American College of Physicians: Internal Medicine — Doctors for Adults ®


Case Study

How hospital perks can violate fraud and abuse laws

From the January 1998 ACP Observer, copyright 1998 by the American College of Physicians.

By Michael J. Werner, JD

In recent years, federal and state enforcement of the fraud and abuse laws have been strengthened, as governments see health care fraud as both a revenue source and an opportunity to reduce "waste" in government programs. As enforcement of these laws increases, physicians will remain vulnerable to a variety of charges and investigations.

The fraud and abuse laws are complex and often misunderstood. Nonetheless, physicians who fail to abide by their terms can be excluded from Medicare, Medicaid and other government health care programs. The government also can impose large civil fines.

This is the first in a series of hypothetical case studies designed to illustrate how the fraud and abuse laws can be applied to everyday scenarios. It focuses on the Medicare anti-kickback statute.

Case study

Internal Medicine Associates (IMA) is a 10-member internal medicine group practice in small city A. About half of IMA's patients are Medicare beneficiaries. There are two hospitals in the city, and IMA physicians have admitting privileges at both.

At the most recent meeting of the partners, Dr. Welby, a senior partner, described a proposal made by one of the local hospitals. The hospital offered to provide regular educational seminars for IMA's staff on CPT coding at no charge. In addition, Dr. Welby said that the hospital has acquired office space in an adjoining building. The hospital would like to fill this building with physician offices and offered IMA a nine-month "introductory" lease at a rate that is significantly below what they will charge future tenants. Should the group agree to the proposal?


No. Implementation of this proposal would be a clear violation of the Medicare anti-kickback statute and would subject the physicians to civil monetary penalties—and possible exclusion from Medicare.

The statute says it is a felony to knowingly and willfully "solicit, pay, offer, or receive any remuneration, in cash or in kind, for the referral or to induce the referral of a patient, or for ordering, providing, recommending or arranging for the provision of any service" payable by the federal health care programs. In this case, any benefit—direct or indirect, in cash or in kind—that goes to the medical group in exchange for services provided by the hospital through referrals will be viewed with suspicion.

Because of the complexity of the anti-kickback law, the Department of Health and Human Services published a set of "safe harbors" a few years ago. Activities that fall within the terms of the safe harbors are protected from enforcement action by the government.

The safe harbors cover a number of situations. Of particular importance to the practice in this case study is the safe harbor governing rental of office space. The regulation specifies the conditions that must be met for a rental agreement to receive safe harbor protection: there must be a signed, written lease; if the lease provides access to the property for periodic intervals of time rather than on a full-time basis, the lease must specify the schedule of such intervals and the rent for each; the term of the lease must be for at least one year; and the aggregate rental charge must be set in advance and consistent with fair market value.

The lease in our example does not fall within these guidelines because it is for only nine months, and it is being offered for significantly less than fair market value. However, merely because the arrangement is not protected by the safe harbor does not make it illegal. The Office of the Inspector General (OIG) at the Department of Health and Human Services would separately evaluate whether the rental represents an illegal incentive plan. The focus of the investigation would be whether one of the purposes of the arrangement is to try to influence the physicians' decision regarding where to refer their patients for treatment.

The OIG has specifically identified use of significantly discounted office space and providing free CPT training for physicians' office staff as suspect activities. In this example, it is likely that the offering hospital is looking to gain a competitive edge over its competition. Thus, the OIG would probably find that this venture is illegal.

If the physicians (or the hospital) were unsure about the legality of the proposed venture, they could request an advisory opinion from the OIG. The requester of an advisory opinion must pay a $250 processing fee and about $100 an hour for the OIG to respond to the request. According to previous requesters, OIG attorneys usually spend about seven hours working on a case. More information about how to request an advisory opinion and about the fraud and abuse laws can be obtained from the OIG web site located at

Michael J. Werner is Counsel for Health Policy in ACP's Washington, D.C., office.

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