Analysis of OIG’s Opinion Shows Compliance Shift

Violations of anti-kickback and Stark laws may be triggered by anatomic path lab condos

CEO SUMMARY: Attorney Richard Cooper believes the latest Advisory Opinion by the Office of the Inspector General (OIG) is consistent with its earlier anti-kickback law pronouncements about situations where a physician is in a position to profit from the patients he/she refers. Cooper also comments on the vulnerability of the anatomic pathology laboratory condominium to violations of the Stark Law.

THERE’S A LITTLE OF THE OLD and a little of the new in the latest advisory opinion issued by the Office of the Inspector General (OIG) last month. That’s the opinion of one veteran lab industry attorney.

“Advisory Opinion No. 04-17 should be studied with care,” observed Richard S. Cooper, Attorney and Partner at McDonald Hopkins, a law firm headquartered in Cleveland, Ohio. “Although it is focused directly on the business model of the anatomic pathology (AP) laboratory condominium, the advisory opinion provides insight into how the OIG views several broader issues of laboratory compliance.”

Both clinical laboratories and anatomic pathology group practices will want to understand the implications of OIG Advisory Opinion No. 04-17. Among other subjects, it addresses the anti-kickback statute and Stark Law in ways that extend long-standing efforts by government regulators to identify and control inducements that occur between laboratories and referring physicians.

“It is important to view this advisory opinion as a logical extension of the OIG Special Advisory Bulletin on ‘Contractual Joint Ventures,’ dated April 30, 2003,” said Cooper. “The OIG’s comments in this newest advisory opinion are consistent with earlier statements it has published on this subject. In that context, this advisory extends existing OIG guidance.

OIG Concerns

“The April 30, 2003 bulletin and the December 17 opinion should be read and studied together,” added Cooper. “The first document addresses general issues in contractual joint ventures involving physicians. The second document is specifically directed to joint ventures involving referring physicians and anatomic pathology services.

“In both documents, the OIG addresses situations where a physician generates patient referrals and wants to offer a clinical service for which his/her patients will be referred. The OIG is concerned about this type of situation: a physician goes to an existing provider already offering this service. The physician partners with that provider to serve the patients he/she refers. The referring physician receives money from these services. The OIG notes that such arrangements have the potential to trigger violations of federal statutes,” he said.

“The OIG’s advisory opinion stated the proposed arrangement could potentially violate anti-kickback statutes and subject the provider to sanctions,” explained Cooper. “This was based on its evaluation of a rather simple business model.

AP Laboratory Condo Model

“As described in the Advisory Opinion, the Requester would, at an off-site location, build up to five separate pathology laboratories in a single building. Each laboratory would be owned by a different physician group practice. The Requester would ‘furnish all necessary management and administrative services, equipment leasing, premises sub- leasing, technical, professional, and supervisory pathology services, and, if requested, billing services for each Physician Group to operate its own Path Lab’,” noted Cooper.

“Requester would execute four contracts with each AP laboratory condominium owner to cover the details of the management arrangements,” he added. “Pathologists and technical staff would rotate among the individual pathology labs and would only pro- vide services on behalf of that laboratory owner while in that particular lab owner’s space.

Two Major Issues

“This was the business model evaluated by the OIG,” said Cooper. “There are two main points in this advisory opinion which should be understood by all clinical lab directors and pathologists. One involves anti-kickback issues. The other involves potential violations of the Stark Law.

“Let’s take the anti-kickback topic first,” stated Cooper. “The statute makes both parties liable when a kick-back situation occurs. Remuneration is defined by the statute to include a transfer of anything that has value.

“The OIG’s 2003 bulletin addresses this point. It says that when a physician group does a joint venture (JV) with another group or provider to capture referral revenues—and the JV partner is already in that line of business and does virtually everything to service the referrals—this situation has the appearance of a sham arrangement organized expressly to capture revenues for the referring physicians.

“The OIG does recognize legitimate joint ventures,” observed Cooper. “But the OIG is concerned with JVs where a physician group shares in the revenues from its referrals without sharing risk and without having substantial involvement. The OIG is alert to JVs where the physician group originating the referrals is effectively a partner on paper and is neither a partner at risk nor a partner involved in operations.

Contractual Joint Ventures

“This was the gist of the OIG’s 2003 Bulletin on contractual joint ventures,” he noted. “In Advisory Opinion 04-17, the OIG examines the anatomic pathology laboratory condominium from this same perspective.

“In fact, the OIG makes precisely this point in three places in the advisory opinion. The first relevant comment is: ‘On the whole, the Physician Group would commit almost nothing in the way of financial, capital, or human resources to the Path Lab, and, accordingly, would assume no or very little real business risk’,” quoted Cooper.

“The second comment is: ‘The Physician Group’s actual financial and business risk would be nonexistent or minimal, because it would have complete control over the amount of business it would send to the Path Lab and could make substantial referrals to the Path Lab. In fact, …by basing the Monthly Fee for each Physician Group on historical utilization data generated by the Physician Group, the parties can easily insure that the business generated by the Physician Group would be sufficient to meet or exceed the Monthly Fee.’

Profits From Lab Referrals

“The third comment is: ‘Accordingly, based on the facts presented here, we are unable to exclude the possibility that the parties’ contractual relation- ship is designed to permit the Requester to do indirectly what it can- not do directly; that is, pay the Physician Groups a share of the profits from their laboratory referrals. In other words, the Requester may be offering the Physician Groups impermissible remuneration by giving them the opportunity to obtain the difference between the reimbursement received by the Physicians Groups from the Federal healthcare programs and the fees paid by the Physician Groups to the Requester (i.e., the profit from pathology services ordered by the Physician Groups).’

Federal Enforcement

“These legal concepts are familiar to most laboratory managers and pathologists,” added Cooper. “They underlay aggressive federal enforcement of lab- oratory industry business practices for more than 20 years.

“The OIG provided these comments to explain why it determined that AP laboratory condominiums “could potentially generate prohibited remuneration under the anti-kickback statute’,” said Cooper. “Taken in con- text with earlier statements by the OIG, this opinion is consistent. It is a clear warning of how the OIG might proceed to build a case against AP laboratory condominiums.”

Missing Legal Opinion Raises Many Questions

IN RESEARCHING THE BACKGROUND and development of the anatomic pathology (AP) laboratory condominium business model earlier this year, THE DARK REPORT found a circumstance both noteworthy and troubling.

Nowhere in the marketplace could there be found a legal opinion which assessed the legal and compliance issues involved in operating an AP laboratory condominium. In fact, during a call to the law firm of one AP laboratory condo company, THE DARK REPORT was told, point-blank, that a legal opinion existed, but had not been shared with anyone not employed by the company—including physician groups which had purchased an AP lab condo.

As clients of THE DARK REPORT know, some of the smartest legal minds in the lab and pathology profession consider the business scheme of the AP laboratory condo to fall outside acceptable compliance parameters. Thus, the fact that no legal opinion produced by an AP lab condo company circulates in the marketplace is evidence that even these companies recognize the questionable compliance grounds upon which this business model is built.

“McDonald Hopkins takes the same view and has the same experience,” said Richard Cooper, attorney at this Cleveland, Ohio-based law firm. “None of us, nor any of our physician group clients, have ever seen a legal opinion prepared by any of these AP laboratory condo promoters.

“In fact, when specialist groups contact us to discuss their interest in buying an AP lab condo, we ask them to get a copy of the legal opinion prepared by the promoter,” he continued. “Never has a group succeeded in obtaining such an opinion. Moreover, most of these physician groups never contact us again. I believe at least a few proceeded to buy their AP laboratory condo, even though the lack of a legal opinion can be considered a sign of the high compliance risks triggered by this type of contractual joint venture.”

Potential Violations

The second main point in the advisory opinion is a reference to the potential of the AP laboratory condominium to trigger a violation of the Stark exception. “This reference is a footnote,” Cooper commented. “The OIG states that it is the role of the Centers for Medicare & Medicaid Services (CMS) to issue opinions about the application of the Stark Law.

“Having made that statement, the OIG then goes on to make a specific comment, which reads ‘We observe, however, that the actual operation of an arrangement is crucial to compliance with the law, and that the propos- al to segregate space and equipment and rotate pathologists and technicians and account for their time spent in each Path Lab would be virtually impossible to monitor (particularly in an off-site facility) and therefore would be prone to substantial abuse, including, without limitation, the risk of inappropriate utilization and improper claims’,” quoted Cooper.

Stark Law Violations

“The OIG intentionally flagged an obvious way the operation of an AP laboratory condominium complex can cross the line into Stark Law violations,” said Cooper. “Both pathologists and the specialist physicians in these types of joint ventures need to under- stand that, even if the operating agreement fully meets the law, the business model on which it depends will only be as good as how it is operated by humans.”

“Our law firm has always considered AP lab condominiums as likely to be problematic—and the referring physicians at risk—because the pathology laboratory is not located within their clinic, and in some cases, is located in another state,” said Cooper. “And, as the OIG so cogently points out in this Advisory Opinion, the very structure of these AP lab condos is ‘prone to substantial abuse’.”

Stepping back, Cooper says it is important to recognize that each of the two main elements in the opinion carries a different kind of risk. “There are ‘safe harbors’ defined within the anti-kick-back law,” he explained. “If a business arrangement falls outside the safe harbor, it still may be compliant. That means a failure to qualify for a safe harbor does not automatically mean a violation of the law has occurred.

“And, as the OIG so cogently points out in this Advisory Opinion, the very structure of these AP lab condos is ‘prone to substantial abuse’.”

“In contrast, the Stark Law defines an exception to self-referral,” he continued. “Anytime a business arrangement fails to meet the requirements of an exception related to Stark services, then a violation of the Stark Law has occurred. This is one big reason why the OIG’s effort to comment on the susceptibility of the AP laboratory condominium to fall outside the Stark Law exception is noteworthy. It believes this is a major source of compliance risk.”

These are clear signs that federal regulators look unfavorably upon this business model. Going forward, the interesting question will be whether OIG Advisory Opinion 04-17 causes some AP lab condo owners to recon- sider their compliance risk and decide to shut them down.

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