Proceed with Caution

The Office of Inspector General in April issued a Special Advisory Bulletin about joint-venture arrangements between mail-order pharmacies and home medical equipment companies that may violate the Federal Anti-Kickback statute. This statute prohibits knowingly and willfully soliciting, receiving, offering or paying anything of value to induce referrals of items or services payable by a federal health care program.

The Bulletin focuses on one type of arrangement, in which a health care provider in one line of business expands into a related health care business by contracting with an existing provider of related items or services to provide the new item or service to the original provider's patients. Two of the three examples of such an arrangement the OIG describes involve durable medical equipment companies.

In the first example, a hospital establishes a subsidiary to provide DME, and the subsidiary contracts with an existing DME company to operate the new subsidiary and to provide the new subsidiary with inventory.

In the second example, a DME company sells nebulizers, and a mail-order pharmacy suggests that the DME company form its own mail-order pharmacy to provide nebulizer drugs. The mail-order pharmacy runs the DME company's pharmacy and provides personnel, equipment and space. The mail-order pharmacy also sells all nebulizer drugs to the DME company's pharmacy for its inventory.

The latter example exhibits several “common elements” of the troublesome arrangements. First, the DME company expands into a related line of business (pharmacy) that is dependent on referrals from, or business generated by, the DME company's existing business.

Second, the DME company does not operate the new business itself and does not commit substantial resources to the venture. Instead, the mail-order pharmacy operates the new business, providing the inventory, office space, personnel, and billing (which is done in the name of the DME company).

The third common element, the OIG states, is that absent the arrangement, both entities would be competitors in the same line of business. The fourth element: Both entities share in the economic benefit of the new business. Finally, the fifth element: Aggregate payments to the mail-order pharmacy typically vary with the value or volume of business generated for the new business by the DME company.