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OIG Issues Unfavorable Opinion on Proposed Offer of Equity Interest to GPO Members

Aug.06.2013

In Advisory Opinion 13-09, the HHS-Office of Inspector General (OIG) determined that a company's offer of equity to members of its subsidiary group purchasing organization (GPO), partially in exchange for certain commitments to purchase through the GPO, could constitute a violation of the federal anti-kickback statute, 42 U.S.C. § 1320a–7b(b) (the "AKS"). While Advisory Opinion 13-09 is significant for GPOs, it also resonates more broadly, as to the AKS's discount safe harbor, as well as any instance where the acquisition of equity is connected to items or services reimbursable under a federal health care program.

Background

The opinion's Requestor was a company providing financial and performance improvement technology-based products and services. The GPO at issue was wholly-owned by the Requestor, and contributed approximately 60 percent of the Requestor's revenue. On behalf of its members, the largest of which were hospital systems and integrated delivery systems, the GPO negotiated discounts and other contractual terms with vendors.

The GPO collected administrative fees from vendors in connection with members' purchases. By its standard terms, the GPO then passed on a certain percentage of those administrative fees to its members, depending on if the member had negotiated to pay a fee for the GPO's services and if the member agreed to minimum purchase requirements. Critically, the GPO certified that it treats such pass-through administrative fees as discounts and complies with the AKS's discount safe harbor. In addition, OIG noted that CMS requires GPO members to account for distributions of administrative fees paid by GPOs as discounts or rebates.1

Proposed Arrangement

The Requestor proposed to offer selected current and prospective GPO members an equity interest in the Requestor—a publicly traded company.  In exchange, the GPO member would (1) extend the term of its GPO agreement for five to seven years (or enter into a new contract of that term), (2) commit not to decrease the volume of its historically-measured purchases, and (3) forego a portion of the administrative fees passed through to the member by the GPO. GPO members would not need to accept the equity interest; but if they did, they would either keep 2/3 of their current administrative fees and receive an amount of equity roughly equivalent to the forfeited one-third, or keep one-third of the administrative fees and receive equity approximating the other two-thirds.

Analysis

The proposed arrangement implicated the AKS because the Requestor proposed to give something of value (equity interests) to induce GPO members to order federally reimbursable products via the GPO's contracts. OIG also noted, as a preliminary matter, that the GPO safe harbor does not apply to remuneration between the Requestor and GPO members (but rather applies to certain fees paid by vendors to the GPO). Further, the discount safe harbor did not apply because the offer of equity is not a reduction in price on items or services.

Having found no applicable safe harbor, OIG proceeded to a risk analysis and concluded that the proposed arrangement posed a sufficiently high risk of fraud and abuse. OIG concluded first that the proposed arrangement would raise costs to federal health care programs. Because GPO members must treat distributions of administrative fees as discounts or rebates, they must report such distributions as rebates on cost reports, and federal payors benefit. But such would not be the case if the discounts/rebates were replaced by equity in the Requestor.

Second, OIG noted that the proposed arrangement guarantees a certain purchase volume, or rewards an increased purchased volume, of items reimbursable by federal health care programs. The Requestor would require extended contracts and a commitment not to decrease purchases. In addition, the value of the equity interest conferred would be tied to the amount of administrative fees forfeited by the GPO member, which is in turn tied to the volume of purchases made.  As a consequence, OIG concluded that the proposed arrangement posed more than a minimal risk of fraud and abuse.

 


1 Citing CMS Provider Reimbursement Manual, Part 1, Pub. No. 15-1, ch.8, § 805.

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Arthur N. Lerner
Partner – Washington, D.C.
Phone: +1 202.624.2820
Email: alerner@crowell.com