Kusserow on Compliance: OIG Advisory Opinion finds arrangement is “low-risk” under Anti-Kickback statute

The Office of Inspector General (OIG) released an Advisory Opinion on an arrangement in which a hospital would “lease non-physician employees” and “provide operation and management services to a related psychiatric hospital for an amount equal to the hospital’s fully loaded costs” (proposed arrangement). The OIG found that the proposed arrangement was low-risk under the Anti-Kickback Statute (AKS) and, therefore, the OIG would not impose sanctions in this circumstance.


A non-profit health system (the system), along with a foundation, a tax-exempt charitable organization, are the sole members of the center, a non-profit psychiatric hospital. The system and the center (the requestors) are parties to a Master Services Agreement and an Employee Lease Agreement (“existing arrangement”), whereby the system leases non-clinician bona fide employees to the center for an amount equal to the system’s fully loaded costs (i.e., salary plus benefits and overhead expense) plus a two percent administrative fee; the system also provides certain operational and management services to the center in exchange for a fee equal to the system’s fully loaded costs to furnish those services plus a two percent administrative fee. Under the proposed arrangement, everything would be the same, except that the center would pay only the system’s fully loaded costs. The concern was that the system and the center are possible sources of referrals to each other. Medicare reimburses the center under the inpatient psychiatric facility prospective payment system, and the center and certain components of the system file cost reports with CMS.

The requestors certified that the services of the leased employees and the operational and management services cannot be obtained elsewhere at an aggregate cost lower than the cost under the proposed arrangement; and the purpose of both the existing and proposed arrangements has been to integrate the center into the system and to achieve cost efficiencies by eliminating duplicative administrative positions and functions. It is anticipated that the proposed arrangement would decrease the center’s labor and operational costs, which ultimately may result in reduced costs to federal health care programs.

The remuneration that the center would pay to the system during the term of the proposed arrangement would not vary based on the volume or value of referrals or other business generated between the parties. The aggregate compensation cannot be set in advance, however, because the system’s costs and the center’s personnel, operational, and management needs may change during the term. The fully loaded costs charged to the center for the leased employees and services (without the administrative fees) may be below fair market value in an arms-length transaction. The requestors asserted that, because the center and the system are related organizations, payments by the center in excess of the fully loaded costs incurred by the system are not allowable costs to the center. The requestors certified that they would accurately reflect all costs under the proposed arrangement within their respective cost reports and would otherwise comply with applicable cost reporting rules and regulations.


The OIG noted that proposed arrangement cannot meet the requirements of the personal services and management contracts safe harbor, because the compensation may be less than fair market value, and it cannot be set in advance. However, the agency examined the totality of the facts and circumstances of the proposed arrangement and concluded that it has a low risk of fraud and abuse and would therefore not be subject of enforcement action, for the following reasons:

  • The proposed arrangement is supported by applicable Medicare cost reporting rules for related parties. As such, payments to the system in excess of the system’s costs for employees and services would not be allowable costs for the center.
  • The proposed arrangement would achieve cost efficiencies between two related entities that are part of an integrated health system and a reduction in the center’s labor and operational costs. While these cost savings are not directly passed through to federal health care programs, they are included in cost reports for use, along with other data, to update reimbursement amounts under Medicare’s inpatient psychiatric facility prospective payment system. Moreover, cost savings that are not derived from stinting on patient care or other abuses are generally beneficial to a health care system as a whole, which indirectly benefits federal health care programs.
  • The OIG recognized that, inasmuch as the requestors are related parties, they may have existing incentives to refer to each other, however, there is no evidence suggesting that the proposed arrangement would increase these incentives, or that any purpose is to induce referrals.

These facts, combined with the absence of other indicia of remuneration to induce referrals, led the OIG to conclude that the proposed arrangement is sufficiently low-risk under the AKS.

Richard P. Kusserow served as DHHS Inspector General for 11 years. He currently is CEO of Strategic Management Services, LLC (SM), a firm that has assisted more than 3,000 organizations and entities with compliance related matters. The SM sister company, CRC, provides a wide range of compliance tools including sanction-screening.

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Copyright © 2015 Strategic Management Services, LLC. Published with permission.