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| 3 minutes read

Unfavorable OIG advisory opinion issued for a proposed venture with surgeon owners but managed by others

Although it is possible to enter into business ventures with referral sources, care needs to be taken to ensure that the arrangement does not run afoul of the Medicare fraud and abuse laws. This month, the U.S. Health and Human Services Office of the Inspector General (OIG) refused to give its blessing to such a venture. In Advisory Opinion 23-05, the OIG reviewed the structure of a venture between surgeons who would become investors and an entity that would supply these same surgeons with intraoperative neuromonitoring (IONM) services.

IONM services are used to monitor a patient’s neurological functions during surgeries in which the patient’s neurological structures are considered to be at risk, with such services including both technical components and professional components. Technical component services are performed by a neurophysiologist located in a hospital or ambulatory surgical center (ASC) surgery suite operating the IONM equipment, with professional component services provided by a neurologist who monitors the test results and waveforms produced by that equipment in real time during the surgery and communicates those results to the surgeon.

The requestor of this advisory opinion is an existing IONM supplier who currently contracts with various hospitals and ASCs under an IONM services agreement to provide these technical and professional component services. The requestor advised the OIG that they propose to assist physicians -- who perform surgeries where IONM is used -- with the formation and operation of a turnkey entity that would perform IONM services (Newco) and that would be owned by those same physicians. The potential physician investors in the Newco currently make referrals to the requestor for IONM services.

OIG's 2003 Special Advisory Bulletin on Contractual Joint Ventures

Because the opportunity for Newco to profit from the difference between the cost for the technical and professional services and the reimbursement Newco would receive for such services, the OIG concluded such remuneration would not qualify for safe harbor protection, thus requiring them to consider the risk of fraud and abuse the proposed venture would present. After considering Newco's structure, it was clear to the OIG that the surgeon owners would have only a passive role in the venture's operations and would contract out substantially all of Newco’s operations. Key to the analysis was the OIG's 2003 Special Advisory Bulletin on Contractual Joint Ventures and the importance of scrutiny when health care providers (the surgeons) in one line of business expand into a related health care business by contracting with an existing provider(s) of a related item or service (the requestor acting as manager of technical component services and a neurology practice providing the professional services) to offer the new item or service to the surgeons' existing patient population, including Federal health care program patients. 

Based on this analysis, the OIG opinion determined there was regulatory risk due to the profits from Newco arising solely from the surgeons' referrals. The venture thus was a vehicle to induce referrals of Federal health care program business.

Particularly interesting is that the requestor advised the OIG that their entry into the IONM venture with the surgeons was for competitive reasons since their existing surgeon clients are continually approached by other IONM companies that are encouraging the surgeons to enter into similar arrangements. Thus, the requestor indicated that they are seeking to retain business from their existing surgeon clients that otherwise could be lost to these competing IONM companies. One suspects that the IONM supplier who requested this advisory opinion is not altogether unhappy with the negative opinion since the OIG's views of the fraud and abuse risks from such an arrangement could conceivably chill the ongoing offers of similar turnkey arrangements to their existing surgeon clients.

This negative opinion illustrates that the OIG continues to have concerns about "contractual joint ventures", just as they did when reviewing another contractual joint venture in 2021, where a referral source can enter into a business venture and receive profits, especially when that referral source contributes a stream of referrals to the newly formed entity and garners profits from the business generated by their referrals. The lesson here is that ventures with referring investors need to be constructed with care and fit as closely as possible into the contours of the OIG safe harbors. 

The financial incentives inherent in the Proposed Arrangement could corrupt the Surgeon Owners’ medical decision-making and result in overutilization or inappropriate utilization of IONM services and improper steering to Newco.


fraud and abuse, oig advisory opinion, contractual joint venture, health care & life sciences