Proceed with Caution

The Office of Inspector General in April issued a Special Advisory Bulletin about joint-venture arrangements between mail-order pharmacies and home medical equipment companies that may violate the Federal Anti-Kickback statute. This statute prohibits knowingly and willfully soliciting, receiving, offering or paying anything of value to induce referrals of items or services payable by a federal health care program.

The Bulletin focuses on one type of arrangement, in which a health care provider in one line of business expands into a related health care business by contracting with an existing provider of related items or services to provide the new item or service to the original provider’s patients. Two of the three examples of such an arrangement the OIG describes involve durable medical equipment companies.

In the first example, a hospital establishes a subsidiary to provide DME, and the subsidiary contracts with an existing DME company to operate the new subsidiary and to provide the new subsidiary with inventory.

In the second example, a DME company sells nebulizers, and a mail-order pharmacy suggests that the DME company form its own mail-order pharmacy to provide nebulizer drugs. The mail-order pharmacy runs the DME company’s pharmacy and provides personnel, equipment and space. The mail-order pharmacy also sells all nebulizer drugs to the DME company’s pharmacy for its inventory.

The latter example exhibits several “common elements” of the troublesome arrangements. First, the DME company expands into a related line of business (pharmacy) that is dependent on referrals from, or business generated by, the DME company’s existing business.

Second, the DME company does not operate the new business itself and does not commit substantial resources to the venture. Instead, the mail-order pharmacy operates the new business, providing the inventory, office space, personnel, and billing (which is done in the name of the DME company).

The third common element, the OIG states, is that absent the arrangement, both entities would be competitors in the same line of business. The fourth element: Both entities share in the economic benefit of the new business. Finally, the fifth element: Aggregate payments to the mail-order pharmacy typically vary with the value or volume of business generated for the new business by the DME company.

The OIG provides a second set of characteristics to help identify suspect contractual arrangements, such as in this example. First, the DME company seeks to expand into a new line of business. Second, the newly created entity “predominantly or exclusively” serves the DME company’s existing patient base. Third, the DME company’s primary contribution to the venture is referrals. Fourth, the mail-order pharmacy is a “would-be competitor” of the DME company’s new line of business.

Fifth, the mail-order pharmacy provides all the key services. Sixth, the overall practical effect of the arrangement is to provide the DME company the opportunity to bill patients and payers for services not otherwise provided by the mail-order pharmacy.

Seventh, the entities may agree to a non-compete clause, barring the DME company from providing the items to any patients other than those coming from the DME company and/or barring the mail-order pharmacy from providing services in its own right directly to the DME company’s patients.

The OIG is concerned that these arrangements are becoming increasingly common. Play it safe: When you enter any new arrangement, seek expert counsel to ensure that the arrangement is consistent with the parameters of all applicable federal and state laws and regulations.

A specialist in health care legislation, regulations and government relations, Cara C. Bachenheimer is an attorney with the law firm of Epstein, Becker & Green in Washington. You may reach her by phone at 202/861-1825 or e-mail at [email protected].