Safe harbor rules draw refinements

November 20, 1991

The Office of the Inspector General needs to work some remainingkinks out of the Medicare anti-kickback safe harbors, althoughthree months have passed since publication of the controversialrules. At a recent conference, OIG staff attorneys were made

The Office of the Inspector General needs to work some remainingkinks out of the Medicare anti-kickback safe harbors, althoughthree months have passed since publication of the controversialrules.

At a recent conference, OIG staff attorneys were made awareof a quirk in the structural 40/60 safe harbor that apparentlydisqualifies all joint ventures from protection, according toAlan E. Reider, a Washington, DC, attorney. The rule stipulatesthat parties in a position to influence referrals cannot controlmore than 40% of any class of security in a medical business thatparticipates in Medicare.

Limited partnerships have at least two stock classes, Reidersaid. One is controlled by the general partner who assumes responsibilityfor the business's liabilities. The other class is held by limitedpartners, who take a lower share of the profits because they assumerelatively less risk.

Many limited partnerships are organized around a single generalpartner, Reider noted. This makes it impossible for such businessesto qualify for safe harbor protection when a hospital, radiologistor anyone in a position to influence referral plays that role.Surprised OIG attorneys said they would write a clarificationto deal with that peculiarity.

The $50 million threshold needed to qualify for the large-entitysafe harbor has also caused confusion. Businesses must pass fivetests to qualify, according to OIG sources:

  • the company must be registered with the Securitiesand Exchange Commission;

  • its stock must be sold to the general public on thesame terms as it is sold to referring physicians;

  • physician investors cannot be given preference overnoninvestor physicians when using the service;

  • cash distributions are to be based on the size of theinvestment and the business's financial performance; and

  • the company must hold more than $50 million in nettangible undepreciated assets.

A misunderstanding about the last requirement led AmericanShared Hospital Services to believe it meets the large entitytest (SCAN 11/6/91). With liabilities deducted, however, the imagingservices firm would not reach the $50 million net tangible assetsthreshold.

The net tangible assets test works as follows, according toOIG sources. The company's total current assets, property andequipment, and accumulated depreciation are added together. Intangibleassets, such as good will, must be winnowed out. Debt and otherobligations relating to tangible assets, such as equipment loansand future lease obligations, are then subtracted.

While the formula appears to be clear-cut, OIG sources admittedthey are not entirely sure about all the debt categories to beincluded.

Using the most liberal interpretation of the safe harbor formula,ASHS comes up about $34 million short of the threshold.

"Falling short certainly doesn't force us off the playingfield," said Richard Magary, vice president of administrationfor ASHS. "There are a number of ways to structure and financethese ventures, so we're still actively looking at fixed-siteproperties."