INTER-OFFICE MEMORANDUM

To: Vice President Hapless County Hospital

From: President Hapless County Hospital

Re: Proposed joint venture for MRI services

Date: April 15, 2016

Congratulations on your first day as vice president here at Hapless County Hospital (hereinafter referred to as Hapless ). I want you to consider the problem set forth in this memorandum to be your first assignment.

There may be a few small points that I forgot to mention during your recent job interview. First, Hapless is in serious financial trouble, and we may not be able to pay your salary for the next few months. Our facilities are old and obsolete, and no patients come here for treatment if he or she can afford to go somewhere else. Most of our patients are indigent, and we operate several clinics in cooperation with the medical school at the state university. Unless we bring in some more revenue in a hurry, we will have to close down some of our indigent care clinics.

Our motto is that we are the best county hospital in Hapless County. However, this motto is not bringing in the paying patients, perhaps because we are theonlycounty hospital in Hapless County.

If patients have health insurance or can afford to pay their bills, they go to Millard Fillmore Memorial Hospital because they have cable television and internet access in every room as well as more modern facilities and equipment. Moreover, the physicians in private practice like to admit their patients to Millard Fillmore Memorial Hospital because the doctor's parking lot is right next door to the sports car dealership. In that way, they can have their cars serviced while they perform surgery, and then head straight for the golf course.

If we could obtain a magnetic resonance imaging (MRI) machine at Hapless, it would help improve our image and might bring in enough revenue to keep our indigent care clinics in operation. Of course, we cannot afford to purchase an MRI machine because of the high cost. I have thought about trying to lease an MRI machine, but the rent would be $500,000 per year.

I do not think that we could generate sufficient utilization of the MRI equipment to make the annual payments on the lease.

Recently, a group of physicians on our medical staff approached us with a business proposal for a joint venture to establish MRI services at Hapless. Under their proposal, Hapless would establish a wholly owned for-profit subsidiary to be known as Hapless Health Services Corporation. That for-profit subsidiary, in turn, would be the sole general partner of a new limited partnership to be known as Hapless MRI Limited Partnership. The limited partners would be the physicians who made the proposal to Hapless. (It may be helpful for you to draw the arrangement in a figure to better understand the relationships).

Hapless for-profit subsidiary will contribute $25,000 as its capital contribution. I told the physicians that we could probably afford to pay that if we delay paying salaries to all my assistants, such as you for the next few months.

Each limited partner will contribute $10,000 in capital to the joint venture. However, profits will be distributed to each limited partner in proportion to the number of patients referred for MRI services. The limited partners will be encouraged to refer all of their patients needing an MRI scan to Hapless, but they will not be required to do so. Moreover, the limited partners may not invest in any other MRI machines in this geographic area.

Rather than having the hospital lease the MRI machine and try to make the lease payments of $500,000 per year, the limited partnership will lease the machine from Medical Equipment Leasing Corporation (MELC), and the limited partnership will make the lease payments of $500,000 per year to MELC. Then, the limited partnership will sublease the equipment to Hapless. And Hapless will make sublease payments to the limited partnership. The sublease payments from Hapless to the limited partnership will be 60 % of $500,000 per year, plus 50% of gross cash collections from use of the MRI machine. Therefore, the amount of the sublease payments will vary with the volume of utilization of the MRI machine.

I hope that we can accept the proposal from the physicians, but I still have some concerns. Last month, I went to a seminar where I heard a presentation about the Medicare anti-kickback law. I wonder if this proposed joint venture would violate that law.

To save money, I donotwant you to ask the hospital's lawyer about this issue. You know what lawyers are like. I know from your interview that you took a good legal course during graduate school at TWU, so please take a look at the excerpt from the regulations that are attached to this memorandum but do not perform any additional research.

Under the anti-kickback statute, payments are generally unlawful if they are made with the intent of inducing referrals of patients covered by federal healthcare programs. However, Congress required HHS to issue regulations that set forth safe harbors from the anti-kickback law.

Therefore, the regulations take the form of a series of exceptions, which are the safe harbors from legal liability.

As you will note, there are two safe harbors for investment interests. To qualify for safe harbor protection, it isnotnecessary to meet all of the requirements set forth with regard to investment interests. However, itisnecessary to meet all of the requirements within one of the two categories of investment interests to be able to take advantage of the safe harbor. Thus, it would be necessary to meet all five of the requirements for the first type of investment interestorall eight of the requirements for the second type of investment.

In addition, there is a separate safe harbor for equipment rental, which has several requirements. Again, it is important to remember that the failure to meet all the requirements of a safe harbor does not mean that the financial arrangement is illegal.

For purposes of this assignment, do not consider the possible application of the Stark self-referral legislation or the regulations that implement that legislation. Instead confine your analysis to the safe harbor regulations that are attached to this memorandum, as well as your knowledge of the general requirements of the anti-kickback law.

For each of the questions set forth below, you may determine that you need some additional facts. If so, list all additional facts that you believe to be needed for each question and explain how your answer for each of the question would change depending on the resolution of those factual issues.

1. Does this arrangement violate the Medicare/Medicaid anti-kickback law? Why or why not?

2. Does the arrangement fit within the safe harbor for either type of investment interest? Why or why not?

3. Does the arrangement fit within the safe harbor for equipment rental? Why or why not?

4. If you conclude that the arrangement may be unlawful, how could you modify thearrangement to make it lawful?