Joint ventures and other arrangements between HME suppliers and hospitals
Jeffrey S. Baird is chairman of the Health Care Group of Brown & Fortunato, a law firm based in Amarillo, Texas. He represents HME providers, pharmacies and other health care providers throughout the U.S. The following is a Q&A he authored.
AMARILLO, Texas—About 15 years ago, it was not uncommon for hospitals to own their own HME operations. Approximately eight years ago, many of these hospitals shut down their HME operations. The hospitals realized that running an HME business was a totally different animal from running a hospital. Basically, the hospitals were losing money on their HME operations.
The pendulum has now swung back. We are again seeing hospitals go into the HME business. However, this time they are doing so in the form of “joint ventures” with existing HME suppliers.
A joint venture occurs when two or more individuals or companies own something together. For example, if Betty and I open up a yogurt stand called Betty’s and Jeff’s Yogurt then we have a joint venture. Likewise, when ABC Medical Equipment, Inc., and St. Mary’s Hospital set up St. Mary’s Medical Equipment, Inc.—jointly owned by ABC and the hospital—then a joint venture occurs.
In addition to—or in lieu of—setting up a joint venture, ABC and St. Mary’s Hospital can enter into other types of business arrangements. This article will discuss joint ventures, and other types of arrangement, that HME suppliers and hospital can enter into.
Question: How can St. Mary’s Hospital and ABC Medical Equipment, Inc., set up a joint venture?
Answer: The hospital and ABC will jointly own an HME operation, separate and apart from ABC’s operation, that will serve patients discharged from the hospital—subject, of course, to their right to choose an HME supplier—as well as patients within the community. The jointly-owned operation will compete with ABC if ABC has an operation in the community. In structuring a joint venture with a referral source such as the hospital, it is critical that the joint venture not merely be a subterfuge to funnel remuneration to the referral source, such as the hospital. If the joint venture is merely a vehicle to pay remuneration to the hospital, then the Medicare anti-kickback statute will be violated.
Question: To avoid problems under the anti-kickback statute, what is the safest way to set up the joint venture?
Answer: The safest way to structure a joint venture is to fit it within the Small Investment Interest safe harbor to the anti-kickback statute. Unfortunately, it is rare for a joint venture to meet the strict terms of this safe harbor, and ABC and the hospital will likely be unable to do so. Therefore, to minimize the risk of governmental action against the joint venture, the terms of the Office of Inspector General’s (OIG) 1989 Special Fraud Alert must be met. This fraud alert provides, in relevant part:
- The hospital should not be actively encouraged to make referrals to the joint venture and to divest its ownership interest if it fails to sustain an “acceptable” level of referrals.
- The joint venture cannot track its sources of referrals and cannot distribute this information to the owners.
- The hospital’s equity interest needs to be transferable.
- The joint venture needs to be independent. ABC cannot manage the operation on a turnkey basis. It is permissible for the hospital and/or ABC to: lease physical space to the operation; lease equipment to the operation; and provide services to the operation. However, the hospital and ABC cannot provide so many services, or so much property, that it appears that the hospital or ABC is managing the operation on a turnkey basis. Doing so will violate the OIG’s April 2003 Special Advisory Bulletin on Contractual Joint Ventures.
- Both the hospital and ABC need to invest risk capital. For example, if the hospital and ABC each own 50 percent of the joint venture, and if the initial cost of the joint venture is $200,000, then at the outset each party will need to contribute $100,000.
Question: What is a Preferred Provider Agreement (PPA)?
Answer: Pursuant to a PPA, the hospital will follow procedures to ensure patient choice. If a patient expresses no preference for an HME supplier, then the hospital will recommend ABC on the basis of the quality and timeliness of ABC’s services. The burden is on ABC to render superior services to the patients referred by the hospital. The PPA is a simple document and normally allows either party to terminate it upon 30 days prior written notice.
Question: Can a hospital lease physical space to an HME supplier and, in return, receive rent from the supplier?
Answer: Yes. ABC can establish a location on property owned by the hospital. ABC will enter into a lease agreement with the hospital that will comply with the Space Rental safe harbor to the anti-kickback statute. Among the other requirements, the lease payments will be fixed one year in advance and will not take into account any referrals from the hospital to ABC.
Question: Can a hospital lease equipment to an HME supplier and, in return, receive rental payments for the supplier?
Answer: Yes. ABC can rent equipment from the hospital. The equipment rental agreement will comply with the Equipment Rental safe harbor to the anti-kickback statute. Among other requirements, the rental payments will be fixed one year in advance and will not take into account any referrals from the hospital to ABC.
Question: Apart from renting space and/or equipment to the HME supplier, can the hospital provide services to the supplier and, in return, receive compensation for the services?
Answer: Yes. The hospital can provide specific services to ABC. The service arrangement will comply with the Personal Services and Management Contracts safe harbor to the anti-kickback statute. Among other requirements, payment by ABC to the hospital for the services will be fixed one year in advance and will not take into account any referrals from the hospital to ABC.
Question: As opposed to setting up a new corporation—jointly owned by the hospital and the HME supplier—can the hospital simply purchase an equity interest in the supplier?
Answer: Yes. The hospital may purchase an equity interest in ABC. In doing so, the hospital will pay fair market value to ABC’s owner for the interest. The hospital will be entitled to receive profit distribution in accordance with its percentage ownership interest.
Question: What exactly is a loan closet, or consignment arrangement, and how does it work?
Answer: ABC may place inventory on the premises of the hospital. The inventory must be for the convenience only of the hospital’s patients and the hospital cannot financially benefit, directly or indirectly, from the inventory. It is important that the hospital ensure patient choice. Technically, ABC can pay rent to the hospital so long as the rental agreement complies with the Space Rental safe harbor to the anti-kickback statute. However, from a practical standpoint, because the physical space utilized by the placement of the inventory is so small, it is preferable for ABC to pay no rent to the hospital.
Question: Lastly, I keep hearing about employee liaisons. What is an employee liaison arrangement?
Answer: ABC may designate an employee to be on the hospital premises for a certain number of hours each week. The employee may educate the hospital staff regarding medical equipment to be used in the home and related services. The employee may also work with a patient, after a referral is made to ABC but before the patient is discharged, so there can be a smooth transition when the patient goes home. The employee liaison may not assume responsibilities that the hospital is required to fulfill. Doing so will save the hospital money, which will likely constitute a violation of the anti-kickback statute. ABC may rent an office at the hospital for the liaison. The rental agreement must comply with the Space Rental safe harbor to the anti-kickback statute.
Jeffrey S. Baird, Esq., is Chairman of the Health Care Group at Brown & Fortunato, P.C., a law firm based in Amarillo, Texas. He represents pharmacies, infusion companies, home medical equipment companies and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization. He can be reached at (806) 345-6320 or jbaird@bf-law.com.
