Packaged deals and Letters of Protection: Fraud and abuse implications
Physician arrangements involving purchase and sale of receivables and facility services can carry risks.
Fraud and abuse implications exist even when services are not federally reimbursed.
Selling receivables and facility services may indirectly induce referral of federal healthcare business.
Such arrangements may create a financial relationship under the Stark law.
The overall relationship between the physician and facility must be considered.
Physicians have been increasingly engaging in certain business arrangements that involve either the physician paying a surgical facility a facility fee so that the physician can charge the patient an all-inclusive package price, or the physician purchasing receivables for services rendered to patients involved in personal injury lawsuits. In both cases, the services are not covered by any third-party payer, including any federal or state healthcare programs. Upon cursory review, these business arrangements do not directly implicate federal fraud and abuse laws, such as the Stark physician self-referral law or the Anti-Kickback Statute (AKS), because no federal healthcare programs are involved in these transactions. A closer look, however, reveals the potential risk these arrangements pose under federal fraud and abuse laws.
Specifically, this article will examine two types of physician business arrangements. The first type of arrangement is the practice of physicians paying surgical facilities their facility fee and then offering patients package deal pricing for surgical procedures that are not typically covered by government-funded healthcare programs or private third-party payers (package deals). The second type of arrangement involves physician practices or physician-owned funding companies purchasing "letters of protection" (LOPs) from hospitals and/or outpatient surgery centers. Both types of arrangements could run afoul of federal fraud and abuse laws if the physicians involved refer federally funded business to the facilities. These relationships could also implicate a variety of state laws, although a detailed discussion of these laws is beyond the scope of this article.
Physicians frequently offer patients package pricing for certain out-of-pocket medical procedures, such as cosmetic surgery. Typically, the physician offers the patient a flat fee for the procedure, which includes the various components required to perform the service, such as the cost of anesthesia, the physician's professional fee, and a facility fee for the use of an ambulatory surgery center (ASC) or hospital outpatient surgery center where the service can be performed. The physician then enters into arrangements with the facilities to purchase their services, typically, on a case-by-case basis. The surgical facility charges the physician a lower facility fee than it would typically charge third-party payers, including government payers. The facility agrees to accept a discounted fee, because there is no risk of non-collection and no delay in payment.
Letters of protection
Hospitals and ASCs are often asked to accept LOPs in lieu of payment from uninsured patients who are parties to personal injury litigation. LOPs are essentially liens that secure the healthcare providers' claims for payment from the proceeds of any settlement or damage award resulting from patients' personal injury lawsuits. Facilities, however, are often reluctant to accept LOPs, because personal injury lawsuits can be protracted, with no guarantee of a favorable settlement or a large enough settlement to cover the facilities' entire bill. As a result, physicians have formed funding companies that enter into agreements with facilities to purchase the accounts receivables secured by LOPs. The physician or group practice may also purchase the LOPs directly. The physician or physician-owned funding company purchases the LOPs for less than their face value, due to the risk of non-payment or reduced payment and the often extended delay (months or even years) in receiving payments. The facilities have the incentive to accept this lesser payment so they do not have to contend with the uncertainty involved in waiting for the patients' personal injury litigation to come to fruition to collect on the LOPs.
Federal anti-kickback implications
The federal AKS is a criminal statute that prohibits the exchange (or offer to exchange), anything of value in an effort to induce or reward the referral of federal healthcare program business.1 Violating the AKS has serious consequences, because it could result in a fine of up to $25,000 and imprisonment for up to 5 years. The Health and Human Services, Office of Inspector General can also assess civil money penalties, which could result in treble damages plus $50,000 for each violation of the AKS. Providers that violate the AKS could also face exclusion from participating in federal healthcare programs.2
The financial relationships between facilities and physicians in the context of package deals or LOPs could trigger scrutiny under the AKS for those physicians who are also referring their federally insured patients to the facilities involved in these transactions. For example, if a physician is buying LOPs from an ASC, but also referring Medicare patients to that ASC, an argument could be made that the physician's profit from the purchased LOPs serves as an unlawful inducement to the physician to refer other business to the ASC, including federally funded business. In other words, the ASC may feel compelled to accept less than fair market value (FMV) for the LOPs in an effort to induce the physician to refer other patients to the ASC. Similarly, the ASC could accept less than FMV in the package deal in order to induce the physician to refer federally reimbursed and other third-party payer business.
As with all facility/physician arrangements, the devil is in the details. A critical factor is the sale price of the LOP or the package deal. If it appears that the price of the LOPs or package deal are not FMV or commercially reasonable, the risk of the arrangement being considered suspect increases. The HHS Office of the Inspector General recognizes certain regulatory "safe harbors" that protect specific types of arrangements from prosecution under the AKS as long the arrangements meet specific criteria. Although there is no specific safe harbor that applies to sale of receivables, it is notable that most of the safe harbors that pertain to sale, rental, or compensation arrangements require that arrangements be commercially reasonable and FMV.3
Additionally, the government would also consider the overall referral relationship between the facility and the physician. For example, the government would take notice if the number of referrals between the physician and the facility increases after entering into this type of arrangement. Note, however, that even if the transaction could be proven to be FMV, government enforcement authorities could still construe the discount as an unlawful inducement to refer that particular patient or other future patients.
Stark Law implications
The Stark Law prohibits physicians from making referrals for certain designated health services payable by Medicare or Medicaid to an entity with which he/she (or an immediate family member) has a financial relationship, unless an exception applies.4 A financial relationship includes direct and indirect compensation arrangements between the physician and the entity/facility to which that physician refers Medicare or Medicaid patients. Designated health services include inpatient and outpatient hospital services, but do not include services performed in ASCs.5
The practice of selling LOPs or entering in to package deals does not directly implicate the Stark Law, because the services being performed by the physicians are not reimbursed by Medicare or Medicaid. But, if the physician is also referring patients to the hospital for services that are covered by Medicare or Medicaid, then the sale of the receivables or services would constitute a compensation arrangement with the physician, regardless of whether the arrangement is with the physician directly or a physician-owned entity, such as a funding company or group practice. A complete analysis of the Stark Law implications of these relationships is beyond the scope of this article, but such an analysis is a critical step in reviewing these arrangements. Notably, the Stark Law does not apply to services performed in ASCs, so a Stark analysis would not be required for arrangements with ASCs.
Other laws to consider
Arrangements involving the sale of receivables or package deals, to the extent that they could be construed as violating either the federal AKS or the Stark Law, may also subject the participants to liability under the federal False Claims Act.6 Such arrangements should also be examined under various state laws. Most states have enacted self-referral, fee-splitting and kickback prohibitions. These laws may apply to these arrangements regardless of source of payment so they must be carefully evaluated.
Specific state laws may govern collection of liens for health care services from proceeds of personal injury settlements or third-party liability laws and regulations that could apply. Additionally, each state enacts its own insurance code that may also contain limitations on such arrangements. (This article is not intended to be an exhaustive survey of all potentially applicable laws. Parties who engage in these arrangements should evaluate each such arrangement individually to determine which law may be implicated.)
Physicians and facilities are increasingly engaging in novel business arrangements. The interrelatedness of referral relationships makes it challenging to form business arrangements that are completely free from scrutiny under state and federal fraud and abuse laws. To minimize the risk of such arrangements, physicians and the facilities involved should carefully evaluate not only the specific arrangement, but also its impact on the entire relationship between the physician and facility. Even if the arrangement taken alone might not implicate federal fraud and abuse laws directly, it might when the whole relationship is reviewed. Careful consideration must be given to all federal and state laws that might touch on these arrangements.
1 42 U.S.C. § 1320a-7b.
2 42 C.F.R. §§ 1003.102, 1003.105.
3 See e.g. 42 U.S.C. § 1001.952(d) (safe harbor for personal services and management contracts).
4 42 U.S.C. § 1395nn (2014).
5 Categories of designated health services can be accessed at https://www.cms.gov/Medicare/Fraud-and-Abuse/PhysicianSelfReferral/index.html?redirect=/physicianselfreferral/.
6 31 U.S.C. § 3729 et al.
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