Anesthesia Company Model Arrangement Fuels $1.718 Million Dollar FCA Settlement by a Surgeon and a Separate Guilty Plea By Another Doctor Defendant

In a recent set of go-rounds with the Department of Justice, the so-called company model of anesthesia services took a major hit: One alleged co-conspirator, Jonathan Daitch, M.D., just agreed to a $1.718 million civil settlement and another, Michael Frey, M.D., plead guilty in a criminal prosecution. Frey appears to be a cooperating witness against other alleged co-conspirators.

A quick refresher: In its most direct form, the company model involves the formation, by surgeon-owners of an ASC, of an anesthesia services company to provide all of the anesthesia services for the center. But there’s nothing inherently “anesthesia” about the set-up; the same issues apply in other referrer-controlled structures, such as in the relationship between a dermatologist and controlled pathologists.

The model has long been regarded either as a blatant violation of the Federal Anti-Kickback Statute . . . or, by others (surgeons), as a perfectly proper way of doing business. That latter viewpoint appears to be crumbling under a million dollar plus settlement and the prospect of years in federal prison.

The combined facts of the settled civil case against Daitch and the guilty plea in the criminal case against Frey included allegations that the two surgeons received kickbacks via Anesthesia Partners of SWFL, LLC. (“Anesthesia Partners”), an anesthesia “company” owned by the two physicians.

The two surgeons were also co-owners of their professional practice, Advanced Pain Management Specialists, P.A. (“Advanced Pain”), which is located in Fort Myers, Florida. Anesthesia Partners was the exclusive provider of anesthesia services for Advanced Pain.

Anesthesia Partners contracted with CRNAs to provide the anesthesia services. These CRNAs were paid a contracted rate. Anesthesia Partners then billed Medicare and TriCare directly for the anesthesia services they provided. Daitch and Frey shared the profits.

The U.S. Attorney alleged in the settled allegations against Daitch that his ownership interest in Anesthesia Partners, and the remuneration he received through this ownership interest, induced him to refer his patients for anesthesia services to Anesthesia Partners. Dr. Frey plead guilty in his criminal prosecution to the same allegations.

These results are entirely consistent with the OIG’s position in Advisory Opinion 12-06. In that opinion, the OIG stated that there was no safe harbor available in respect of distributions that the surgeons would receive from their anesthesia company. Even if the safe harbor for payment to employees applied, or if the safe harbor for personal services contracts applied, those safe harbors would protect payments to the anesthesia providers. But, they would not apply to the company model profits that would be distributed to the surgeons, and such remuneration would be prohibited under the AKS if one purpose of the remuneration is to generate or reward referrals for anesthesia services.

The failure to qualify for a safe harbor does not automatically render an arrangement a violation of the AKS. As a result, Advisory Opinion 12-06 then turned to an analysis pursuant to the 2003 Special Advisory Bulletin on suspect joint ventures and found that the physician-owners of the proposed company model entity would be in almost the exact same position as the suspect joint venture described in the bulletin: that is, in a position to receive indirectly what they cannot legally receive directly—a share of the anesthesia fees in return for referrals.

The results in the Daitch and Frey cases are also entirely consistent with the OIG’s position in Advisory Opinion 13-15 (disclosure: I was counsel to the requestor of that opinion) centering on a proposed arrangement in which a psychiatry group performing ECT procedures at a hospital would capture the difference between the amount it collected for anesthesia to ECT patients and the per diem rate it would pay to the anesthesia provider.

The OIG found that the proposed arrangement would not qualify for protection under the AKS’s safe harbor for personal services and management contracts.

That safe harbor protects only payments made by a principal (here, the psychiatry group) to an agent (here, the anesthesia group); no safe harbor would protect the remuneration the anesthesia group would provide to the psychiatry group by way of the discount between the per diem rate their group would receive and the amount that the psychiatry group would actually collect.

Because, again, failure to comply with a safe harbor does not render an arrangement per se illegal, the OIG in 13-15 then analyzed whether, given the facts, the proposed arrangement would pose no more than a minimal risk under the anti-kickback statute.

The OIG flatly stated that “the proposed arrangement appears to be designed to permit the psychiatry group to do indirectly what it cannot do directly; that is, to receive compensation, in the form of a portion of the anesthesia group’s revenues, in return for the psychiatry group’s referrals of patients to the anesthesia group for anesthesia services.”

The OIG concluded that the proposed arrangement could potentially generate prohibited remuneration under the AKS and that the OIG could impose administrative sanctions in connection with the proposed arrangement. In other words, the OIG declined to approve the arrangement.

Advisory Opinions 12-09 and 13-15, and, now, the civil settlement by Dr. Daitch and the guilty plea entered by Dr. Frey in his criminal prosecution, demonstrate a fact lost to many when discussing “company model” deals: they generally do not fit into an available safe harbor — either the personal services and management contract safe harbor or the employee safe harbor.

Not only is this because payment is not set in advance and will vary with the value or volume of referrals, but even more fundamentally because those safe harbors apply only to payments from the principal to the agent, not to payments (in the form of the discount), which is remuneration, from the agent to the principal.

Physicians and CRNAs currently engaged in company model deals would be well advised to immediately obtain counsel to evaluate their relationships in light of these new developments.

Contact me if you’d like to discuss your situation.

Mark F. Weiss

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