HHS-OIG Advisory Opinion 26-08: Cochlear Implant Center’s Lease Arrangements Clear OIG Scrutiny

Physician-Owned Hearing Loss Center Proposed Shared Space and Equipment Leasing Model

A corporation (“Requestor”) owned by a physician specializing in treating patients with hearing loss (“Physician”) proposed to enter into a series of sublease transactions with audiologists, cochlear implant device manufacturers, and other physicians to create a central location for patients to access the full range of hearing loss education and care in one place (the “Center”). Subleases would be either or both space and equipment leases, and either full or part-time. The Requestor certified the following key facts regarding the lease arrangements: 

• The only remuneration between the Requestor and the sublessees would be fair market value space and equipment rental fees, with no additional remuneration from sublessees. 
• No other payments would be offered or paid by the Requestor or the Physician to the sublessees, nor between the various sublessees.
• There would be no referral requirement or pressure for the Requestor, the Physician, or any sublessees to refer patients to each other.
• The Requestor would pass through its costs for the subleased space and equipment to the sublessees and not charge any additional amounts such that Requestor would not profit from the fees derived from the subleases.

How the Proposed Arrangement Satisfied OIG Safe Harbor Requirements 

Safe Harbor Compliance 

OIG concluded that the proposed arrangement raises concerns under the Federal anti-kickback statute because the Requestor and each of the sublessees would be in a position to refer patients to each other for items and services paid for by Federal health care programs. However, OIG determined the arrangement would be protected by the space and equipment rental safe harbors because each of the following conditions would be met: 

• Each sublease would be written and signed by the parties. 
• Each sublease would cover all of the space or equipment leased between the parties for the term of the sublease. 
• Part-time subleases would specify exact schedules and rent for periodic intervals. 
• Each sublease would have a term of at least one year. 
• The rent for each sublease would be set in advance, consistent with fair market value, and not determined based on volume or value of referrals. 
• The total space or equipment leased to the sublease would be no more than what is reasonably necessary for legitimate business purposes. 

Subleases Not a “Sham Contract” 

Notwithstanding that the proposed arrangement meets all of the safe harbor elements, OIG noted that in the past it has said that full safe harbor compliance is not determinative when there is concern that the arrangement is not a bona fide business deal, but rather a “sham contract” in which the parties do not actually intend to carry out the proposed purpose.  

In concluding that the proposed arrangement was not a sham contract, OIG relied on Requestor’s certification that: (1) the only payments the Requestor would receive from referral sources would be the rental fees, which would consist only of its costs for subleased space and equipment such that Requestor would not profit from the fees; (2) no other payments would be offered or paid by the Requestor or the Physician to sublessees, or between sublessees, as part of the Center’s operation; and (3) there would be no referral requirement or pressure for any party to refer patients to each other. 

What OIG Advisory Opinion 26-08 Means for Healthcare Compliance and Leasing Structures 

OIG Advisory Opinion 26-08 provides important guidance for healthcare providers considering space and equipment lease arrangements. The opinion reiterates for a third time OIG’s position that strict compliance with the space and equipment rental safe harbors is not enough to protect participants from prosecution in the case of sham contracts and provides insight into factors it may consider regarding that analysis. 

Providers are cautioned, however, from interpreting OIG’s focus on pass-through costs as evidence of a bona fide arrangement as also indicating that pass-through amounts are necessarily fair market value. In fact, OIG’s long-standing position has been that pass-through costs are not necessarily fair market value in the context of safe harbor compliance and will be scrutinized to ensure that low-cost alternatives are not being offered to referral sources in exchange for referrals. 

Reminder: OIG’s opinion is limited to the specific facts and parties involved. Any major changes or undisclosed facts could make the opinion invalid, and the opinion does not automatically apply to the same or similar structures or arrangements. Only the Requestor may rely on the opinion.