The United States Department of Health and Human Services, Office of Inspector General (“OIG”) recently released two unfavorable advisory opinions, OIG Advisory Opinion No. 25-04 and -08 (the “Opinions”) to medical device companies (the “Requestors”). In the Opinions, OIG analyzes whether the Requestors’ payment of service fees that their customers would otherwise pay (the “Arrangements”) would constitute grounds for sanctions under the exclusion authority at section 1128(b)(7) of the Social Security Act (the “Act”) or the civil monetary penalty (“CMP”) provision at section 1128A(a)(7) of the Act, as those sections relate to the commission of acts described in section 1128B(b) of the Act (the “Anti-Kickback Statute” or “AKS”).
The Advisory Opinions
Each Opinion Requestor is a medical device company whose customers — hospitals, health systems, and ambulatory surgery centers (the “Customers”) — have requested or required the Requestor to use third-party services that shift expenses from the Customer to the Requestor. In AO 25-04, the Requestor’s Customers desired that the Requestor pay for a third-party company to screen and monitor the Requestor for exclusion from federal healthcare programs so that the Customer might avoid CMP liability that could arise from contracting with an entity OIG has excluded from participating in federal healthcare programs. Similarly, in AO 25-08, the Requestor’s Customers wanted it to pay for a third-party vendor to facilitate their purchases of items from the Requestor, even though the Requestor had an internal process that sufficiently handled the transactions. Utilization of these third-party services would cost each Requestor at least several hundred thousand, and perhaps more than one million, dollars per year. The 25-08 Requestor further certified that it had not identified any appreciable benefit that it would receive by using the third-party service, which seemed geared exclusively toward convenience and potential cost-savings to the Requestor’s Customers. Indeed, the Requestor affirmatively stated that the only reason for it to use the third-party services was to sell medical devices to Customers that requested or required the Requestor to use it.
OIG observed that each arrangement implicated the AKS because the Requestors would pay the third party fees to facilitate Customers’ purchases of Requestor’s products or to screen and monitor Requestor for exclusion from federal healthcare programs (thereby avoiding potential CMP liability for the Requestor’s Customer). Each arrangement could induce Customers to purchase items or services from the Requestor that might be reimbursable by a federal healthcare program, and neither met the requirements for a regulatory “safe harbor.” OIG did not elaborate on why the proposed arrangement in 25-04 missed the harbor. As to AO 25-08, OIG pinpointed that the contracted services would exceed those which were reasonably necessary to accomplish the commercially reasonable business purpose of the service.
Because neither proposed arrangement could shelter in a safe harbor, OIG analyzed the totality of their facts and circumstances. OIG reiterated its longstanding concerns regarding the provision of free items or services to referral sources that could lead to additional consumption of federal healthcare funds. Here, each proposed arrangement presented anticompetitive risks and risks of inappropriate steering. In AO 25-08, the third-party service was valuable only for the convenience and cost-savings of the Requestor’s Customers, not the Requestor itself. In 25-04, the Requestor’s payment for the third-party service would relieve its Customers of a financial burden they otherwise would bear for exclusion screening and monitoring. In either scenario, the payments to the third parties could inappropriately steer customers to the Requestor over the Requestor’s competitors that are not willing or able to pay those fees.
OIG acknowledged that there are myriad ways for parties to structure business arrangements to allocate responsibilities, and there could be different fact patterns that would result in OIG rendering a favorable advisory opinion. However, under these scenarios — where the proposed arrangements did not serve a commercially reasonable purpose or where the Customers potentially conditioned their business on Requestor’s payments the third-party fees — the payments Requestor would make to the third party appear to be part of an effort to retain and potentially expand business with Customers who could provide referrals for purchases reimbursable by federal health care programs.
Analysis
“The OIG’s position on the provision of free or below-market-price goods or services to actual or potential referral sources is longstanding and clear: such arrangements are suspect and may violate the federal anti-kickback statute, depending on the circumstances.”1 These two advisory opinions, and a raft of opinions from previous years, shed light on the circumstances in which OIG may find possibilities of fraud and abuse under the AKS.
For example, arrangements in which a healthcare provider customer explicitly conditions a continuing business relationship on a vendor’s outlay of funds must be highly scrutinized for AKS risks. In both 25-04 and -08, the Customers explicitly tied the future business relationship to the Requestors’ use of (and payment for) a third-party service. This created potential risks that the third-party would serve as a gatekeeper of referrals between the Customers and Requestors and that federal healthcare referrals would be inappropriately steered to parties able or willing to pay the hefty fees. However, AKS exposure may lurk even where the pay-to-play proposition is not explicitly stated, such as in AO 15-04. There, at physician practices’ request, a regional laboratory sought OIG’s blessing to waive charges for patients insured under a contract dictating another lab as the patient’s exclusive lab. That way the regional lab could serve all of a physician’s patients, removing the physician’s administrative and financial burdens associated with using multiple labs, and ostensibly making healthcare delivery more efficient. But OIG nixed the idea, observing that the “main purpose of the Proposed Arrangement is to secure all of the referrals . . . from participating physician practices” potentially resulting in inappropriate steering of federal healthcare program beneficiaries.
A vendor paying for its healthcare provider customers’ financial obligations also can breed AKS risks. In AOs 25-04 and -08, the medical device companies would remove burdens from their healthcare provider customers of at least several hundred thousand dollars per year. OIG stringently questioned another such arrangement in AO 16-12. There, a laboratory wanted to provide labeling of test tubes and specimen collection containers at no cost to dialysis facilities. The facilities were already performing these services themselves, albeit without reimbursement from Medicare, which considered this an administrative task for which it would not pay. The lab would offer this free service “based on whether offering such services would be necessary to obtain or retain the business of a particular dialysis facility.” OIG concluded that in these circumstances, an inference arose that the free labeling services would be intended to influence the facilities’ selection of a laboratory, generating significant referrals and revenue streams including potentially from federally funded healthcare programs.
Finally, a vendor relieving its healthcare provider customer from administrative or compliance burdens — without any appreciable benefit to the vendor — may also kick up AKS concerns. Recall that in AO 25-04, the Requestor proposed to pay costs that the providers would otherwise incur to conduct exclusion and compliance screening. Additionally, in 25-08, the Requestor floated paying for a redundant and unnecessary third-party service to save its provider customers money or administrative hassle. Neither proposal rendered any benefit to the vendor (aside from referral stream cultivation). Conversely, OIG may look more favorably on a vendor’s relieving a healthcare provider’s burdens if so doing also serves a “commercially reasonable purpose” for the vendor. See, for example, AO 12-10, in which the OIG reviewed a radiology service’s plan to provide free pre-authorization services to referring physicians. Though the pre-authorization program would confer “obvious” financial and administrative benefits, OIG gave a favorable opinion, in part because the radiology service had a legitimate business interest in uniform preauthorization services. The radiology services’ payments were at stake, so its financial interest in ensuring that pre-authorization was diligently pursued provided a rationale for the proposed arrangement wholly distinct from a scheme to curry favor with referral sources.
Going Forward
OIG concluded both AO 25-04 and -08 with the same caveat: “We acknowledge that there are myriad ways for parties to structure business arrangements to allocate responsibilities and that there may be different fact patterns that would result in OIG reaching a favorable conclusion.” This pair of unfavorable opinions showcase “longstanding and clear” OIG concerns with the conferral of benefits on healthcare providers and illustrate that healthcare stakeholders should work with experienced counsel to carefully analyze contemplated arrangements to foster compliance with healthcare fraud and abuse authorities.
[1] Advisory Opinions 22-20 at *10; see also Advisory Opinions 20-01, 16-12, 15-04, 12-19, and 12-10.
