Joint ventures with referral sources are possible, but care needs to be taken to ensure that the arrangement does not run afoul of the Medicare fraud and abuse laws. Last month, the U.S. Health and Human Services Office of the Inspector General (OIG) refused to give its blessing to such a joint venture. In Advisory Opinion 21-18, the OIG reviewed the structure of a proposed joint venture (JV) between a contract therapy services company and a company that owns skilled nursing facilities (facility owner). 

The JV would provide therapy services through the management of day-to-day operations and therapy staffing for rehabilitation programs in long-term care communities. The facility owner and therapy company would own interests in the JV 60-40. During the initial phases of the joint venture, venture revenues would likely be generated solely by therapy services agreements at the facility owner's locations.

The opinion states that the remuneration exchanged under the proposed JV would not qualify for protection under any safe harbor. In rejecting the proposed JV, the OIG cites a "host of concerns," including patient steering, unfair competition, inappropriate utilization, and increased costs to federal health care programs. Noted also were attributes of the problematic contractual joint ventures described by the OIG in its 2003 Special Advisory Bulletin on Contractual Joint Ventures.

The OIG observed that the contract therapy services company, the partner in the JV, was already an established provider of the same services that JV would provide. The contract therapy services company, in other words, would be a competitor to the JV. By creating a joint venture with the facility owner, the contract therapy services company effectively would be agreeing to forego a portion of the profit that it would realize if it provided those services directly (as it currently does), while providing the facility owner the opportunity to share in those profits.

After considering these facts, the OIG concluded that it was unable to exclude the view that the JV was designed to permit the contract therapy company to do indirectly what it could not do directly: pay the facility owner a share of the profits from the owner's referrals by: (i) rewarding the facility owner for directing federal health care program and other business to the JV; (ii) locking in that referral stream; and (iii) blocking out potential competitor therapy services providers.

This opinion illustrates that the OIG continues to have concerns about "contractual joint ventures" where a referral source can enter a business venture and receive profits, especially when that referral source essentially contributes a stream of referrals to the JV entity. The lesson here is that such JVs need to be constructed with care and fit as closely as possible into the contours of the OIG's safe harbors.