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FEDERAL ANTI-KICKBACK PROVISIONS
MONTALVO & RAMIREZ
Attorneys at Law
LEGAL UPDATE
As of October 30, 1991
Supplementary Memorandum
Final Rule Implementing Sec. 14 of Public Law 100-93, the Medicare and Medicaid Patient and Program Protection Act of 1987 (Medicare Anti-Kickback Statute - 42 U.S.C. § 1320a-7b)
Amending 42 CFR § 1001
56 Fed. Reg. 35952, July 29, 1991
I.
This web site is provided only as public information on the current status (as of the date of this page) of the Medicare and Medicaid Patient and Program Protection Act of 1987 (Medicare Anti-Kickback Statute - 42 U.S.C. § 1320a-7b) and not intended as legal advice to any one. You are encouraged to seek legal counsel for individual guidance in complying with these regulations.
II.
To reiterate the previous memorandum, (dated November 20, 1991) the Medicare and Medicaid Patient and Program Protection Act of 1987 (Medicare Anti-Kickback Statute - 42 U.S.C. § 1320a-7b) (the "Act") makes it a criminal offense for anyone to knowingly and willfully solicit or receive, or offer or pay (directly or indirectly, overtly or covertly) any "remuneration" in return for Medicare/Medicaid patient referrals.
The Office of the Investigator General (the "OIG"), in its preamble to the regulations, points out that the regulations do not attempt to define any illegal conduct under the Act, nor to create any new illegal activities, but rather only set out to what extent certain business activities and financial arrangements may exist without being subject to OIG (or Justice Dept.) scrutiny and possible civil and/or criminal penalties.
42 CFR § 1001.952 (a)-(k) of the new regulations implementing the "Anti-kickback Statute", excludes as "remuneration" (as used in the Act) all payments in connection with the following:
a) Investment Interests;
b) Space Rental;
c) Equipment Rental;
d) Personal Services and management contracts;
e) Sale of practice;
f) Referral services;
g) Warranties;
h) Discounts;
i) Employees;
j) Group purchasing organizations; and
k) Waiver of beneficiary co-insurance and deductible amounts.
III.
Investment Interests: 42 CFR § 1001.952 (a)
The subject of the "40% ownership/40% revenue" rule for small partnership entities, has been previously briefed by separate update, but as a follow-up, the following questions are being answered.
QUESTION:
How may an existing lab comply with the "40 percent ownership/40% revenue" standard?
ANSWER:
There has to be a re-structuring of the ownership so that no more than 40% of the owners are in a position to:
a) influence or make referrals to the partnership;
b) provide items or services to partnership; or
c) otherwise generate business for the partnership.
This may be accomplished by one or more of the following actions:
1. Sale of ownership interest to a person "not in a position to...make referrals ...provide services, or generate business..."
NOTE: Because OIG states in its regulations that an investor is one who holds either a direct or indirect interest in the entity, the sale must be a bona-fide divestment of seller's interest, and not a "sham" sale, or scheme to circumvent regulations, for example:
a) sale must be for fair market value;
b) not to an immediate family member;
c) not to any partnership or corporate entity where seller owns a legal or beneficial interest; and
d) preferably seller does not finance the sale (entity may not finance sale to passive investors)
-- if seller finances sale, loan is not secured by interest in entity.
2. Retirement from practice by some partners;
3. Moving practice out of the geographical area by some partners.
4. Some of the partners could execute a stipulated agreement that for the life of their investment they will not make, induce, influence referrals to the partnership, or in any other manner generate business for the partnership. (OIG has stated in these regulations that it "will accept a written stipulation that for the life of the investment the investor will not make referrals to, furnish items or services for, or otherwise generate business for the entity").
As previously mentioned, closely aligned to, and overlaying this "60-40 ownership" rule is also the "60-40 revenue" rule (thus "40% ownership/40% revenue" standard), which dictates that no more than 40% of the gross revenues of the entity may be from referrals, items or services furnished, or business otherwise generated from investors.
This "40% ownership/40% revenue" standard) is not yet cast in stone because by January 1992, the OIG must report back to the Secretary on the effectiveness of these "60-40 ownership" and "60-40 revenue" standards and whether or not stricter standards should be adopted. Although this seems to add uncertainty to the future of this "safe harbor" regulation, the OIG has assured us that this is the final form of this regulation.
QUESTION:
What time period is available for a firm to comply with these "safe harbor" regulations?
ANSWER:
There is no prescribed time period, just as there is no requirement that it comply at all with these regulations. However, for an entity to determine whether or not it is in compliance it may evaluate its operations for the last fiscal year or the preceding 12-month period. The OIG states that an entity's failure to comply with the regulations does not mean that an entity is in violation of the Medicare Anti-kickback Statute. All that non-compliance means is that an entity exposes itself to OIG and U.S. Justice Department scrutiny.
QUESTION:
Will OIG give advisory opinions, or provide examples of payment arrangements that are in violation of the Anti-kickback Statute?
ANSWER
No. The "safe harbor" regulations do not directly or indirectly define what activities violate the "Anti-kickback Statute", rather only what activities do not violate the statute. Failure to comply with these regulations is not determinative of whether or not an activity violates the "Anti-kickback statute. Further, since the statute requires proof of "knowing or willful" violations, advisory opinions would be meaningless as most "knowing" violations are perpetrated via facially legitimate operations. For these reasons, the OIG states in its regulation that it will not give advisory opinions. The OIG points to the "Fraud Alerts" which it publishes periodically as being sufficient guidance, short of advisory opinions.
IV.
Personal Services or Management Contracts: 42 CFR § 1001.952 (d)
QUESTION:
If an active investor (managing partner) receives compensation for services provided to the entity in addition to proportional return on any investment interest, is this protected by the "safe harbor" regulations?
ANSWER:
No, unless this compensation is being made pursuant to a personal service or management contract which complies with 42 CFR § 1001.952 (d) of the regulations, which requires:
1) the agency agreement to be a signed writing;
2) agency agreement specifies the services to be provided;
3) if services to be provided by agent are on periodical intervals, rather than on full-time basis, then agreement must specify intervals and exact schedule of such intervals, and the exact charge for such intervals;
4) agreement may not be for less than a year;
5) payment must be fair-market value of services and not linked in any manner to volume or value of referrals or other business generated between the parties for which payment may be made in whole or in part under Medicare or a State health care program; and
6) the services performed under the agreement do not involve the counseling or promotion of a business arrangement or other activity that violates State of Federal law.
NOTE: If the entity is paying any individual for furnishing any item or service for which payment may be made in whole or in part under Medicare or a State health care program, such payment must also be pursuant to a personal services and management contract, as set out above, unless the individual is a bona-fide employee of the entity.
V.
The sale of a partnership interest in a medical lab will have tax consequences for both the Seller and Buyer for which each individual should seek specific guidance from a tax specialist.
Much as OIG, and for the same reason, this law firm does not state an opinion as to what arrangement or activities would violate Medicare Anti-Kickback Statute (42 U.S.C. § 1320a-7b), other than to state that to be exempt from criminal or civil violations under the Act, these "safe harbor" regulations must be literally complied with.
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