The Office of Inspector General in April issued a Special Advisory Bulletin about joint-venture arrangements between mail-order pharmacies and home medical
by Cara C. Bachenheimer, Esq.

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

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

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

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