OIG Approves Hospital’s Redemption Offer to Retiring Physician-Owners

Firm Publication

On January 3, the U.S. Department of Health and Human Services Office of Inspector General (OIG) published Advisory Opinion No. 23-12, approving a physician-owned hospital’s offer to redeem over a two-year period the ownership interests of physicians who turn 67 and agree to retire within six months.

Although, as always, this advisory opinion is limited to the particular arrangement at issue and to the requesting party, it provides guidance on structuring the redemption of physicians’ ownership interests in syndicated facilities, such as physician-owned hospitals and ambulatory surgery centers, which have been the subject of recent enforcement actions under the federal False Claims Act. Key to OIG’s favorable opinion were the objective eligibility criterion that is unrelated to referrals or other business generated and OIG’s determination that the redemption payments were unlikely to alter referral patterns.

The Arrangement

The requesting party is a limited liability partnership that operates a hospital. It also wholly owns a subsidiary that operates a second hospital. Partnership units are held by individual physicians and by a subsidiary of a nonprofit corporation that owns and operates a medical center. The partnership agreement expressly allows physician-owners to hold medical staff privileges at any facility, treat patients at any location, and refer patients to any provider, all irrespective of whether the facility or provider is a competitor.

The partnership agreement permits a one-time payment for redemption upon a physician’s retirement from the practice of medicine, but it does not require retirement at a particular age. Concerned that it could face a liquidity crunch if numerous physician-partners retire in close succession (and the partnership elects to redeem their units upon retirement), the partnership elected to extend a one-time offer to physician-owners who turn 67 to redeem their units over the course of two years, and expects to continue doing so each year. To accept the redemption offer, a physician-owner must agree to retire from the practice of medicine within six months of receiving the first payment and must certify in writing that he or she will not, or will not be in a position to, refer patients to the hospitals or the other partners in the partnership as of the earlier of the retirement date (which would be within six months of the first payment) and the date the physician-owner no longer satisfies the partnership agreement’s eligibility requirements.

For physician-owners who accept the offer, the partnership would redeem their units in three equal increments over the two-year period for a fair market value price as of each redemption date. Because the value of units could increase over the two-year period, it is possible that a physician-owner who accepts this voluntary redemption offer would receive more money than one whose units are redeemed all at once.

Redeemed units are offered to existing and prospective physician-owners through annual offerings. The partnership certified that units are offered equally among all physicians who subscribe to the offering, whether new or existing owners and without regard to the volume or value of referrals or other business generated for the hospitals or the partners.

OIG’s Analysis

The redemption offer implicates the federal Anti-Kickback Statute because it involves offering (and, if the offer is accepted, paying) remuneration to the physician-owners, each of whom is in a position to refer federal healthcare program business to the hospitals, the other physician-partners, and the medical center partner. Although no safe harbor is available, OIG concluded that the arrangement posed a sufficiently low risk under the Anti-Kickback Statute to issue a favorable advisory opinion. OIG reached this conclusion for two reasons:

  1. Eligibility for the redemption offer is unrelated to the volume or value of referrals or other business generated by the physician-owners. Redemption offers, if extended in a given year, are made to every physician-owner who turns 67 during the calendar year, regardless of their referrals or any business they generate. Using this objective criterion that is applied consistently to all physician-owners, OIG reasoned, reduces the risk that the redemption offer could result in steering or increased costs to federal healthcare programs from overutilization or inappropriate utilization.
  2. The remuneration is unlikely to result in unfair competition by altering referral patterns. To accept the offer, a physician-owner must agree not to refer patients to the hospitals or any of the other partners upon the earlier of the physician’s retirement date (which must be within six months of the first redemption payment), and the date the physician no longer satisfies the eligibility criteria in the partnership agreement. Although physicians who accept the offer could continue referring patients to the hospitals and other partners for six months after receiving the first payment, the short duration of this period and the fact that time is needed to wind down the retiring physician’s medical practice in accordance with state law led OIG to conclude that the arrangement is unlikely to alter referral patterns or otherwise result in unfair competition.

Takeaways

Depending on how redemptions and offerings are structured, physician-owned hospitals face risk under the Anti-Kickback Statute when they repurchase or sell interests. Objectivity and consistency are key. Taking into account referrals or other business generated in redemptions or offerings—when determining whose interests are repurchased, to whom interests are offered, or the apportionment of investment opportunities—can result in violations of the Anti-Kickback Statute and the federal physician self-referral law (Stark Law), as recent enforcement actions suggest. On the other hand, basing redemptions and offerings on objective criteria unrelated to the volume or value of referrals or other business generated and then applying those criteria consistently to all physicians reduces the risk of non-compliance, as Advisory Opinion 23-12 illustrates.

If you have any questions about this advisory opinion, please contact the authors.

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Firm Publication

On January 3, the U.S. Department of Health and Human Services Office of Inspector General (OIG) published Advisory Opinion No. 23-12, approving a physician-owned hospital’s offer to redeem over a two-year period the ownership interests of physicians who turn 67 and agree to retire within six months.

Although, as always, this advisory opinion is limited to the particular arrangement at issue and to the requesting party, it provides guidance on structuring the redemption of physicians’ ownership interests in syndicated facilities, such as physician-owned hospitals and ambulatory surgery centers, which have been the subject of recent enforcement actions under the federal False Claims Act. Key to OIG’s favorable opinion were the objective eligibility criterion that is unrelated to referrals or other business generated and OIG’s determination that the redemption payments were unlikely to alter referral patterns.

The Arrangement

The requesting party is a limited liability partnership that operates a hospital. It also wholly owns a subsidiary that operates a second hospital. Partnership units are held by individual physicians and by a subsidiary of a nonprofit corporation that owns and operates a medical center. The partnership agreement expressly allows physician-owners to hold medical staff privileges at any facility, treat patients at any location, and refer patients to any provider, all irrespective of whether the facility or provider is a competitor.

The partnership agreement permits a one-time payment for redemption upon a physician’s retirement from the practice of medicine, but it does not require retirement at a particular age. Concerned that it could face a liquidity crunch if numerous physician-partners retire in close succession (and the partnership elects to redeem their units upon retirement), the partnership elected to extend a one-time offer to physician-owners who turn 67 to redeem their units over the course of two years, and expects to continue doing so each year. To accept the redemption offer, a physician-owner must agree to retire from the practice of medicine within six months of receiving the first payment and must certify in writing that he or she will not, or will not be in a position to, refer patients to the hospitals or the other partners in the partnership as of the earlier of the retirement date (which would be within six months of the first payment) and the date the physician-owner no longer satisfies the partnership agreement’s eligibility requirements.

For physician-owners who accept the offer, the partnership would redeem their units in three equal increments over the two-year period for a fair market value price as of each redemption date. Because the value of units could increase over the two-year period, it is possible that a physician-owner who accepts this voluntary redemption offer would receive more money than one whose units are redeemed all at once.

Redeemed units are offered to existing and prospective physician-owners through annual offerings. The partnership certified that units are offered equally among all physicians who subscribe to the offering, whether new or existing owners and without regard to the volume or value of referrals or other business generated for the hospitals or the partners.

OIG’s Analysis

The redemption offer implicates the federal Anti-Kickback Statute because it involves offering (and, if the offer is accepted, paying) remuneration to the physician-owners, each of whom is in a position to refer federal healthcare program business to the hospitals, the other physician-partners, and the medical center partner. Although no safe harbor is available, OIG concluded that the arrangement posed a sufficiently low risk under the Anti-Kickback Statute to issue a favorable advisory opinion. OIG reached this conclusion for two reasons:

  1. Eligibility for the redemption offer is unrelated to the volume or value of referrals or other business generated by the physician-owners. Redemption offers, if extended in a given year, are made to every physician-owner who turns 67 during the calendar year, regardless of their referrals or any business they generate. Using this objective criterion that is applied consistently to all physician-owners, OIG reasoned, reduces the risk that the redemption offer could result in steering or increased costs to federal healthcare programs from overutilization or inappropriate utilization.
  2. The remuneration is unlikely to result in unfair competition by altering referral patterns. To accept the offer, a physician-owner must agree not to refer patients to the hospitals or any of the other partners upon the earlier of the physician’s retirement date (which must be within six months of the first redemption payment), and the date the physician no longer satisfies the eligibility criteria in the partnership agreement. Although physicians who accept the offer could continue referring patients to the hospitals and other partners for six months after receiving the first payment, the short duration of this period and the fact that time is needed to wind down the retiring physician’s medical practice in accordance with state law led OIG to conclude that the arrangement is unlikely to alter referral patterns or otherwise result in unfair competition.

Takeaways

Depending on how redemptions and offerings are structured, physician-owned hospitals face risk under the Anti-Kickback Statute when they repurchase or sell interests. Objectivity and consistency are key. Taking into account referrals or other business generated in redemptions or offerings—when determining whose interests are repurchased, to whom interests are offered, or the apportionment of investment opportunities—can result in violations of the Anti-Kickback Statute and the federal physician self-referral law (Stark Law), as recent enforcement actions suggest. On the other hand, basing redemptions and offerings on objective criteria unrelated to the volume or value of referrals or other business generated and then applying those criteria consistently to all physicians reduces the risk of non-compliance, as Advisory Opinion 23-12 illustrates.

If you have any questions about this advisory opinion, please contact the authors.

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