dependent on patient referrals from the existing business; 2. the owner neither operates nor commits substantial resources to the new business; 3. absent the contractural arrangement, the subcontractor would be a competitor; 4. payments to the owner are based on the owners’ referrals to the new business. The presence of any of these or similar elements in a contractural joint venture indicates a prohibited arrangement.

“The joint ventures we don’t like have substantially captive populations,” said an OIG source. “No one is starting a new business. They are trying to take another piece out of the existing patient pool.”

OIG officials say they are seeing a proliferation of such relationships, which they claim are little more than an exchange of cash for referrals, and that violates the anti-kickback statutes.

If a hospital and DME share resources in starting up and running an entirely new business that doesn’t rely on the hospital’s “captive” referral base, that is okay, the OIG source said.

“That is America,” the source said. “But if you are trying to ding us up for another service to these patients that you control, that is problematic.”

By eliminating competition, joint ventures make it easier to provide inferior products and reduce services to maximize profits, a government source said.

The OIG bulletin strikes M&A expert Dexter Braff as strange.

The hospital/JV model laid out by the OIG is “standard operating procedure,” Braff said, adding that he has never seen a joint venture operation where the hospital did not have to make a financial contribution, although the amount of the contribution varies.

Additionally, over the past few years joint ventures between hospitals and DMEs have declined in popularity. For one thing, a hospital has to share the revenue with the DME, and in many cases, the joint ventures aren’t all that lucrative and more trouble than they are worth for the hospital, Braff said.

With hospitals and DMEs entering into joint ventures for many years (often as a way to keep the business from a competitor), industry watchers wonder why the OIG decided to clamp down on them now.

Much of the reason stems from HIPAA, which provided the OIG with additional resources and made it easier to levy civil penalties, which are much easier to prosecute than criminal charges, said a government source.

As for a DME that is a wholly-owned hospital subsidiary, “we think those stink too,” said a government source. Unfortunately, it’s harder to prosecute those cases because a kickback requires two people — one giving the money, the other taking it. With a wholly-owned subsidiary there is essentially one entity, the hospital.

The bottom line, said Antone, is that “the government wasn’t prosecuting for this, but now it is.”

“I’m going to have to send a handful of clients this (bulletin) and say, ‘We might have to think this through again because they are flat out telling you that you are talking a risk,’” said Ann Berriman, a Baltimore healthcare attorney. HME
The OIG’s Special Bulletin on joint ventures may also have serious implications for pharmacy management agreements. See story.

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