Joint ventures worth close examination

Sometimes there are chances for a contract with another physician, practice group or entity that offers certain items or services complementary to your practice. Such a deal -- often referred to as a joint venture -- might include any common enterprise with a perceived mutual economic benefit. It could include an arrangement for physical therapy, clinical lab services, durable medical equipment, radiology and imaging services, or pharmacy services.

But physician joint ventures have increasingly come under scrutiny by the government because physicians are in the position to refer patients to entities providing items or services paid for by Medicare and Medicaid. State and federal fraud and abuse laws can thrust many complications onto joint ventures due to self-referral and anti-kickback considerations.

A few years ago the Office of Inspector General issued a special advisory bulletin regarding contractual joint ventures. This OIG bulletin continues to serve as a warning to anyone in the health care system who treats Medicare and Medicaid patients against entering into joint venture arrangements that reward the physician for improper patient referrals in violation of federal anti-kickback laws.

The OIG identified several characteristics of potentially problematic arrangements including:

• New line of business: The physician owner is expanding into a related business that is wholly dependent on patient referrals from the existing business.
• Captive referral base: The owner's primary contribution to the venture is referrals, and payments to the owner are based on the owner's referrals to the new business.
• Little or no business risk: The owner neither operates nor commits substantial resources to the new business.
• Status of the manager/supplier: The manager/supplier, the term for the party in the joint venture besides the physician owner, would be a competitor of the owner's new line of business and normally would compete for the captive referrals.

The OIG has cautioned physicians that any of these elements in a joint venture could potentially indicate a prohibited arrangement. The OIG bulletin also identified certain complex contractual joint ventures that use a combination of "shell" entities and subcontracting arrangements with freestanding providers of related health services, such as durable medical equipment or home oxygen suppliers, to disguise illegal kickbacks.

Before forming a joint venture, you should examine how participants are selected and retained. If a participant is selected based on the value or volume of referrals, either directly or indirectly, that joint venture may be suspect.

A joint venture will be considered suspect if a participant already is engaged in the line of business to be conducted by the joint venture and that participant will own all or most of the equipment, provide or perform all or most of the items or services, or take responsibility for all or most of day-to-day operations.

You need to look at how investments are structured to determine how they are financed and profits are distributed. Moreover, make sure you fully understand compensation terms in order to avoid disguised payments such as those in which participants are offered investment shares for a nominal or for no capital contribution, the amount of capital that the participants invest is disproportionately small, and the returns on the investment are disproportionately large when compared with a typical investment in a new business venture.