Diversification and Consolidation Efforts Can Be Criminal

As consolidation occurs in the healthcare industry, diversification follows. Consolidation and diversification have a yin and yang effect. Consolidation of similar types of services and providers simply adds numbers, more of the same, and perhaps greater market share within the same service line. Consolidation coupled with diversification, however, expands the business into new service lines, perhaps to capture more of the patient experience.

For example, surgeon-owners of a surgery center may look to take control of their center’s anesthesia service line. An orthopedic surgery group may consider employing its own physical therapists or start selling braces and orthotics. This diversification can take the form of acquisition of current competitors. While this would be normal in non-healthcare fields, it can be criminal in healthcare.

Consolidation and diversification carry both great opportunities and great risks. No practice should look to diversify or consolidate without the advice of good health law counsel.

Failing to seek counsel could put you in the situation one of my new clients is in now: entering a guilty plea to violation of the federal Anti-Kickback Statute for the financial arrangement his practice entered into with a drug company. To him it was a way to make drugs available to his patients. On the surface it seemed like a legitimate arrangement. To the U.S. Attorney it was a crime. He sought the advice of counsel too late. Now I’m advising him on possible ways to continue to maintain his medical license.

The U.S. Attorney does not take kindly to an “I didn’t realize this was wrong” defense. Physicians and their practices are obligated to make sure their diversification and consolidation efforts are legal. The government has issued a special fraud alert on contractual joint ventures. It has also issued an advisory opinion on ambulatory surgery centers specifically, but that may apply to other types of service line consolidation.

In that opinion the surgery center wanted to take control of the anesthesia service line by forming its own subsidiary anesthesiology groups that could bill and collect for the anesthesiology piece on the surgeries the surgeon-owners performed. The government said the proposed arrangement may violate the Anti-Kickback Statute. The fact that the surgeon-owners of the surgery center were entering into a service line they could not have done on their own was a key concern for the government.

Any time a practice seeks to diversify, healthcare counsel experienced in the Stark Law, Anti-Kickback Statute, False Claims Act and Medicare billing rules should be consulted so the relationship is structured legally.

The special fraud alert on contractual joint ventures provides plainspoken guidance on what types of consolidation and diversification arrangements the government suspects as fraudulent. It includes some examples of potentially problematic contracts:

• A hospital establishes a subsidiary to provide durable medical equipment (DME). The new subsidiary enters into a contract with an existing DME company to operate the new subsidiary and provide the new subsidiary with DME inventory. The existing DME company already provides DME services comparable to those provided by the new hospital DME subsidiary and bills insurers and patients for them.

• A DME company sells nebulizers to federal healthcare beneficiaries. A mail-order pharmacy suggests the DME company form its own mail-order pharmacy to provide nebulizer drugs. Through a management agreement, the mail-order pharmacy runs the DME company’s pharmacy, providing personnel, equipment and space. The existing mail-order pharmacy also sells all nebulizer drugs to the DME company’s pharmacy for its inventory.

• A group of nephrologists establishes a wholly owned company to provide home dialysis supplies to their dialysis patients. The new company contracts with an existing supplier of home dialysis supplies to operate the new company and provide all goods and services to it.

The alert goes on to characterize the following common diversification elements as problematic:

1. The owner expands into a related line of business, which is dependent on referrals from, or other business generated by, the owner’s existing business.

2. The owner neither operates the new business itself nor commits substantial financial, capital or human resources to the venture. Instead it contracts out substantially all the operations of the new business.

3. The other company is an established provider of the same services as the owner’s new line of business. In other words, absent the contractual arrangement, the other company would be a competitor of the new line of business, providing items and services in its own right, billing insurers and patients in its own name and collecting reimbursement.

4. The parties share in the economic benefit of the owner’s new business.

5. Aggregate payments to the other company typically vary with the value or volume of business generated for the new business by the owner.

If you are contemplating a consolidation or diversification transaction that has some of these elements in its structure, seek advice of counsel for clarification and guidance on whether a restructuring is required. 

Ann Bittinger, an attorney and owner of The Bittinger Law Firm in Jacksonville, FL, specializes in representing physician practices in their healthcare regulatory and transactional matters. Reach her at ann@bittingerlaw.com.