Final safe harbors narrow and rarely navigable - safe harbor rule on Medicare/Medicaid antifraud and abuse law

Healthcare Financial Management, Oct, 1991 by Gary W. Eiland

Healthcare providers adrift in a sea of Medicare/Medicaid antifraud and abuse law will find little comfort in the safe harbor rules published by the Office of the Inspector General (OIG) on July 29. (a) The final regulations describe innocuous business practices that are always acceptable under Medicare and Medicaid illegal remuneration provisions. The safe harbors became effective when published and apply to all situations. There is no grandfather provision.

Juding from the preamble to the final regulations, (b) a transaction falling outside the bounds of a safe harbor is not necessarily illegal. It may, however, come under scrutiny by the OIG.

Unfortunately, the OIG specifically declines to give either advisory opinions or cease-and-desist orders. OIG fraud alerts will remain the only form of OIG advice and guidance to the healthcare industry. What is more, the preamble stipulates that advisory letters previously issued by the Health Care Financing Administration (HCFA) and its predecessors should not be relied on. In short, a provider will not know whether the OIG dislikes a specific transaction until its agents come knocking.

Eleven ports in a storm

The final regulations contain only 11 safe harbors. A payment practice that serves a single purpose but may fit more than one safe harbor must comply with the rules of only one safe harbor. A payment practice serving multiple purposes, however, must comply fully with each applicable safe harbor.

INVESTMENTS. The final rules provide investment interest safe harbors for large, publicly traded entities and certain small entities. Investment interests subject to safe harbor rules include equity and debt instruments, such as shares in a corporation, interest in or units of a partnership, bonds, debentures, and notes.

Perhaps the most significant change in the final investment interest safe harbors is one that excludes most healthcare joint ventures from safe harbor protection. The investment interest safe harbor focuses on interested investors, individuals "who are in a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the entity." Although the concept of an interested investor was included in earlier drafts of safe harbor rules, the final regulations significantly expand this suspect category to include people who furnish items or services to an entity. A durable medical equipment supplier who invests in and provides services to a joint venture would be considered an interested investor.

Healthcare suppliers and providers who had hoped that final safe harbor rules would stem the tide of new joint ventures should be pleased. On the other hand, many healthcare industry investors preparing to launch a new joint venture may choose to remain drydocked or overhaul their offerings.

Large, publicly traded entities. A safe harbor for investment interests in large, publicly traded entities is provided if the entity has at least $50 million in net value of healthcare assets either in its most recent fiscal year or in the most recent 12-month period. Other criteria concern compliance with regulations of the Securities Exchange Commission, loans to an interested investor, marketing or providing services to passive investors, cross-referrals, and the relationship of return to the amount of capital invested.

Small entities. To fit in the small entities safe harbor, an organization and its investors must meet the following standards:

* No more than 40 percent of each class of investment interest may be held by interested investors in the previous fiscal year or 12-month period;

* Terms offered to a passive interested investor cannot be different from terms offered to other passive investors;

* Terms offered to an interested investor, active or passive, cannot be related to the previous or expected volume of business between the interested investor and the entity;

* A passive investor cannot be required to make referrals to, be in a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the entity as a condition for remaining an investor;

* The manner in which an entity's services are marketed and furnished cannot preferentially favor passive investor customers or otherwise differ from the method used to market or furnish services to non-investors;

* No more than 40 percent of an entity's gross revenue in the previous fiscal year or 12-month period may come from interested investors;

* An entity cannot loan or guarantee its investment funds to an interested investor; and

* The amount of a return must be directly proportional to the amount of a capital investment, including the fair market value of any pre-operational services rendered.

The "60/40" investment and revenue standards make it unlikely that typical physician joint ventures would fit within the small entities safe harbor. The final draft of the safe harbor regulations further limits protection of small entities by expanding the concept of interested investor.