United States: OIG Issues Favorable Advisory Opinion Of Hospital Leasing Arrangement

Last Updated: August 4 2015
Article by Samantha P. Kingsbury

Last week, the Office of Inspector General (OIG) for the Department of Health and Human Services published Advisory Opinion 15-10 (Opinion). The Opinion addressed a hospital system's proposal to lease non-clinician employees and provide operational and management services to a related psychiatric hospital. While finding that the Proposed Arrangement could potentially generate prohibited remuneration under the Anti-Kickback Statute (AKS), the OIG stated that it would not impose administrative sanctions in connection with the arrangement because it was sufficiently low-risk.

The hospital system (System) that requested the Advisory Opinion is a non-profit system that owns multiple hospitals and other health care providers.  The System and a non-profit corporation are the sole members of a non-profit psychiatric hospital (Center), which in turn is part of the System's integrated health network. The Center is paid by Medicare under the inpatient psychiatric facility prospective payment system and the Center (and certain parts of the System) file cost reports with the Centers for Medicare & Medicaid Services (CMS). The System and Center are possible referral sources for each other.

Prior to requesting the Advisory Opinion, the System and Center were already parties to a Master Services Agreement and an Employee Lease Agreement under which the System: (1) leased non-clinician employees to the Center for an amount equal to the System's fully loaded costs (i.e., salary, benefits and overhead expenses for those employees) plus a two percent administrative fee; and (2) provided operational and management services to the Center for a fee equal to the System's fully loaded costs to provide those services plus a two percent administrative fee (the Existing Arrangement).  Under the arrangement proposed to OIG (Proposed Arrangement), the parties would retain the Existing Arrangement except that the Center would no longer pay a two percent administrative fee for either the leased employees or the operational and management services.

The Center and System certified that they could not obtain the leased employees or the operational and management services anywhere else at a lower aggregate cost than that under the Proposed Arrangement and also that the purposes of the Existing and Proposed Arrangements were to integrate the Center into the System and create cost efficiencies by eliminating duplicative positions and functions. They also believed that the Proposed Arrangement could lower the Center's labor and operational costs, which, in turn might result in lower costs to Federal Health Care Programs.

Notably, although the amount the Center would pay the System would not vary based on the volume or value of referrals or other business between them, that amount could not be set in advance because the System's costs and the Center's needs for personnel and operational and management services might change during the term of the arrangement. In addition, the fully loaded costs the System would charge the Center (without the administrative fee) might be below fair market value in arms-length transactions. Because the Center and System are "related organizations" (as defined by applicable regulations), Medicare cost-reporting rules dictate that Medicare would not reimburse the Center for costs above the System's fully loaded costs.

After review, the OIG concluded that the Proposed Arrangement would implicate the AKS because the System would be charging the Center (a possible referral source) a rate below fair market value for leased employees and operation and management services. That below-fair-market-value rate could be remuneration to the Center in exchange for referrals to the System . Moreover, the OIG found that the Proposed Arrangement did not meet the safe harbor for personal services and management contracts because the compensation would be less than fair market value and not be set in advance.

That said, despite the fact that the Proposed Arrangement could possibly generate prohibited remuneration under the AKS, the OIG stated that it would not impose administrative sanctions because the Proposed Arrangement had a low risk of fraud and abuse. The OIG based its conclusions on the following factors:

  1. The parties had structured the Proposed Arrangement in a manner they believed would be supported by Medicare cost reporting rules for related parties (i.e., would not exceed allowable costs for the Center).
  2. The parties certified that the Proposed Arrangement would (1) achieve cost efficiencies between the Center and System (as part of an integrated health system); and (2) reduce the Center's labor and operational costs. While these savings would not be passed directly through to Federal health care programs, the OIG noted that there were indirect benefits to Federal health care programs: (1) the savings would be included in cost reports for use in updating reimbursement amounts under Medicare's inpatient psychiatric facility prospective payment system; and (2) they were not achieved by skimping on patient care or other abuses that might benefit the System.
  3. While the System and Center are related parties and might have incentives to refer to each other, there was no evidence to suggest that the Proposed Arrangement would increase those incentives or that the Proposed Arrangement was intended to induce referrals.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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