Joint Venture Fraud

There is ever-increasing scrutiny by federal and state law enforcement authorities, Congress, the courts and private insurers regarding arrangements between healthcare providers and potential referral sources. The goal of these agencies is to ensure that investment by referral sources is not designed to exchange dividends for patient care referrals. Even if structured to look like bona fide investments in which an investor merely receives profit distributions directly proportional to his or her ownership percentage and not directly in relation to referrals, the practice is still scrutinized. Clinical laboratory testing, in particular, was among the first on the radar for fraudulent inducement schemes, and continues to be a hotbed area for enforcement. Additionally, insurers are making kickback allegations as a defense to payment in cases, or administrative appeals brought to enforce payment, or during audits. Joint Venture Fraud

The Anti-Kickback Statute (42 USC § 1320a-7b (b)) makes it a criminal offense to knowingly offer, solicit or receive any remuneration-the transfer of value, cash or otherwise, including payments for equipment and services-directly or indirectly, overtly or covertly, to induce referrals of items or services reimbursable by a federal healthcare program (i.e., Medicare or Medicaid). Where remuneration is paid purposefully to induce or reward referrals of items or services payable by Medicare or Medicaid, the statute is violated.

Many states have laws that are consistent with the Anti-Kickback Statute, which state statutes generally apply to all payors, including private insurance and private patient pay, state health programs, workers’ compensation, no-fault and other sources.

In particular, the Federal Office of Inspector General (OIG) and states’ attorneys general and other enforcement agencies have concerns about certain problematic “joint venture” arrangements between those in a position to refer business and those whom furnish items or services. This is especially relevant when all or most of the business of the joint venture is derived (i.e., referred or ordered) from the joint venture participants.

SEE ALSO: Clinical Trial Results Underreported

Joint ventures may be formed by contract or through offering equity, and frequently raise concerns under the Anti-Kickback Statute because they pose a risk that dividends, profit distributions and other income from the arrangement may incentivize referral sources to over utilize (i.e., over refer) the Medicare-reimbursed service, particularly when not medically necessary. Additional concerns derive from a single provider being referred at the expense of quality of care considerations, or even when a test is medically necessary, thereby interfering with both practitioner and patient free choice.

This is especially true with respect to a pathology laboratory setting, where the referring providers have the ability to “steer” specimen submission, since patients do not typically provide their own input into the clinical laboratory that is used.

Key Concerns
In analyzing whether an investment is legitimate or subterfuge, the government inquires as to whether the following factors are present:

The investment is a nominal amount by today’s standards.
– Investors may be permitted to “borrow” the amount of the “investment” from the entity and pay it back through deductions from profit distributions, thus eliminating even the need to contribute cash.
– Higher referring investors are offered a greater amount of interests.
– The business is one that the investor would not normally expand into, and it has no knowledge of or ability to contribute meaningfully to the business in which it is investing.
– The investor will not actually participate in managing the business, including oversight, contribution of time, attendance at meetings, etc.
– The business risk assumed by the investor is low, as there is no requirement for continued capital contribution or guarantying of company obligations after the initial investment.
– Lack of voting participation.
– The ability of the company to elect, at any time, to expel an investor and redeem its interests at nominal value or what it paid in.
– There is an exclusive obligation to utilize or refer to the laboratory or not open a competing laboratory.
– The company does not actually need an infusion of funds, as all equipment is already financed or purchased, the real estate secured and the site operational.
– The return on investment is disproportionate to the investment actually made.
– Distributions are not made in proportion to ownership interest, whereby referring owners pay different prices for their ownership interests, because of the expected or actual volume or value of anticipated referrals.
– Investors may be required to divest their ownership interest if they cease to practice in the service area-for example: if they move, become disabled or retire.
– Investment interests are not transferable

If a company is already operational and its equipment financed, then it has no urgent need for infusion of funds in order to start its business. The offering of an investment to referral sources could be viewed as merely a means to ensure referrals, particularly if the investor has no actual involvement in the company after they pay in. Any carte blanche ability of the company to buy-back part of an investor’s interests creates an implication that low referring investors may be subject to reduction in their total ownership. Further, the ability to expel an investor at any time-for no more than the amount they paid in-implies intent (or a threat) to expel those who do not refer. A mention in the corporate documents of a company option to dilute other members and to sell more Units to a current owner also suggests a “carrot” for increasing referrals.

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