On April 14, 2011, the Office of Inspector General ("OIG) issued an advisory opinion that raises questions about the legality of joint ventures in which the business depends on referrals from long-term care facilities that are members of the joint venture.  In Advisory Opinion No. 11-03, the OIG stated that the formation of a new long-term care pharmacy involving joint ownership by an existing pharmacy's employee and long-term care facilities could potentially violate the Federal anti-kickback statute.  The significance of the opinion is that the OIG expressed concern that the returns on investments long-term care facilities make in such joint business arrangements, whether to establish pharmacies or other services, would be kickbacks for referrals.

The Advisory Opinion was requested by a pharmacy that currently provides pharmaceutical products and services ("Existing Pharmacy") to skilled nursing facilities, intermediate care facilities, assisted living facilities, and residential care facilities ("LTC Facilities").  Under the proposed arrangement, the Existing Pharmacy's employee would form a new long-term care pharmacy ("New Pharmacy").  The New Pharmacy would engage in the same business as the Existing Pharmacy and would include items and services reimbursed by Federal health care programs. 

The Existing Pharmacy employee would own the New Pharmacy along with one or more LTC Facility owners in the Existing Pharmacy's market area.  The LTC Facility owners would receive shares in proportion to the amount of capital invested and the Existing Pharmacy's employee would receive shares at a nominal price.  Dividends and distributions from the New Pharmacy would be paid in proportion to share ownership.

The Existing Pharmacy would provide all personnel and day-to-day services and make all decisions to allow the New Pharmacy to provide services to its LTC Facility customers under a comprehensive management agreement.  In exchange for the services provided under the management agreement, the New Pharmacy would pay the Existing Pharmacy a fair market value management fee, direct costs, and overhead expenses. 

The OIG began its analysis by reiterating its longstanding concerns about joint venture arrangements between entities in a position to refer business (the LTC Facilities in this case) and entities that provide items or services reimbursed by Medicare or Medicaid (the Existing Pharmacy), especially when most of the business is derived by one or more of the parties. 

The OIG was particularly concerned about the following characteristics of the relationship:

• The LTC Facility owners would be expanding into a related line of business (long-term care pharmaceutical products and services) that would be dependent on referrals from the LTC Facilities.
• The LTC Facility owners would not participate in the operation of the New Pharmacy but would contract out substantially all of the New Pharmacy operations to the Existing Pharmacy under the management agreement.
• The LTC Facility owners would have minimal risk because they would control the amount of business referred to the New Pharmacy.
• The Existing Pharmacy is already in a position to directly provide the pharmaceutical products and services itself (instead of the New Pharmacy).
• The aggregate payment to the Existing Pharmacy under the management agreement and the LTC Facility owners' income would vary based on the volume of referrals from the LTC Facilities.
• The Existing Pharmacy and the LTC Facility owners would share in the economic benefit of the New Pharmacy.

Based on the facts presented by the Existing Pharmacy, the OIG would not exclude the possibility that the proposed New Pharmacy was designed to permit the Existing Pharmacy to impermissibly pay the LTC Facility owners a share of the profits from their referrals.  The OIG found a significant risk that the proposed New Pharmacy would be an improper joint venture that would be used to reward the LTC Facility owners for referrals.

Advisory Opinion No. 11-03 is available at: 

http://oig.hhs.gov/fraud/docs/advisoryopinions/2011/AdvOpn11-03.pdf

For more information concerning OIG Advisory Opinion No. 11-03 or if you have any questions, please contact Cindy Hutto (843.720.4307), or Alice Harris (803.255.9487).