OIG Issues New Guidance on Financial Restructuring Arrangements With FQHC Look-Alikes

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The Department of Health and Human Services, Office of Inspector General (“OIG”) recently released a favorable advisory opinion, OIG Advisory Opinion No. 22-17, analyzing the proposed restructuring of financial relationships between a Health System and a Clinic (collectively, the “Requestors” of the advisory opinion). The Requestors asked whether the contemplated restructuring (the “Proposed Arrangement”) would constitute grounds for sanctions under the exclusion authority at section 1128(b)(7) of the Social Security Act (the “Act”) or the civil monetary penalty provision at section 1128A(a)(7) of the Act, as those sections relate to the commission of acts described in section 1128B(b) of the Act (the “Anti-Kickback Statute” or “AKS”). The OIG concluded that though the Proposed Arrangement would generate prohibited remuneration if the requisite intent were present, the OIG would not impose sanctions under the Act in connection with the Proposed Arrangement.

The Advisory Opinion

According to the facts presented, the Health System is a regional nonprofit healthcare system that operates four hospitals. The Clinic is a public benefit corporation that offers healthcare to patients regardless of their ability to pay or their insurance status. The Requestors serve areas that the Health Resources and Services Administration (“HRSA”) has designated as medically underserved and with shortages of health professionals. The Requestors also serve populations that HRSA has designated as medically underserved. When it is in the patient’s best interest and with the patient’s consent, the Health System and Clinic refer patients to one another on a regular basis, though neither is obligated to do so.

The Health System supported the establishment of the Clinic in 2015 to address the primary care services shortage and reduce overutilization of the emergency departments at the Health System’s hospitals. The Clinic has been designated as a Federally Qualified Health Center (“FQHC”) Look-Alike (“FQHC Look-Alike”) since June 2017. An FQHC is a community-based healthcare provider that receives grant funds under section 330 of the Public Health Service Act. An FQHC Look-Alike is a health center that meets the requirements to be an FQHC but does not receive grant funds under section 330 of the Public Health Service Act. By virtue of being an FQHC Look-Alike, the Clinic is subject to federal government oversight of its operations, finances, and compliance with additional requirements. The Clinic also receives certain Federal grant funds or awards that subject the Clinic to the same or similar oversight and reporting obligations that apply to recipients of section 330 funds.

In furtherance of the Requestors’ shared goals — which include expansion of healthcare access for low-income residents, improving overall health of patients served by Requestors, and reducing barriers in accessing quality healthcare services — the Health System has provided financial support to the Clinic. The Health System purchased property and built a medical office building that the Clinic has leased from the Health System since 2017 to use as one of the Clinic’s primary locations. Notwithstanding a written agreement providing for fair market value rent (the “Lease”), the Clinic made no payments to the Health System. The Health System entered into a credit line note with the Clinic in June 2018 for a loan (the “Note”). Notwithstanding the payment terms of the Note, the Clinic has made only two payments towards the Note balance. Finally, Requestors entered into a master services agreement in 2019 pursuant to which the Health System provides the Clinic with certain administrative and medical services, for which the Clinic is contractually obligated to pay a fair market value payment rate (the “MSA”). Clinic has only made two partial payments for two months under the MSA. All amounts owed under the MSA and Lease have been charged against the Note and are reflected in the total amount due on the Note.

Under the Proposed Arrangement, Requestors would restructure the existing agreements between the Health System and the Clinic under the Note, the Lease, and the MSA. Specifically, the Health System proposes to forgive the full outstanding amount owed by the Clinic on the Note through a donation in that amount to the Clinic (the “Note Donation”). Requestors also would enter into new agreements to address the Clinic’s use of the assets currently covered by the Lease (the “New Lease”) and a revised scope of administrative and medical services to be provided by the Health System to the Clinic, reflecting the Clinic’s growth and maturity since its formation in 2015 (the “New MSA,” and together with the Note Donation and the New Lease, the “New Agreements”). The New Lease would allow the Clinic to use the assets covered by the Lease free of charge, and the New MSA would require the Clinic to pay the Health System fair market value for the services provided under the New MSA. The Requestors further certified, inter alia, that:

  1. the New Agreements would be in writing and would specify the amount of all goods, items, services, donations, or loans to be provided by the Health System to the Clinic (the “Benefits”);
  2. the Benefits would be for a fixed sum and would not be conditioned on the value or volume of federal healthcare program business generated between the parties;
  3. the Benefits would be medical or clinical in nature or otherwise relate directly to the services the Clinic provides to its patients;
  4. the Benefits would contribute meaningfully to the Clinic’s ability to maintain or increase the availability, or enhance the quality of, services provided to a medically underserved population; and
  5. nothing would require either Requestor to refer patients to a particular individual or entity, and the Clinic would provide effective notice to patients of their freedom to choose any willing provider or supplier.

The OIG concluded that the Proposed Arrangement poses a sufficiently low risk of fraud and abuse under the AKS. It noted that the Note Donation would implicate the AKS because it would involve remuneration by alleviating a significant financial debt via the Note Donation and providing free use of the premises under the New Lease. The OIG further noted that the Proposed Arrangement would not qualify for protection under the FQHC Safe Harbor because that safe harbor only protects remuneration to an FQHC, and the Clinic is an FQHC Look-Alike.

Nonetheless, the OIG found that the Proposed Arrangement posed a sufficiently low risk of fraud and abuse under the AKS for a combination of reasons.

First, Requestors’ certifications indicate that the Proposed Arrangement would be structured and operated in a manner that aligns with all of the requirements of the FQHC Safe Harbor, including that the Clinic would be free to refer patients to other providers and that the remuneration under the New Agreements would contribute meaningfully to provision of health services to a medically underserved population.

Second, although the Clinic does not receive section 330 funding, HRSA has designated the Clinic as an FQHC Look-Alike, and by virtue of that designation, HRSA conducts regular oversight of the Clinic’s operations and finances. The Clinic also receives certain funds that subject the Clinic to the same or similar oversight and reporting obligations that apply to recipients of section 330 funds.

Third, certain attributes of the Proposed Arrangement reduce the risk that it would result in inappropriate patient steering from the Clinic to the Health System, including that neither the Health System nor the Clinic is under any obligation to refer patients to the other.

Lastly, the remuneration that would be provided under the Proposed Arrangement is a continuation of the Health System’s longstanding support of the Clinic as part of their shared mission, which includes expansion of healthcare access for low-income residents, improving overall health of patients served by Requestors, and reducing barriers in accessing quality healthcare services.

Analysis

Many hospitals operate outpatient clinics to satisfy their charitable missions. These clinics may not be operated as cost effectively as FQHCs or FQHC Look-Alikes, which receive enhanced Medicaid payments and Medicare reimbursements and access to discounted prescription drugs under Section 340 of the Public Health Services Act. In addition, FQHCs receive annual grants. Also, medical malpractice claims against providers working at FQHCs must be filed in federal court under the Federal Tort Claims Act. Federal government attorneys rather than private counsel will defend the FQHC under qualifying circumstances, mitigating expenses associated with malpractice insurance. For these reasons and others, a hospital may find it beneficial to partner with a FQHC or FQHC Look-Alike to further their charitable missions.

Because the FQHCs and FQHC Look-Alikes are in a position to generate federal healthcare program business through their treatment of federal healthcare program patients or prescription of pharmaceutical products that may be payable by federal healthcare programs, hospitals partnering with them must guard against AKS violations. The AKS makes it a criminal offense knowingly and willfully to offer, pay, solicit, or receive any remuneration to induce or reward referral of items or services reimbursable by a federal healthcare program. The Department of Health and Human Services has promulgated safe harbor regulations that define practices that are not subject to the AKS because such practices would be unlikely to result in fraud or abuse. See 42 C.F.R. § 1001.952. There is a safe harbor for the transfer of goods, items, services, donations, loans, or combinations thereof to a federally qualified health center receiving federal grants, as long as nine specified standards are met (the “FQHC Safe Harbor”). 42 C.F.R. § 1001.952(w). Significantly, the safe harbor requires that there be a signed, written agreement; the amount of the contribution be fixed or set by a fixed methodology not conditioned on referrals or business generation; contribution to the FQHC be “medical or clinical in nature”; and the FQHC “reasonably expects the arrangement to contribute meaningfully” to the health center’s mission. Id. § 1001.952(w)(1)-(3). However, safe harbor protection is afforded only to those arrangements that precisely meet all of the conditions set forth in the safe harbor. Arrangements that do not comply with a safe harbor are evaluated on a case-by-case basis.

Advisory Opinion 22-17 is not the first of the OIG’s analyses to approve a Proposed Arrangement even though it did not fit squarely within the FQHC Safe Harbor. In Advisory Opinion 08-01, the OIG considered a proposed arrangement under which, inter alia, a partnership sought participation on behalf of its affiliated FQHCs in various bulk replacement patient assistant programs (“PAPs”) sponsored by pharmaceutical companies that provide in-kind donations in the form of free drugs. The OIG determined that the proposed arrangement did not fit neatly within the FQHC Safe Harbor because the FQHCs were not required to make the requisite determinations regarding benefits to underserved populations, and the free drugs offered by PAP sponsors were not offered to all FQHC patients regardless of payor status. Nonetheless, the OIG concluded that the risk of improper kickbacks was mitigated for several reasons, including:

  1. the FQHCs served as conduits for distributing PAP drugs to uninsured patients who met financial eligibility criteria;
  2. the proposed arrangement was transparent, with terms documented in a written, signed agreement;
  3. participating pharmaceutical manufacturers had to provide PAP drugs uniformly to all participating FQHCs, and the availability of drugs under the PAPs was not conditioned on the volume or value of federal healthcare program business generated by an FQHC; and
  4. the proposed arrangement related directly to the core clinical services provided by the FQHCs and helped ensure the availability of safety net health services for otherwise underserved populations.

In both advisory opinions, the OIG seemed to focus on the proposed arrangement’s nexus to the organizations’ charitable missions, the transparency of proposed arrangements, and that the provision of the benefit was not tied to the federal healthcare program business potentially generated by the provider to determine that they posed a low risk of fraud despite not fitting neatly into the FQHC Safe Harbor.

Advisory Opinion 22-17 is available here and Advisory Opinion 08-01 is available here. While these opinions only apply to the specific facts and proposed arrangement presented in each particular request and should not be relied upon as general policies, they offer informal guidance to healthcare providers about practices relating to arrangements involving FQHCs or FQHC Look-Alikes.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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