Marketing Alternatives

There is good news and there is bad news with the anti-fraud and Stark laws and other anti-referral rules. The good news is that these laws permit many viable arrangements between health care providers. The bad news is that the arrangements must be carefully structured and monitored to avoid legal challenge.

Even though the anti-fraud laws apply to virtually every financial relationship between providers, the most notoriety and the greatest scrutiny have focused on health care joint ventures. Joint ventures in the medical equipment and supply market are riskier because of this scrutiny. Fortunately, there are alternative financial arrangements between providers, other than traditional joint ventures, that will not violate the anti-referral or Stark laws if they are structured and monitored correctly.

Note that virtually all of the following five options are simpler in operation than are typical joint venture partnerships, corporations or limited liability companies. This greater simplicity often reduces the legal risks because there are fewer issues and tricky complexities that might raise the government’s suspicions.

Many times, these arrangements are preferable financially as well because the fees (and profits) can be determined precisely and paid quickly. Further, the relationship can be canceled more easily, with minimal unwinding problems.

1. Preferred Provider Agreement This seemingly simple relationship between two providers (for instance, a hospital and a CPAP supplier) basically says, “If you refer patients to me, I promise to do a good job servicing them.” Often, the promise is a little broader: “If you give our name to most or all of your patients, we promise to do a good job servicing them.” Under this arrangement, the referred provider (the CPAP supplier, in our example) makes certain promises about the quality, delivery, accessibility and/or accountability of the services to be provided. The referring entity may itself be a service provider (hospital, home health agency, physician, etc.) or a payer (HMO, PPO, etc.). Typically, the contract contemplates that the referred provider will accept most or all of the referring entity’s default patients, that is, those patients who express no preference for an alternate supplier. It is important for the relationship to acknowledge true patient choice, so that the patient is prompted to offer preferences for other suppliers. I have seen relationships where the patient is not told of suppliers other than the preferred provider, but I find it safer to give the patient a choice even when no prior preference is indicated. Also, I encourage that the relationship allow patient family members or physicians to express preferences, although I have seen relationships where the physician (or, occasionally, family) preference is ignored. I have also seen relationships where the patient must affirmatively request an alternate supplier; the discharge planner does not prompt the patient to exercise choice. I believe this approach skirts the boundaries of the disclosure rules. Regardless, it is greedy. A well-structured preferred provider relationship will easily capture 75 to 80 percent of the business. This is both because most patients don’t have a preference, and because many patients will assume that the referring entity’s “preferred provider” must be of high quality in order to become preferred. Thus, efforts to restrict choice seem like an unnecessary avarice. Remember the old saying, “Pigs get fat, but hogs get slaughtered.”

The legal safety net for preferred provider agreements is premised on there being no financial relationship between the referring entity and the preferred provider. If there must be some other relationship, such as a space rental, it is essential that it fall within the specific requirements of the anti-kickback safe harbor.

Even then, the safe harbor protections will apply only to the financial relationship at issue. They will not serve as a complete protection if the government suspects that the preferred provider is getting referrals in exchange for the other financial relationship. Still, despite this caution (and my reservations), I am aware of preferred provider relationships that are accompanied by space rental or other financial intertwining.

Preferred provider agreements raise virtually no legal concerns if they are properly structured, marketed and implemented. Many times, a referring provider or payer primarily seeks assurances of quality, accessibility and accountability. So, a preferred provider agreement can often establish a relationship that is mutually beneficial but requires no financial concessions by the service provider.

One caution, though: A preferred provider agreement will usually impose on the default supplier an obligation to take all patients. Agreeing to such a clause may result in so many no-pay or slow-pay patients that profitability is lost. A provider considering this sort of relationship may wish to negotiate limits on the indigency obligation. The limits may be tied to a financial ceiling, a maximum percentage of patients or some similar benchmark.

1. Professional Services Agreement

Under this arrangement, a provider (for example, a respiratory therapy supplier) will utilize professional support personnel employed by another provider (for example, a pulmonologist in private practice) to provide clinical support on behalf of the supplier.

The range of clinical support services that might be offered includes respiratory or infusion therapy, nursing services, CPAP set-ups, patient education and instruction, pharmaceutical mixing, case management, etc. Under this relationship, the provider supplying the support personnel will be paid a specific fee for the services rendered. This fee must be at fair market value (typically ranging from $50-$140 per visit, depending on many factors), and is typically payable 30 to 60 days after invoice.

The provider utilizing the support personnel must be able to justify that it is less costly to engage the contracted support personnel than to use existing personnel on payroll. For example, if many patients reside far from a respiratory provider’s office, it will be expensive for the provider to pay its personnel to travel to those patients’ homes. The supplier can provide services more profitably if it purchases clinical support from a source located near to the patients — such as the other provider.

Another justification for use of a professional services agreement occurs when a provider temporarily has more business than it can handle with its existing workforce but not enough extra activity to justify hiring additional full-time clinical personnel.

The key to creating a professional service agreement that will withstand scrutiny is to use the contract consistent with the justification for its creation, and to avoid using it solely with the referral source’s own patients. This is essential for relationships that include government-reimbursed patients, and highly recommended for private-pay referrals as well. (Many state laws will apply legal restrictions similar to the federal rules.) You must be able to show that your ostensible justification for the relationship (for example, geographic inaccessibility) reflects the operational reality.

For example, if a patient is located far from the supplier’s office, but is located near to a “contractor provider’s” office, that provider’s support personnel (nurses, respiratory therapists, etc.) should service the patient regardless of whether that provider originally referred the patient to the supplier.

On the other hand, if a “contractor provider” refers a patient who resides reasonably close to the supplier’s office, the patient should be seen by the supplier’s own employees and not by the referring provider’s personnel. Of course, the parties must carefully document and monitor this relationship to ensure that it will stand up to legal scrutiny.

Properly marketed, professional services agreements can be a valuable resource, at times, even more productive than joint ventures. Professional services agreements can augment each provider’s profits.

The provider initiating the relationship (the supplier, in our example) pays less for the contracted personnel. The “contractor provider” gains a continuity of patient care and a diversified visibility in the community, as well as payment of a specific sum of money, paid on a timely basis. This avoids much of the ill will that occurs when a joint venture generates less profits (or slower profits) than were expected.

1. Support Services Agreement

This arrangement is similar to the professional services agreement. With this contract, however, payment is made for operational support services rather than for professional support services.

The sort of services provided under this type of arrangement include: insurance verification; pick-up and delivery services; collection assistance; space rental for display, operations and/or storage, as well as telephone, janitorial, maintenance, security, furniture and other services and supplies in connection with the rental; clerical and administrative assistance in preparing claims for reimbursement; providing advertising space and/or materials; assisting in marketing; etc.

As with the professional services agreement, fees must be based on fair market value, and the providers must be able to justify the need for the agreement according to geographic inconvenience, incremental needs or some other reason not tied to whether the “contractor provider” is also a referral source.

Also, the justification should be applied in a manner that demonstrates its use for all relevant patients, not just those tied to the referral source/support services subcontractor. Again, careful documentation and monitoring is recommended.

A support services agreement can present an attractive source of legitimate revenue for the “contractor provider,” and is often more cost-effective for the supplier than is the typical joint venture.

1. Advisor Agreement

This arrangement targets key experts to provide advisory/consulting services to the provider. For example, a long-term care provider might target a renowned nursing home executive or a gerontologist; a respiratory therapy or DME provider might target a renowned pulmonologist, neonatologist, cardiologist or internist; an infusion therapy provider might target an oncologist, infectious disease specialist or gastroenterologist.

This relationship typically uses the expert to provide advisory services such as: reviewing clinical protocols; evaluating the provider’s marketing efforts; developing educational programs; evaluating new technology and new products; developing programs to improve communication between the provider and referral sources; assisting in planning efforts; discussing new trends and breakthroughs, etc.

For the provider, the arrangement offers a valuable resource for planning and marketing insights. A well-chosen expert can increase the provider’s visibility and credibility in the market. Finally, the arrangement creates the possibility of referrals from the advisor himself/herself, or from people who work with or know of the advisor.

For this type of arrangement to pass legal muster, fees must be reasonable in relation to the amount of time required to provide the necessary services. Advisory services should be well-documented, and the provider should monitor the arrangement to verify that the fees continue to reflect value. As with all of these arrangements, compensation should in no way be tied to referrals.

Parties utilizing this arrangement will want to make sure that proprietary information remains confidential. A restrictive covenant may be appropriate in certain circumstances. Also, the parties will need to provide adequate written disclosure to all patients referred by the advisor, and ensure that the patient has freedom of choice in his or her selection of a provider. This disclosure/choice requirement is an important component of the other arrangements described as well.

Finally, be very careful about including certain forms of marketing services among the advisor’s duties. Public speaking, assistance with brochures and developing targeted ads are typically safe marketing obligations to give to an advisor. But direct marketing to potential patients or referrals sources can lead to danger.

If such marketing needs to be part of the package, it is important to roll it in with other duties and pay a set fee for a set quantity of hours that includes (but by no means is limited to) the marketing activities. Under no circumstances should the physician be paid on a percentage of collections or per patient basis.

1. Management Subcontract

Under this arrangement, one provider performs various management or support services for another provider. For example, a hospital might create a home medical equipment company, which then contracts with an existing HME supplier to provide certain management services.

Services provided under this arrangement include wholesale equipment purchase and/or rental; billing and collection services; pick-up and delivery services; nursing services; mixing services; warehousing; and so forth.

The key to this arrangement is that the contractor (the hospital’s HME company, in our example) is itself the provider of reimbursed services. The contractor determines the rates to charge, the contractor enjoys all of the opportunities for profit and the contractor bears all of the risks from no payment, slow payment, market downturn, etc.

To minimize legal risk, the management fee should be a fixed dollar amount rather than a percentage of the contractor’s retail price. Also, for legal safety the subcontract fee should be paid within a fixed, reasonable timeframe, and must not be tied to whether the contractor has yet been reimbursed.

Another danger arises if too many services are funneled into the subcontract arrangement. If virtually all of the contractor’s costs are rolled into the subcontract, the government may wonder whether the so-called “management arrangement” is actually a disguised kickback where the subcontractor is actually the patient’s supplier, with the contractor simply being the referral source.

The government looks closely at whether such arrangements are essentially turnkey operations, and is particularly suspicious when the subcontractor is engaging in essentially the same services it handles (or formerly handled) on its own.

Therefore, one of the key ingredients for the safe management subcontract is for the owner to take on as many responsibilities as is practical. These may include responsibility for all or some of the staffing (hiring/firing, payroll, etc.), pricing decisions, marketing decisions, some or all equipment purchasing, legal and accounting, etc.

Nonetheless, when properly structured and carefully handled, management services agreements are profitable, legally viable arrangements.

These five describe only a few of the arrangements additional to joint ventures that remain available in today’s volatile health care market. Other arrangements include space leases and/or “loan closets” in long-term care institutions, physician offices, pharmacies, etc.; paying pharmacies for assistance with claims submissions paperwork; marketing services agreements; and research grants.

Each of these relationships is risky legally if carelessly structured and/or implemented. But when utilized effectively, all of these arrangements can present a legitimate, profitable and valuable alternative to the currently disfavored joint venture relationships.

Neil B. Caesar is president of the Health Law Center (Neil B. Caesar Law Associates, PA), a national health law practice in Greenville, S.C., focusing on business opportunities and regulatory issues for health care providers. He is also a principal with Caesar Cohen Ltd., which offers compliance training, outsourcing and consulting, and author of the Home Care Compliance Answer Book series. You can reach him at [email protected] or 864/676-9075.