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OIG Advisory Opinions Illustrate Government's View of The Right Way vs. The Wrong Way

November 11, 2010 | Legal Alert

The Office of the Inspector General (OIG) recently issued two Advisory Opinions dealing with sleep studies performed in hospital-owned facilities. Although the facts were similar, the OIG decided that one proposed arrangement was acceptable while the other raised concerns under section 1128B(b) of the Social Security Act, the Federal anti-kickback statute. Read together, these two Advisory Opinions provide helpful guidance to healthcare providers trying to structure arrangements that comply with the law.

Advisory Opinion 10-24: The Right Way

In Advisory Opinion 10-24, an entity owned by non-physicians (the contractor) provided sleep studies in both freestanding facilities and hospital-owned facilities. To operate a sleep study center within the hospital in question, the contractor proposed an arrangement where it would provide all of the necessary equipment, staff, technology and supplies, while the hospital would provide the physical space. In addition to the services needed to operate on a day-to-day basis, the contractor would also provide marketing services for the sleep study center.

Sleep studies would be scheduled by the contractor, and technicians employed by the contractor would perform the studies, evaluate the data, and transmit the results to the interpreting physician. The hospital would bill for the studies in its own name, “under arrangement.”

The contractor would be compensated by the hospital through three separate fees:

The OIG reviewed the proposed arrangement and the history of the anti-kickback statute and found that, assuming each of the fees to be received by the contractor represented true fair market value (the OIG itself does not determine fair market value), no sanctions would be imposed. The OIG noted that the result could be different if the parties intended to improperly induce referrals.

In its lengthy discussion, the OIG noted concern that the contractor performed marketing services on behalf of the sleep study center, “Payments for marketing services involving Federal health care program business warrant close scrutiny under the anti-kickback statute.” However, the OIG reasoned that because the contractor’s marketing services were compensated by a fixed annual fee, set in advance, there should not be undue incentive to generate unnecessary sleep studies.

In short, the contractor and the hospital in this Advisory Opinion appear to have threaded the needle. They managed to create the business arrangement they wanted—one where the hospital would benefit from the contractor’s expertise while the contractor would benefit from the hospital’s proximity to patients—without running afoul of the federal anti-kickback statute.

Advisory Opinion 10-23: The Wrong Way

The facts of Advisory Opinion 10-23 were almost identical to the facts of Advisory Opinion 10-24. The single, critical difference, involves the method of calculating the compensation paid to the contractor by the hospital.

As noted above, the contractor in Advisory Opinion 10-24 received three separate fees, each a fixed annual amount, set in advance. In contrast, the contractor in Advisory Opinion 10-23 received its entire compensation in the form of a per-study fee. The more sleep studies performed, the higher the fee the contractor received.

The OIG noted that:

Marketing fees paid on the basis of successful orders for items or services are inherently subject to abuse because they are linked to business generated by the marketer. Because the [contractor] receives a fee each time its marketing efforts are successful, the [contractor’s] financial incentive to arrange for or recommend the hospital’s sleep testing facility is heightened.

After reviewing “the totality of the facts and circumstances,” the OIG declined to approve the arrangement.

Far from threading the needle, the contractor and the hospital in this Advisory Opinion managed to miss the needle altogether, first by having the contractor perform marketing services for the sleep center it operated on the hospital’s premises, and second by compensating the contractor on a “per-click” basis.


Left to the reader’s imagination is how the OIG would have ruled in Advisory Opinion 10-23 if (1) the contractor had not performed any marketing services, or (2) the contractor had received a fixed annual payment for its marketing services and a per-study fee for everything else.

Nevertheless, the two Advisory Opinions, read together, clearly illustrate how physicians and their advisors should approach these kinds of business arrangements. The OIG will permit a wide variety of arrangements, even some that appear to nudge the envelope of legality, but draws a clear line at compensation arrangements that will, almost by definition, induce referrals and potentially drive up volume.

For more information or questions on these opinions, please contact any member of Flaster/Greenberg’s Healthcare Practice Group.

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