The Office of Inspector General, Department of Health and Human Services posted an unusual negative Advisory Opinion (AO 18-14) on a drug company’s proposal to provide free drugs to hospitals for use with pediatric patients suffering from a form of epilepsy. Of particular interest is OIG’s reliance on a longstanding, but rarely used, authority to justify finding and relying on public information about the drug at issue, including pricing information, to support its unfavorable conclusion. This advisory opinion might counsel future opinion requestors to withdraw their opinion request once OIG indicates the opinion will be unfavorable.

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With health care becoming more consumer-driven, health care providers and health plans are wrestling with how to incentivize patients to participate in health promotion programs and treatment plans. As payments are increasingly being tied to quality outcomes, a provider’s ability to engage and improve patients’ access to care may both improve patient outcomes and increase providers’ payments. In December 2016, the Office of Inspector General of the US Department of Health and Human Services (OIG) issued a final regulation implementing new “safe harbors” for certain patient incentive arrangements and programs, and released its first Advisory Opinion (AO) under the new regulation in March 2017. Together, the new regulation and AO provide guardrails for how patient engagement and access incentives can be structured to avoid penalties under the federal civil monetary penalty statute (CMP) and the anti-kickback statute (AKS).

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On July 20, the Office of Inspector General of the Department of Health and Human Services (OIG) posted a new Advisory Opinion (the Opinion) addressing a health system’s restructured arrangement to lease employees, and provide other operational and management services, to a related psychiatric hospital (the Arrangement). The Opinion is a notable departure from other recent statements and enforcement actions, and signals a greater flexibility in how related entities may share non-clinical employees and operational expenses. It also shows the OIG’s willingness to consider more practical factors, such as cost reporting requirements and the systemic benefits from integrated entities behaving in cost-efficient ways, when determining the risk presented by an arrangement.

The Opinion concerns a nonprofit health system (System) with a membership interest in the psychiatric hospital (Center). The Center is also part of the System’s integrated health network.  The System and the Center are potential referral sources to each other. Currently, both parties have an existing arrangement, whereby the Center leases non-clinician employees and obtains certain other operational and management services from the System, paying the System’s fully loaded costs (e.g., salary, benefits, overhead expenses) plus a two percent administration fee. The Arrangement would continue the same relationship, but the Center would no longer pay the System the administration fee. The parties have asserted, and OIG verified, that the administrative fee is an unallowable cost under applicable Medicare cost-reporting rules, and would not be reimbursable by the Medicare program.

The OIG noted that the new Arrangement, where the System would provide the same services for less aggregate compensation, could raise fair market value (FMV) issues. Such a discount could be considered remuneration in exchange for the Center’s referrals. In addition, the aggregate compensation under the Arrangement can’t be set in advance as the System’s costs, and Center’s needs, may change during the term. Given these issues, the Arrangement would not meet the requirements of the Anti-Kickback Statute (AKS) safe harbor for personal services and management contracts. Nonetheless, given the totality of the circumstances, the OIG concluded that the Arrangement would present a low risk of fraud and abuse and thus OIG would not impose sanctions.

The Opinion described several mitigating factors that, from OIG’s perspective, decreased the Arrangement’s risk of fraud and abuse. Not only did the parties attempt to structure the Arrangement to be in compliance with Medicare cost-reporting rules for related parties, there was also no evidence that the Arrangement was structured to, or actually would, induce referrals. Moreover, the parties pointed to the cost efficiencies of health system integration that would be promoted by the Arrangement, and to the potential indirect benefits (by way of cost savings) to federal health care programs.

The Opinion’s more flexible approach to analyzing the Arrangement stands in contrast to the OIG’s other recent activities, all of which express a consistent concern with payments between independent actors that are not consistent with FMV. For example, the OIG issued a fraud alert focusing on improper physician financial arrangements on June 9, 2015 (previously discussed here. The alert encourages physicians to “ensure that [their] arrangements reflect fair market value for bona fide services.” Similarly, the OIG has recently settled with several leased-employee physicians compensated by Fairmont Diagnostic Center and Open MRI Inc. (Fairmont) following Fairmont’s False Claims Act settlement concerning these arrangements. The OIG alleged that full time Fairmont employees, placed in certain physicians’ offices for study-related tasks, were actually performing office functions on the physician’s behalf, which constituted improper remuneration intended to induce referrals. Given this sustained regulatory focus on FMV compensation, health care entities should pay particular attention to the business justifications of their arrangements.