August 3, 2006Client Alert

OIG Approves a Research Institution’s Proposal to Provide Affiliates Free Medication for Specific Patients

In a recent advisory opinion, the U.S. Department of Health and Human Services' Office of Inspector General ("OIG") discusses whether a research and treatment institution can provide drugs and supplies to its affiliated entities for administration to patients receiving outpatient treatment at the affiliated entities under the Federal Anti-Kickback Statute ("AKS").1 The OIG concludes that while there may be a technical violation of the AKS, the OIG will not impose administrative sanctions upon the Arrangement.

OIG Advisory Opinion Number 06-05 (April 26, 2006)

Background Information

OIG Advisory Opinion Number 06-05, issued on April 26, 2006, involves a non-profit, pediatric research and treatment institution's ("Institution") practice of providing drugs and supplies to its affiliated entities for administration to patients receiving outpatient treatment at the affiliated entities ("Arrangement").2 The Institution's primary focus is on pediatric cancers, immuno-deficiencies, and genetic disorders. The Institution's activities are funded predominately by charitable contributions, amounting to 68% of the Institution's operating revenue. The remainder of the Institution's operating budget comes from third party payors, including Medicaid. The Institution, however, only expects to recover, as reimbursement from third party payors, 30 cents for every dollar incurred in patient care costs. This is largely due to the type of care provided by the Institution, which is experimental in nature and, therefore, generally not covered by most third party payors, including Medicaid.

The nature of the experimental treatments provided by the Institution often requires the children and their families to live close to the Institution for long periods of time, due to the frequency and duration of the treatments. The Institution contracts with six other health care providers ("Affiliates"), located in four geographical regions, to provide treatment to children in other parts of the country. This contractual arrangement serves two purposes. The Institution can increase the number of children it can treat and include in its research agenda. At the same time, many children and their families can receive the same treatments closer to home. Per the Arrangement, the Institution provides its Affiliates with monitoring and treatment of the patients at the Affiliates' location. This includes all protocol medications and related supplies for administration during the course of treatment at the Affiliates. Providing all protocol medications enables the Institution to maintain consistency and quality in its research agenda. In addition, some Affiliates may not have the required protocol medication available in their local pharmacy. On rare occasions, the Institution will provide the Affiliate with protocol medication for children who are not patients of the Institution, but who are receiving inpatient care at an Affiliate.

The Institution accepts full financial responsibility for the acquisition costs related to the protocol medication and administration supplies, as well as billing and recovery of the acquisition costs. Any billing and reimbursement associated with the costs incurred by the Affiliates is the sole responsibility of the Affiliates. The Affiliate never bills Federal health care programs for the protocol medication.

The OIG's Analysis

The OIG finds that the financial arrangement between the Institution and its Affiliates implicates the AKS. The AKS is violated when remuneration is purposefully paid to induce referrals for items or services which may be reimbursable by a Federal health care program. Remuneration includes anything of value given directly or indirectly, overtly or covertly, in cash or in kind. The Federal government is concerned that referrals will be made which are not based on medical necessity, but rather on the remuneration which is exchanged. The AKS is a criminal statute, which requires the government to prove, beyond a reasonable doubt, that the parties knowingly and intentionally violated the statute. While this hurdle places a substantial burden on the government, courts have interpreted the AKS rather broadly. Where one purpose of the remuneration is to induce federally reimbursable referrals, the statute is violated.3 An arrangement may include many appropriate purposes (e.g., lower costs, superior medical service, or geographical convenience for the patient) but may be impermissible if only one purpose was to induce referrals.4

While the Arrangement may create a technical violation of the AKS, the OIG determined that the Arrangement is unlikely to result in health care fraud and abuse, and it will not seek administrative sanctions against the Institution or its Affiliates. The OIG based this determination upon four considerations:

  • First, the Arrangement confers little, if any, benefit to the Affiliates because they do not bill for the protocol medication. While some small administrative costs for the Affiliates may be avoided as a result of the Arrangement, the benefit is likely to be so small and speculative that the OIG is not concerned with its effects on the Affiliates' independent decision-making. The minimal savings (if any) is not likely to induce any referrals from the Affiliates to the Institute.
  • Second, the OIG finds that it is unlikely that the intent of the parties is to enter the Arrangement for the purpose of generating Federal health care program referrals. The
  • nature of the Arrangement (allowing patients to choose between treatment locations) actually minimizes referrals between the Institution and its Affiliates. In addition, the size of the patient referral population is substantially limited by the Institution's stringent admissions policy. Finally, the Institution only receives reimbursement from Federal health care programs equivalent to about 30% of the treatment costs. Considering the low rate of reimbursement, it is unlikely that the Arrangement is designed to generate Federal health care program referrals, because such referrals are not profitable to the Institution.
  • Next, the OIG finds that there is little risk that the referrals (if any) from the Affiliates would result in inappropriate utilization or increased program costs for Medicaid. The Institution's treatment is dictated by largely unbiased, peer-reviewed clinical protocols, which help protect against overutilization. Furthermore, experimental interventions are usually not covered by any third party payors, including Medicaid. In addition, the Institution has a policy that it pays for all patient deductibles and copayments, which creates a significant incentive for the Institution to monitor and control overutilization.
  • Finally, the OIG finds that the service offered by the Institution and its Affiliates provides a substantial public benefit. The non-profit Institution's primary mission is to perform research regarding, and provide treatment of, childhood diseases, which is furthered by the Arrangement with the Affiliates.

42 U.S.C. § 1320a-7b.

2 In very limited circumstances the Institution will provide protocol medication to its patients receiving

inpatient treatment at the affiliated entities.

3 See U.S. v. Greber, 760 F.2d 68 (3d Cir. 1985), See, e.g., U.S. v. McClatchey, 217 F.3d 823 (10th Cir.), cert. denied, 531 U.S. 1015, 121 S. Ct. 574 (2000); U.S. v. Bay State Ambulance & Hosp. Rental Serv., 874 F.2d 20 (1st Cir. 1989); U.S. v. Kats, 871 F.2d 105 (9th Cir. 1989).

4 Id.

back to top