HHS inspector general publishes final safe harbor regulations - Health and Human Services Office of the Inspector General details criminal and civil sanctions for certain tax shelter payment practices in Medicare/Medicaid - column

Physician Executive, Sept-Oct, 1991 by Carrie Valiant

The Medicare/Medicaid antikickback statute broadly prohibits offer, payment, solicitation, or receipt of any "remuneration" in return for referring patients for Medicare-or Medicaid-covered services, or for inducing such referrals or the purchase of Medicare-or Medicaid-covered items or services. Case law has broadly interpreted the statute such that if one purpose of a payment is to induce referrals or the purchse of covered items or services, the payment is proscribed, even if the payment is also for legitimate services rendered. As one purpose of nearly every health care industry venture is to promote referral business, Congress mandated that the Department of Health and Human Services (HHS) adopt "safe harbors" to provide protection for certain common business practices in the health care industry that otherwise could be subject to prosecution or the imposition of civil sanctions.

The final regulations specify 11 separate safe harbors:

* Investment interests

* Space rental

* Equipment rental

* Personal services and management contracts

* Sale of practice

* Referral services

* Warranties

* Discounts

* Employees

* Group purchasing organizations (GPOs)

* Waiver of beneficiary coinsurance and deductible amounts

Investment Interests

Perhaps the greatest attention has focused on the safe harbor for investment interests, expected to immunize from liability certain health care joint ventures that have proliferated in recent years. Originally, the proposed regulation contained an exemption only for certain large, publicly traded companies. This safe harbor is retained in the final regulation, but the standards have been tightened. Whereas the proposed rule would have required the company to have assets of $5 million and to meet SEC requirements without the need for actual SEC registration, the final regulations require assets of $50 million as well as actual registration. Moreover, investors, such as physicians, in a position to influence referrals must obtain their investment interest through public trading on a recognized stock exchange.

In draft regulations circulated in 1989, entities consisting solely of active investors (e.g., general partners and corporate officers) and passive investors not in a position to refer patients to the entity would have been required to meet only minimal standards that, if adopted, would have created a significant safe harbor for any venture organized as a general partnership. This separate safe harbor was deleted from the final regulation.

Under the final safe harbor, all entities must meet the "60/40 rule"--that is, no more than 40 percent of the "value of the investment interests" may be held by, and no more than 40 percent of the gross revenue of the entity may come from, investors "who are in a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the entity." In the words of the Office of Inspector General, such investors constitute the "tainted pool."

This 60/40 rule represents a significant tightening of the initial 50/50 rule contained in the draft regulations. The rule ignores the fact that many business ventures are established on a 50/50 basis for governance purposes. Even if such ventures are altered to 60/40, it is unclear whether a super-majority governance agreement would be deemed more than 40 percent of the "value" of the investment interest, thus disqualifying the venture from safe harbor protection. Thus, safe harbor protection may now come at the price of losing equal governance of the venture.

Moreover, under the draft regulation, a joint venture between, for instance, a durable medical equipment (DME) company and a group of physicians could have qualified for the safe harbor simply by making the DME company a 51 percent owner of the venture. The final regulations narrow the safe harbor by including in the calculation of the "tainted pool" not only investors who are a source of referrals, but also investors who furnish items or services to the venture and who "otherwise generate business" for the venture. This latter "business generation" standard draws into question whether a joint venture participant may market the venture, or even discuss the existence of the business with a potential referral source, without disqualifying the venture from safe harbor protection.

The resulting narrow scope of the investment interest safe harbor creates an added burden in structuring arrangements. Physicians will have to look at othe indicia of legality, such as case law and "fraud alerts" periodically issued by the Office of Inspector General, to attempt to assess the risk involved in existing or proposed ventures. Such ventures must be undertaken with the undestanding that, if the activity is outside a safe harbor, while it is not necessarily illegal, it clearly will not be risk-fee. Given the criminal penalties related to antikickback enforcement, tough choices will be required.

Practice Purchases

One of the concerns about the safe harbors is that they would not protect common, arguably necessary practices. Such is the case witht he "sale of practice" safe harbor. As this safe harbor only covers sales between practitioners, all hospital purchases of physician practices would fall outside any safe harbor. Moreover, the safe harbor would not protect any situation in which the physician who sells the practice is retained on the staff following the practice purchase. Again, while this does not necessarily mean all such transactions are illegal, physicians who ae contemplating any such arrangements with hospitals should be especially careful in structuring the arrangement.