OIG Releases Unfavorable Opinion on Proposed LTC Pharmacy Joint Venture

The Department of Health & Human Services Office of Inspector General [OIG] issued Advisory Opinion 11-3 on April 7, 2011, concerning formation of a new long-term care pharmacy. OIG concluded that the Proposed Arrangement, described below, could potentially generate prohibited remuneration under the Anti-Kickback Statute, and OIG could impose administrative sanctions on the Requestor, depending on the parties' intent.

Requestor is an existing long-term care pharmacy that provides pharmaceutical products and services primarily to various LTC facilities [LTC Facilities]. Under the Proposed Arrangement, one of Requestor's employees, a pharmacist serving as Requestor's director of business integration and a consultant pharmacist to LTC Facilities, would form a new long-term care pharmacy [Newco] that he would co-own with one or more owners of the LTC Facilities. Dividends or distributions would be paid in proportion to ownership.

Newco would engage in the exact same business as the Requestor. Under the Proposed Arrangement, Newco and the Requestor would enter into a management agreement under which the Requestor would provide all personnel and day-to-day services necessary for Newco to serve its LTC Facility customers. Newco would not have any employees, and would store its entire inventory either with its LTC Facility customers or at the Requestor's facility. The Requestor would make all decisions associated with Newco's operations and Newco's agreements with LTC Facility customers. In exchange for these services, Newco would pay Requestor a management fee based on fair market value. The pharmaceutical products and services that Newco would provide to its LTC Facility customers would include items and services covered and reimbursed by Federal health care programs.

OIG cited its longstanding concerns about certain problematic joint venture arrangements between those in a position to refer business, such as the LTC Facilities here, and those furnishing items or services for which Medicare or Medicaid pays, especially when all or most of the business of the joint venture is derived from one or more of the joint venturers. OIG noted that the Proposed Arrangement is very similar to suspect joint venture arrangements described in its Special Advisory Bulletin "Contractual Joint Ventures", in which a health care provider in one line of business contracts out substantially the entire operation of a related line of business to an existing provider of the related service, and in return receives the profits of the business as remuneration for its federal program referrals. The financial risk of the Proposed Arrangement is minimal, because LTC Facility owners would control the amount of business they refer to Newco.

OIG concluded that it was unable to exclude the possibility that the Proposed Arrangement is designed to permit the Requestor to do indirectly what it cannot do directly - to pay the LTC Facility owners a share of the profits from their pharmaceutical products and services referrals. There is a significant risk that the Proposed Arrangement would be an improper joint venture that would be used as a vehicle to reward the LTC Facility owners for their referrals.

If you would like additional information, please contact Susan E. Ziel at sziel@kdlegal.com or (317) 238-6244 or Anne O'Brien at aobrien@kdlegal.com or (312) 423-9310.