Office of Inspector General Advisory Opinion 04-08 - Physician Ownership of Physical Therapy Center
July 2004
The Office of Inspector General ("OIG") issued an advisory opinion on June 30, 2004, stating that a proposal by a physician group to own and lease a physical therapy center ("PT Center") would potentially violate the federal anti-kickback statute (OIG Advisory Opinion 04-08 is on the internet at oig.hhs.gov/fraud/docs/advisoryopinions/2004/AdvOp04-08B.pdf). The OIG found that it could not determine whether payments under the arrangement were at fair market value and the arrangement could involve compensation in exchange for referrals.
The physician group proposed to form a limited liability company ("LLC") to own the PT Center. The LLC would lease space, equipment and the services of a staff therapist to physicians in the physician group and other physicians with patients needing PT services. The lessees would each bill insurance companies for services provided to their patients at the PT Center. The physician group and lessees are potential referral sources for one another.
The PT Center would be available to lessees on a first-come, first-served basis. Each lessee would enter into a lease with the LLC and pay a fee for unlimited use of the facility. The lease payment would be calculated annually based on the total rental fair market value of all space, equipment and administrative services provided by the PT Center and dividing by the total number of lessees. Accordingly, each lessee would pay the same fee regardless of usage.
The OIG determined that the arrangement did not comply with the anti-kickback safe harbors for space, equipment and personal services and management contracts. Significantly, the OIG characterized the leases as part-time leases, rather than full-time leases; thereby making them subject to the somewhat impractical requirement for part-time leases under the anti-kickback safe harbors. (The criteria for part-time leases include that the lease specify precisely the schedule and duration of the rental periods and the compensation charged for each rental period.) The OIG opinion states that the physician group had characterized the leases as full-time leases; presumably this characterization was to avoid compliance with the part-time lease requirements.
Although the OIG may determine that an arrangement presents a low risk of fraud and abuse even in the absence of safe harbor protection, it declined to do so here for the following two reasons. First, it stated that the "overlapping, as-needed" structure of the leases made it difficult to assess fair market value. Because some physicians may pay more or less than fair market value depending on usage, the OIG determined that there is a risk that the payments could be for referrals.
Second, the OIG stated that the lease payments appeared to be a guaranteed income stream to the LLC because they were not based on usage. It found that this income stream could also be payments for referrals.
This advisory opinion demonstrates the difficulty in meeting a safe harbor for part-time arrangements on a practical basis. Moreover, the OIG decided in this advisory opinion that it is difficult to assess fair market value if the safe harbor requirements are not met. As stated above, part-time leases must specify the schedule and duration of rental periods and the compensation charged for each period to meet a safe harbor. In addition, all leases, whether full or part-time, must set aggregate compensation in advance. The arrangement described in the advisory opinion met the requirement that the aggregate compensation be set in advance, but not the requirement that the schedule, duration and compensation for each rental period be set in advance. If the proposed arrangement had been on a "per-use" basis, the compensation paid and duration for each rental period would presumably have been specified, but typically not the rental schedule or the aggregate compensation. As stated above, an arrangement that does not meet a safe harbor is not necessarily illegal, but this advisory opinion raises the question whether the OIG would sanction any arrangement that does meet the above requirements because fair market value becomes more difficult to assess.
Although not addressed in the OIG's opinion, this arrangement also poses issues under the federal self-referral or "Stark" law.
If you have any questions about this advisory opinion, please call Robert Saner, Rebecca Burke, Barbara Straub Williams or the attorney with whom you normally work at (202) 466-6550.
