United States: OIG Issues Favorable Advisory Opinion Regarding Wholly Owned GPO Arrangement

Jenna Bigornia is a Partner and Andrea Eichman is an Associate in Holland & Knight's Boston office

HIGHLIGHTS:

  • The Office of Inspector General (OIG) issued Advisory Opinion 16-06, finding a sufficiently low level of risk in a group purchasing organization (GPO) arrangement in which the GPO would be wholly owned by an entity that also wholly owns participants in the GPO.
  • The opinion builds on Advisory Opinion 12-01, issued in 2012, which addressed a similar arrangement with a different affiliated participant ratio.
  • Advisory Opinions 16-06 and 12-01 provide insight into how the OIG analyzes wholly owned GPO arrangements and the factors that the OIG believes are important in minimizing any associated risk.

The U.S. Department of Health and Human Services Office of Inspector General (OIG) on May 9, 2016, issued Advisory Opinion 16-06, finding a sufficiently low level of risk in a group purchasing organization (GPO) arrangement in which the GPO would be wholly owned by an entity that also wholly owns participants in the GPO. The opinion builds on Advisory Opinion 12-01, issued March 8, 2012, which addressed a similar arrangement. Taken together, these opinions provide insight into safeguards the OIG has noted in structuring wholly owned GPO arrangements in the healthcare industry.

Opinion 12-01 Provided Key Safeguards for Wholly Owned GPO Arrangements

The OIG found in 2012 sufficiently low risk in an arrangement in which a proposed GPO would be wholly owned by an entity that owned many of the GPO's prospective participants. The OIG first noted that the discounts and administrative fees passed through the proposed GPO to the participants may qualify for protection under the discount safe harbor to the Anti-Kickback Statute (AKS). However, the administrative fees retained by the proposed GPO would fall outside the GPO safe harbor because both the proposed GPO and its affiliated participants would be owned by the same parent organization or by the parent's wholly owned subsidiary.

The OIG examines arrangements falling outside a safe harbor on a case-by-case basis. While the administrative fees retained by the GPO could not qualify for safe harbor protection, the OIG concluded that the proposed arrangement presented a sufficiently low risk of fraud and abuse. The OIG explained that the proposed arrangement included a number of key safeguards to mitigate the potential risk inherent in a wholly owned GPO structure:

  • The proposed GPO would retain only the portion of the administrative fees necessary to offset its costs and would distribute any excess administrative fees it collected.
  • Participants would be required to report their portions of administrative fees as rebates and to comply with the discount safe harbor requirements.
  • Participation agreements included robust reporting requirements regarding the passed-through administrative fees.
  • The proposed GPO planned to inform vendors and the public through website disclosures that administrative fees in excess of its costs may be passed on to participants.
  • The proposed GPO would inform vendors directly that they may have reporting requirements related to administrative fees that do not qualify as bona fide service fees.
  • The proposed GPO would not be restricted to affiliated participants.
  • The parent organization and its subsidiaries committed to using resources to seek out the best value for the participants, even if the purchases would not be made through the proposed GPO.

Opinion 16-06 Added New Safeguards to Consider

In Advisory Opinion 16-06, the OIG examined a similar proposed arrangement in which a health system, through a series of mergers, would acquire the remaining 5 percent ownership interest in a GPO, resulting in the GPO being wholly owned by the health system that also owned approximately 1 percent of the GPO's members. As in 12-01, the OIG explained that the administrative fees retained by the GPO would fall outside the GPO safe harbor because both the GPO and certain affiliated participants would be owned by the same parent organization. Based on a review of the facts and circumstances, the OIG determined that there was sufficiently low risk of an improper intent to induce or reward referrals of federal healthcare program business. This time, the analysis emphasized new safeguards beyond those described in 12-01:

  • The members wholly owned by the same entity that owns the GPO comprised a scant 1 percent of the GPO's total membership (approximately 800 out of 84,000 members).
  • The affiliated GPO members under common ownership would not receive more or less favorable discounts or shareback calculations as compared with unaffiliated members.
  • The proposed ownership change would not change the GPO's role as the purchasing agent for its members, the vast majority of which are not affiliated members.

The opinion further noted that the GPO participation agreement terms and conditions would continue to be negotiated on the same basis for the affiliated members as for the unaffiliated members.

Practical Implications

Advisory Opinion 16-06 affords further insight into how the OIG analyzes wholly owned GPO arrangements and the factors that the OIG believes are important in minimizing any associated risk. The arrangements examined in 12-01 and 16-06 differ primarily in the ratio of affiliated to unaffiliated members, so the opinions provide guideposts for wholly owned GPO arrangements with different affiliated participant ratios. The addition of 16-06 expands on the limited number of GPO-related advisory opinions and offers additional factors that the OIG might consider in assessing the potential for fraud and abuse in these types of arrangements.

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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