OIG Joint Venture Advisory Opinion Does Not Consider Multiple Court Decisions That Undermine The Conclusions In Its Opinion

Published date19 January 2022
Subject MatterCorporate/Commercial Law, Litigation, Mediation & Arbitration, Food, Drugs, Healthcare, Life Sciences, Corporate and Company Law, Contracts and Commercial Law, Trials & Appeals & Compensation
Law FirmAkin Gump Strauss Hauer & Feld LLP
AuthorMr Robert S. Salcido

Key Points

  • HHS-OIG recently issued an Advisory Opinion finding that proposed JV, if undertaken, could constitute prohibited remuneration under the AKS.
  • The scope of material the OIG may consider is limited. The OIG does not opine regarding the intent of the Requester and does not and cannot under its rules, address defenses recognized under related laws like the FCA in which courts have construed the scope of the AKS.
  • If the parties to the arrangement do not have an intent to engage in wrongful conduct and all payments are made at fair market value, the parties to the JV should have dispositive defenses to any contention that they violated the AKS or FCA under multiple court decisions that the OIG did not, and cannot, consider.

On November 17, 2021, the Department of Health and Human Services (HHS) Office of Inspector General (OIG) issued Advisory Opinion 21-18 (the "Advisory Opinion" or "Opinion"). The OIG concluded that the proposed joint venture (JV) arrangement between a therapy services company and a company that owns skilled nursing facilities (SNFs), if undertaken, could generate prohibited remuneration under the Anti-Kickback Statute (AKS) "if the requisite intent were present."1 The OIG observed that its Opinion reflected its longstanding concern regarding JV arrangements, "especially where all or most of the business from the joint venture is derived from one of the joint venture investors."2

The OIG's Advisory Opinion is only binding on the Requester, and not other members of the public, and it offers little guidance to everyone else in structuring JVs.3 Under the AKS, two critical elements are whether "remuneration"'that is, some amount other than fair market value'was paid and whether the party "knowingly and willfully" engages in wrongful conduct.4 OIG Advisory Opinions do not address these two elements.5 Further, a primary enforcement device for the AKS are actions filed under the False Claims Act (FCA). OIG Advisory Opinions do not express any opinion regarding potential exposure to liability under the FCA.6

As a result of these gaps in guidance, OIG Advisory Opinions do not address, in the context of a JV arrangement, FCA court decisions interpreting the scope of the AKS that find there is no violation of the AKS when all payments are made at fair market value. For example, multiple courts, including a circuit court, have ruled that if fair market value is exchanged, there cannot be any unlawful remuneration exchanged under the AKS and hence no FCA violation in actions asserting the FCA was breached because of an underlying AKS violation.7 Further, a half dozen FCA appellate cases have ruled that if the governing law is ambiguous'such as whether a fair market value payment can be unlawful remuneration under the AKS'and no official governmental guidance exists to warn defendant away from a reasonable interpretation, there cannot be a violation of the FCA.8

Set forth below is the OIG's policy guidance regarding suspect JVs, including its recent guidance in Advisory Opinion 21-18. Also set forth is a detailed discussion of FCA / AKS case law addressing what constitutes unlawful remuneration for purposes of the AKS and, under what circumstances, one can knowingly breach a governmental rule when the governing rule itself is ambiguous, case law the OIG did not consider in rendering its Opinion. What this analysis shows is that, if the current case law is taken into account, rather than the necessarily myopic view the OIG must take, there should not be any legal impediment to properly structured JV arrangements that are based upon fair market value payments when the parties do not have any intent to engage in wrongful conduct. Indeed, in the one case the Department of Justice pursued regarding an alleged suspect contractual JV similar to what the OIG describes in its Advisory Opinion, defendants prevailed at trial.9

OIG's Guidance Regarding JVs

The OIG, in continuous guidance, over 30 years, has expressed concerns regarding JVs, especially where all or most of the business from the JV is derived from one of the JV investors.10 Over this period, neither Congress nor HHS has enacted a law prohibiting this business structure. Courts generally do not provide substantial deference to agency policy statements.11 Similarly, "OIG advisory opinions do not establish rules of decision, and are not to receive judicial deference."12

OIG Fraud Alert

Related to JVs, the OIG published a Special Fraud Alert indicating various features that it considered suspect.13 In the Special Fraud Alert, the OIG conceded that "[o]f course, there may be legitimate reasons to form a joint venture, such as raising necessary investment capital."14 But the OIG also warned that where the intent was not to raise investment capital, or other lawful purpose, but to "lock up a stream of referrals" from investors to compensate them indirectly for their referrals, the arrangement could result in a violation of the AKS.15 The OIG raised the following non-exclusive list of questionable features that could raise red flags that the JV is created for an improper purpose:

  • Investors are chosen because they are in a position to make referrals.
  • Investors are expected to make a large number of referrals and may be offered a greater investment opportunity in the JV than those anticipated to make fewer referrals.
  • Investors may be actively encouraged to make referrals to the JV, and may be encouraged to divest their ownership interest if they fail to sustain an "acceptable" level of referrals.
  • The JV tracks its sources of referrals, and distributes this information to the investors.
  • 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 may be nontransferable.
  • The amount of capital invested by the referral source may be disproportionately small and the returns on investment may be disproportionately large when compared to a typical investment in a new business enterprise.
  • Referral source investors may invest only a nominal amount such as $500 to $1,500.
  • Referral source 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 to the partnership.
  • Investors may be paid extraordinary returns on the investment in comparison with the risk involved, often well over 50 to 100 percent per year.16

OIG Advisory Opinion 21-18

Recently, on November 17, 2021, the OIG issued Advisory Opinion 21-18. Under the contemplated arrangement, a contract therapy services company that provided services at SNFs proposed to enter into a JV with a company that owns SNFs and the JV would provide therapy services to the SNFs.17 The SNF's purchase price for its ownership interest in the JV would be based upon a third-party valuation and be consistent with fair market value.18 The SNF would enter into a management services agreement with the JV to provide the clinical and back-office employees, space and equipment necessary of the JV's operations in exchange for a fee that is consistent with fair market value.19 Distributions to the SNF and therapy company would be proportional to their respective ownership interests in the JV.20 The SNF would not be involved in the day-to-day operations of the JV.21 The JV would not have employees but would lease all clinical and back-office staff from the therapy company.22 Under the arrangement, the SNF would not be required to contract with or make direct referrals to the JV, but it was anticipated that the SNF would do so.23 Further, it was anticipated that at the start of the arrangement, the JV would only do business with the SNF that held an ownership interest in the JV and hence all the JV's revenues would likely be generated through its agreements with the SNFs.24 The JV would bill the SNFs for its services and the SNFs would pay the JV fair market value for the JV's services.25 The SNFs would bill and collect from payors, including federal health care programs.26

The OIG concluded that the proposed arrangement, if undertaken, &ldldquo;would generate prohibited...

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