Barristers Offer Insights Into OIG Opinion 04-17

There’s more compliance guidance to come on the subject of physician self-referrals

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CEO SUMMARY: This is an intelligence briefing which tries to “read between the lines” and: 1) provide useful information about the OIG’s “undeclared” views on physician self-referral issues, particularly as they relate to anatomic pathology condominiums; and, 2) how specialist physician groups and pathologists are reacting to such issues in the real world of the healthcare marketplace.

IT IS WIDELY-BELIEVED that the Office of Inspector General’s (OIG) Advisory Opinion 04-17, made public on December 17, 2004, is government’s initial response to the growing trend of specialist physician groups trying to capture ancillary service revenues that result from their own patient referrals. The question, however, is whether 04-17 is the last word we should expect to hear from the government on this issue.

Ancillary Revenue

A variety of business arrangements designed to allow physicians to capture ancillary revenue from their own referrals have recently appeared in the marketplace. That is how anatomic pathology (AP) laboratory condominiums came into existence. (See TDRs, July 19 and August 9, 2004.) And it is AP lab condominiums that are the subject of OIG Advisory Opinion 04-17.

To supplement coverage on this topic, THE DARK REPORT conducted its first-ever audio conference on January 26, 2005. The objective was to make two attorneys, each with unique insights on 04-17, available for discussion and specific questions by clients and regular readers. Several valuable nuggets of intelligence resulted during the 90-minute session.

Thomas Bartrum was the first attorney to speak. He is with Waller Lansden Dortch & Davis, located in Nashville, Tennessee. Bartrum has a national health care practice representing health care facilities and ancillary service providers. More significantly, he was part of the legal team that made the original request to the OIG for an advisory opinion on the basic concept of AP laboratory condominiums.

Over the course of 12 months, Bartrum served as the requestor’s primary contact with the OIG. He thus participated in several conversations with the OIG as the OIG developed its position on the topic.

“During our conversations with the OIG, several interesting things occurred which bear directly on two points. One, why the OIG chose to issue Advisory Opinion 04-17 and, two, how it crafted its response in that document,” stated Bartrum. “When our client first requested an advisory opinion on its proposed business model for an AP lab condominium arrangement with referring physicians, the OIG told us right from the start that it would not issue a favorable advisory opinion on this business model.”

“Armed with that knowledge, our client decided to proceed,” he explained. “Because compliance law in areas like the Anti-Kickback Statute and the Stark Law is continually evolving, we wanted to find out precisely what the OIG’s position was with respect to the AP laboratory condomium model, regardless of whether, in the final analysis, the OIG was unable to grant a favorable advisory opinion.

OIG Showed Keen Interest

“During these conversations, the OIG showed keen interest in the topic and indicated they had several concerns with the proposed AP lab condo model,” said Bartrum, “while acknowledging that the model presented by our client was one of the more conservative models of which they were aware.

“Early in these conversations, the OIG expressed its concerns as to whether the Stark Law’s in-office ancillary services exception was intended to protect such business arrangements as the AP laboratory condominium,” he recalled. “Pathologists and specialty physician groups should take this as an indication that the OIG will not stand for attempts to do indirectly what the law will not allow them to do directly.”

In Advisory Opinion 04-17, the OIG specifically footnoted its concerns about the potential for an AP laboratory condo to violate the Stark Laws. “This is consistent with the discussions we had with the OIG during their investigation into this request for an opinion,” observed Bartrum. “The OIG had raised the issue that, although this business model might look acceptable on paper, in actual operation there were obvious ways in which the arrangement could violate the Stark Law. It was also noted that such AP lab condo arrangements might lead to abuses such as inappropriate utilization and improper claim submissions.”

“During these conversations, the OIG showed keen interest in the topic and indicated they had several concerns with the proposed AP condo lab model…”

As to the Anti-Kickback Statute, Bartrum stated “The OIG expressed a real concern over physicians capturing a portion of the revenue generated from their own referrals. In this regard, the OIG clearly takes the position that the Anti-Kickback Statute is potentially violated if a healthcare provider outsources the development and management of an ancillary service line to an established provider of that ancillary service line. The OIG dismissed our argument that such arrangements should be okay since clearly the physician could develop its own AP laboratory.”

High Interest In Topic

“It was clear to our legal team that, within the OIG, the topic of AP laboratory condominiums was of interest at the highest levels,” added Bartrum. “Such interest was evident by the relatively quick turn around of the opinion and that, during our conversations with the OIG, senior OIG staff participated and actively discussed points of interest to them.

“I take their keen interest and hands-on involvement to mean that we have not heard the last word from the OIG on physician attempts to capture a portion of the revenues generated from ancillary services deriving from their own patient referrals,” he noted.

Contractual Joint Ventures

Bartrum also had a useful insight about why Advisory Opinion 04-17 was strongly based upon the OIG’s Special Advisory Bulletin on “Contractual Joint Ventures,” dated April 30, 2003. “Although the discussions our legal team had with the OIG covered a variety of compliance concerns under the Stark Law and the Anti-Kickback Statute, the OIG seems to have found it simpler to base their opinion on the points made in its Special Fraud Alert on Contractual Joint Ventures,” he observed. “Not only was such an analysis the simplest way to deny a favorable advisory opinion on the model presented by our client, but appears to be an effort by the OIG to further elucidate its earlier published guidance. on contractual joint ventures.”

More Guidance To Come

“However, because of the many different compliance issues the OIG identified during its investigation of our request, I think it would be a mistake to assume that the OIG would be fine with an arrangement that did not raise the contractual joint venture concerns,” observed Bartrum. “Further, I believe we will see more from the government on both the topic of anatomic pathology laboratory condominiums specifically and physician attempts to capture ancillary revenue in general.”

If Bartrum represents the opportunity for us to “eavesdrop” and learn something about how the OIG evolved its thinking as expressed in Advisory Opinion 04-17, then Richard Cooper gives us a window into the healthcare marketplace.

Cooper is a partner at McDonald Hopkins, headquartered in Cleveland, Ohio. McDonald Hopkins has a large national healthcare practice. It represents specialist medical groups and also has an extensive client list of pathology group practices and laboratory companies.

“Our legal advice to specialist groups and pathologists is consistent and identical” stated Cooper. “Any type of business arrangement which involves a physician gaining financial benefit as a result of his/her patient referrals will raise significant compliance issues.

“This makes it important to conduct extensive and intense due diligence,” he added. “Unfortunately, there are physician groups which, in their desire to access the economic benefits of such arrangement, fail to conduct effective due diligence.

“Don’t rely on a legal opinion from the promoter, or, even worse, just take their word for it that one exists,” cautioned Cooper.”

“Don’t rely on a legal opinion from the promoter, or, even worse, just take their word for it that one exists,” cautioned Cooper. “Insist on obtaining a copy of the promoter’s legal opinion and get your own review by competent legal counsel.”

Cooper says that OIG Advisory Opinion 04-17 has already made an impact. “We see a greater degree of caution by specialist groups interested in acquiring their own AP laboratory condominium,” he observed. “There seems to be a pause in the marketplace while everyone tries to determine what might be the OIG’s next action on this subject.

“The tenor of Advisory Opinion 04-17 and knowledge that the OIG’s 2005 Work Plan includes a review of pathology services provided in physician group settings will probably curtail businesses that have already started,” observed Cooper. “The conclusions and aggressive tone make it clear that the intent of the OIG is to prompt a behavior change.”

“The conclusions and aggressive tone make it clear that the intent of the OIG is to prompt a behavior change.”

Both Cooper and Bartrum believe that influential legislators, such as Senator Charles Grassley (R-Iowa) may also keep this issue on the OIG’s front burner. Their consensus is that further guidance will be forthcoming on both AP laboratory condominiums and physician self-referral issues.

Both attorneys also believe that some state legislatures may take up either or both the issues of physician self-referrals and AP laboratory condominium arrangements. Were this to occur, such state laws would be enacted independent of any action taken by the OIG.

Unfavorable OIG Opinion

THE DARK REPORT believes it is important to recognize a key fact: in response to a provider’s request, the resulting OIG Advisory Opinion 04-17 is unfavorable regarding the proposed AP lab condominium arrangement. Yet few legal commentaries or news stories printed following the issuance of OIG 04-17 start with the obvious declaration that the OIG declined to provide a favorable opinion on the concept of the AP lab condominium business model described. It is also noteworthy that, according to Bartrum, the AP lab condo business arrangement described in the request letter sent by his client to the OIG was more conservative in design than some already operating in the marketplace.

Increasing Compliance Risk

Moreover, as Bartrum discussed during this audio conference, the OIG asked questions about several other compliance issues it considered to be of concern regarding the AP lab condominium arrangement. Since a number of these compliance concerns were not addressed in Advisory Opinion 04- 17, that makes it likely that the 2005 OIG Work Plan item on pathology services in physicians’ offices is a sign that the OIG wants to provide guidance or comments on those issues.

Given these circumstances, it is reasonable to interpret the issuance of Advisory Opinion 04-17 as the start of a process in which the OIG may steadily raise the compliance risk for arrangements, including anatomic pathology laboratory condominiums, that allow a physician to financially benefit from his/her own patient self-referrals. Also, with the OIG now on record as issuing an unfavorable opinion on a “conservative” AP laboratory condominium arrangement, it certainly should raise the discomfort level of those who continue to operate existing lab condos.


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