**An Overview of Relevant Federal and State**

**Laws and Regulations for**

**Community Access Program Consortia**[^1]

**Prepared for the Health Resources and Services Administration**

***by:***

**Feldesman, Tucker, Leifer, Fidell & Bank LLP**

***with the assistance of:***

**Powell, Goldstein, Frazer & Murphy LLP**

**April 3, 2001**

**I. INTRODUCTION**

This issue brief provides an overview of various Federal and State laws
and/or regulations that may be relevant to Community Access Program
("CAP") consortia. Specifically, this issue brief summarizes Federal and
State laws with which CAP grantees and their counsel should be most
familiar in structuring and implementing a CAP arrangement.[^2]

**II. FEDERAL LAW**

There are a number of Federal laws that have important implications for
CAP consortia participants. In addition, many states have enacted
legislation in a particular area that may differ from or may be more
stringent than the Federal law. We have noted instances where CAP
participants should be mindful of both the Federal and State laws in a
particular area. In all cases, qualified legal counsel should review a
proposed arrangement to ensure compliance.

A. [Federal Income Tax Law.]{.underline}

CAP participants that are forming a separate entity in order to carry
out their program should consider the Federal income tax implications of
this decision. There are several key considerations in deciding whether
to form a for-profit versus a nonprofit corporation including:

> 1\. the purpose of the corporation (if not charitable, it will not be
> possible to obtain §501(c)(3) tax-exempt status);
>
> [Note]{.underline}: To the extent that the CAP consortium furnishes
> only administrative support services to participating providers rather
> than providing health services, the IRS may not view the activity as
> "charitable." In addition, if the CAP entity is developing a managed
> care organization, obtaining Section 501(c)(3) status may be more
> difficult than in the past since the IRS has been increasingly
> reluctant to grant exempt status to such organizations.
>
> 2\. the likely source(s) of capital to finance the entity's
> operations; and
>
> Note: To the extent that the corporation will continue to rely on
> government and/or foundation grants, a tax exemption may be required.
>
> 3\. the parties' intent regarding the distribution of net income.

Tax-exempt organizations, such as a nonprofit hospital or health center,
may ordinarily own a for-profit entity, in whole or in part, without
jeopardizing their income tax exemptions, so long as the for-profit
entity will further the tax-exempt purposes of the (tax-exempt)
nonprofit entity. Further, nonprofit entities can invest charitable
assets in a for-profit venture.[^3] A for-profit entity owned by
nonprofit entities may distribute net income to the nonprofit "owners,"
so long as such revenues are used by the nonprofit owners to further
their respective tax-exempt purposes. However, the for-profit entity's
"profits" will be taxed before any remaining revenues are paid to the
nonprofit owners, typically in the form of dividends.

A limited liability company ("LLC") is sometimes formed to carry out a
joint venture between health care providers. An LLC protects its members
from liability, similar to a corporation, but is a "pass through"
organization for income tax purposes, meaning that the LLC does not pay
tax on any income that is passed through to its members. However, unless
the LLC itself qualifies for income tax exemption, the income received
by a tax-exempt member of the LLC is treated as taxable, un-related
business income. Regardless of the form, any separate entity formed by a
CAP consortia, whether for profit or nonprofit, should be carefully
structured so that the entity does not adversely impact the tax-exempt
status of its participants under Federal law.

B. [Grant-Related Regulations.]{.underline}

Recipients of Federal grant funds are subject to the responsibilities
and requirements that attach to the benefit of receiving these funds.
The requirements are in place to safeguard the expenditure of Federal
funds and ensure that the recipients are accountable for their use.
Depending upon whether the CAP grantee is a nonprofit organization or
state/local government, these grant-related requirements may differ.
There regulations are set forth in 45 C.F.R. Part 74 (for institutions
of higher education, hospitals, and other nonprofit organizations) and
Part 92 (state and local governments).

1\. *[Recordkeeping, Reporting and Monitoring]{.underline}*.

CAP grantees are responsible for managing and monitoring the activities
supported by the grant. This includes such requirements as establishing
a financial management system that is able to support an accrual
accounting system, the accurate identification of the source and
application of funds, and the effective control and accountability for
all funds, property and assets. Grantees have periodic reporting
requirements and any significant deviations from the approved budget
and/or project require DHHS's prior approval. A CAP grantee's
expenditure of funds is further regulated by the Federal cost principles
that govern the allowability of costs charged to grants and that specify
the necessary documentation of such costs.[^4] Generally, CAP grantees
whose grants exceed \$300,000 will be subject to the audit requirements
described in Office of Management and Budget ("OMB") Circular A-133.

2\. *[Procurement Standards]{.underline}*.

If the CAP grantee intends to purchase goods or services
([e.g.]{.underline} A Management Information System, consultant
services, equipment, or clinical services from one or more of the
consortium participants) using Federal grant funds, CAP collaborators
must ensure that the purchase complies with Federal procurement
regulations. Contracts for procuring goods or services which are paid
for by Federal funds, in whole or in part, are subject to the
administrative requirements and principles contained in OMB Circular
A-110[^5] as promulgated by DHHS in regulation at 45 C.F.R. Part 74 (for
Nonprofits) and Part 92 (for State and Local governments). Specifically,
the procurement regulations require Federal grant recipients to: (1)
maintain written standards of conduct including an appropriate conflict
of interest policy; (2) provide for open and free competition; (3)
establish written procurement procedures; (4) maintain procurement
records; (5) maintain a contract administration system to ensure
conformance with the terms and conditions of the contract; and (6)
include certain provisions in the contract.[^6] Finally, grantees
purchasing goods (or services) in an amount exceeding \$100,000 in
Federal funds that do not document the need for utilizing a "sole
source" procurement must competitively procure the goods (or services)
unless their DHHS-approved proposal specifies a specific vendor that
will be used.

3\. *[Property or Equipment Acquired with Federal Funds]{.underline}*.

Property or equipment[^7] acquired (or improved), in whole or in part
with Federal grant funds may not be encumbered, used for other than
approved project purposes, or disposed of without Federal approval.[^8]
If a CAP grant includes funds for acquisition of property by a grantee
or consortium entity, the grantee must have an agreement that
incorporates the Part 74 requirements regarding use, sharing or
disposition of the property. Further, if the grantee intends to transfer
any property or equipment acquired with Federal funds to another entity,
the grantee must first obtain Federal approval and must comply with any
disposition instructions that may be provided. These instructions may
require the CAP grantee to compensate the Federal government for that
percentage of the current fair market value attributable to the "Federal
share" in the acquisition or improvement cost of the property or
equipment.

C. [Intellectual Property Laws]{.underline}.

CAP consortia should consider whether intellectual property law is
relevant to their program.[^9] As mentioned above, the focus of many CAP
collaborations is on the purchase or development of a shared MIS. In
other instances, CAPs are premised on the development of shared
protocols, policies or procedures. Under all of these circumstances,
questions regarding "ownership" of the system or information should be
resolved. In general, Federal law protects the unauthorized use and
reproduction of "intellectual property" that is owned by others.

Intellectual property laws may affect several activities conducted by
CAP collaborations such as negotiating a software licensing agreement
that ensures appropriate access to the system ([i.e.]{.underline}, that
enough individuals have access to the software) or that resolves who
"owns" the data that is generated by the system; or creating materials
such as protocols, health education materials, or manuals that should be
copyrighted by the collaborators. Regardless of the particular activity
conducted or the intellectual property law involved, CAP participants
should clearly define who has rights to use or duplicate the materials,
under what terms and conditions, and to whom credit must be given. In
some cases, participants who develop a patentable product or invention
may need to file appropriate documentation with the U.S. Office of
Patent and Trademarks to protect their material or designs.[^10] When
filing an application, CAP consortia are subject to the regulations that
govern patents and inventions developed by nonprofit organizations and
small businesses under a Federal grant.[^11]

CAP consortia that develop or purchase ownership of intellectual
property under a Federal grant award should note that DHHS reserves a
royalty-free, non-exclusive and irrevocable right to use, reproduce, and
publish the work (or property) for Federal purposes. DHHS may also
authorize others to do so.[^12]

D. [Health Insurance Portability and Accountability Act
(HIPAA)]{.underline}.

HIPAA[^13] was enacted in 1996 and included, among other things, fraud
and abuse provisions (i.e. the Medicare Integrity Program), the
"Administrative Simplification" provisions that directed DHHS to take
steps to increase efficiency in the health care system, and the
"Privacy" provisions that directed DHHS to promulgate regulations
regarding the security and privacy of health information.

The first set of "Administrative Simplification" rules proposed by DHHS
were the Standards for Electronic Transmission.[^14] DHHS published the
second set of HIPAA regulations, the Standards for Privacy of
Individually Identifiable Health Information,[^15] commonly referred to
as "the Privacy Regulations," on December 28, 2000.[^16] The Privacy
Regulations cover virtually every health care provider (including
hospitals and health centers) and to extend to health plans, and health
care clearinghouses. In addition to limiting the circumstances under
which personally identifiable patient information can be disclosed
(including disclosures within an organization), these Standards impose
new administrative requirements for managing and tracking the disclosure
of protected patient information.

While health care providers will have time to comply with the HIPAA
regulations, they may have significant implications for CAPs that should
be addressed prior to their effective date. For example, the Privacy
Regulations require in most instances that covered entities obtain
patient consent or authorization prior to disclosing individually
identifiable health information. Accordingly, CAP collaborators that are
purchasing an MIS to share health information must ensure that the
system is adaptable to HIPAA standards or it may require modification
(and investment) in a matter of months. Moreover, CAP collaborators
should ensure that their agreements, whether among themselves or with
outside vendors, include clauses that mandate compliance once the
regulations go into effect. For additional information regarding HIPAA's
privacy considerations, please review the Issue Brief entitled "HIPAA
Privacy Considerations for Community Access Program Grantees" dated
March 1, 2001, and seek the advice of qualified counsel for specific
questions or guidance.

E. [Federal Antitrust Law]{.underline}.

In general, Federal antitrust laws[^17] prohibit activities among
competitors and potential competitors that are considered inherently
\"anti-competitive\" or which are deemed to be anti-competitive when
balanced against their potential pro-competitive effects. Activities
deemed to be inherently anti-competitive ([i.e.]{.underline}, [per
se]{.underline} anti-competitive) include price fixing, boycotting,
market allocation agreements, and other forms of collusive behavior.
While these activities are [per]{.underline} [se]{.underline} examples
of antitrust law violations, other activities, such as mergers,
consolidations and joint ventures, require a careful analysis of the
particular facts and circumstances to the law to determine whether
potential anti-competitive effects outweigh potential pro-competitive
effects. This type of analysis is referred to as the "rule of reason."

The Federal agencies that enforce the antitrust laws, the Department of
Justice ("DOJ") and the Federal Trade Commission ("FTC"), have generally
looked favorably upon joint ventures in the health care arena, viewing
the majority of them as pro-competitive. However, to provide additional
guidance regarding permissible activities, the agencies have created
certain \"safety zones\" which describe particular activities that will
not be challenged by DOJ or FTC, absent extraordinary circumstances.
These safety zones generally distinguish between activities that may be
conducted by "integrated" providers (as specifically defined by the
criteria) versus those that may be conducted by "non-integrated"
providers.

Any CAP arrangements involving the participation of potentially
competing health care providers in the same market or service area
should be carefully evaluated to determine whether the collaboration
could result in unacceptable levels of market power or other antitrust
concerns. For example, a CAP collaboration that seeks to increase access
for all populations to specialty care services in a particular county by
establishing a shared referral system or appointment schedule and
linking providers in the area without shared financial risk may lead to
antitrust problems as collaboration without financial integration may be
viewed as anti-competitive. This does not mean that the collaboration
can not move forward, only that it should be carefully evaluated in
order to create a structure that best protects the participants. Many
CAP arrangements can be structured to meet the criteria for a safety
zone.

State antitrust laws generally mirror the Federal statutes. However,
relevant State antitrust laws should be researched independently to
determine whether they contain more stringent requirements. In addition,
many states have enacted statutes that provide immunity from antitrust
prosecution for certain joint venture activities between health care
providers that would control health care costs and improve the quality
of, and access to, health care services.

F. [Federal Fraud and Abuse Law]{.underline}.

The health care fraud and abuse laws[^18] present particular challenges
when structuring collaborative arrangements among health care providers.
Potential sanctions for violating these laws include sizable fines,
criminal penalties, and exclusion from the Medicare, Medicaid and other
Federal health care programs. Virtually every State has enacted health
care fraud and abuse laws that also carry fines and penalties, including
criminal sanctions.

> 1\. [Federal Anti-Kickback Statute]{.underline}.

The Federal Anti-Kickback statute is designed to prevent fraudulent or
abusive arrangements that could result in higher costs to the Government
or compromise the quality of care provided to program beneficiaries.
Specifically, the Anti-Kickback statute prohibits any person or entity
from knowingly or willfully soliciting or receiving (or offering or
paying) remuneration directly or indirectly, in cash or in kind, to
induce patient referrals or the purchase or lease of equipment, goods or
services, payable in whole or in part by a Federal health care
program.[^19]

The implications of the Anti-Kickback statute may be particularly
important for CAP consortia because many of the collaborations begin as
efforts to increase access for uninsured or underinsured individuals and
families by having "deeper pocket" providers helping subsidize the cost
of the services provided. In other instances, a "deeper pocket" provider
may offer to contribute expensive information systems, personnel, or
other resources to facilitate the CAP effort. These arrangements, while
well-meaning, may be problematic because the arrangements often include
provision for referrals between consortium participants (and those they
contract with) and/or presume the purchase of goods or services.

Violations of the Anti-Kickback statute can occur even if the intent to
induce ([i.e.]{.underline} influence) referrals or a purchase/lease, is
only one of several reasons or purposes for the arrangement. CAP
consortia must be mindful of the breadth of the statute and ensure that
any payment or other "remuneration" that is flowing between the parties
not be viewed an unlawful incentive for referrals of Federal health care
program beneficiaries or the purchase or lease of goods or services paid
for by Federal health care programs. Furthermore, how the parties
communicate about the intent of the relationship can dramatically affect
exposure under the Anti-Kickback statute. For instance, if one party
sends an e-mail to another stating that participating in the CAP
collaboration will increase referrals for Medicare or Medicaid patients,
this could "taint" the entire relationship.

a\. *[Safe Harbors]{.underline}*.

In recognition of the fact that not all arrangements between providers
are intended to impermissibly induce referrals, a series of statutory
and regulatory "safe harbors" have been established to protect certain
business practices. In order to be protected under a specific safe
harbor rule, the arrangement must meet all requirements of that rule. If
an arrangement requires protection under two or more safe harbor rules,
it must fully comply with all of the requirements of each of the
relevant rules. Arrangements or the purchase or lease of goods or
services that do not fit squarely within a safe harbor may still be
permissible; each arrangement is judged on a case-by-case basis. Of
particular relevance to CAP consortium are the following safe
harbors:[^20]

> [Referral agreements for specialty services]{.underline}:[^21] These
> arrangements will not be viewed as kickback arrangements if: (1) the
> mutually agreed upon time or circumstance for referral back to a
> referring practitioner is clinically appropriate; (2) services for
> which the referral is made are not within the medical expertise of the
> referring individual or entity but is within the specific expertise of
> the practitioner receiving the referral; (3) the parties receive no
> payment from each other and do not split a global fee from any Federal
> health care program; and (4) unless both practitioners belong to the
> same group practice, the only exchange of value between the parties is
> the remuneration the parties directly receive from third-party payors
> or from the patient for the services furnished by the particular
> party.
>
> [Investment Interests]{.underline}.[^22] An investment interest by
> providers in an entity providing health care services may be
> safe-harbored if the investors and the entity meet a number of
> requirements. The bar for meeting these safe harbor requirements may
> be lowered somewhat if the investment is located in a geographic area
> designated as a Medically Underserved Area ("MUA") in accordance with
> DHHS regulations.
>
> [Obstetrical Malpractice Insurance Subsidies]{.underline}:[^23] An
> arrangement in which a hospital or other entity pays for the
> malpractice insurance premiums of a practitioner who engages in
> obstetrical practice in a primary care Health Professional Shortage
> Area ("HPSA") can be safe harbored if certain requirements are met,
> one of which is that the practitioner be able to maintain that
> seventy-five percent (75%) of his or her obstetrical patients
> receiving care under the malpractice insurance coverage reside in a
> HPSA or MUA or are part of a Medically Underserved Population ("MUP").
>
> [Space rental, equipment rental and personal services and management
> contracts]{.underline}:[^24] Agreements for space rental, equipment
> rental or personal services or management contracts can be safe
> harbored if there is a written, signed contract between the parties
> with a term of not less than one year that specifies the premises,
> equipment, or services to be provided. If services are offered on
> sporadic or part-time basis, the contract must specify a schedule for
> such intervals and exact charge for such intervals. The aggregate
> compensation must be set in advance, consistent with fair market value
> in an arms-length transaction and can not vary based on volume or
> value of referrals or business generated between the parties. The
> aggregate amount of space, equipment or services contracted for cannot
> exceed what is reasonably necessary to accomplish a commercially
> reasonable business purpose.
>
> [Managed care safe harbor for risk-sharing activities]{.underline}:
> The OIG has promulgated an interim final rule establishing a safe
> harbor from prosecution for certain managed care/risk sharing
> activities.[^25] The portion of the rule most relevant to CAPs
> protects arrangements between eligible managed care organizations
> ("EMCO") and the providers or entities with whom they directly
> contract for the provision of services under a Federal health program
> (such as Medicaid and Medicare). Without a safe harbor, such an
> arrangement might be viewed as remuneration (from the provider) in
> exchange for referrals (from the EMCO). The general rule does not
> protect these providers or entities, referred to as "downstream
> contractors," who seek additional payments from Federal health care
> programs.[^26]
>
> b\. *[Advisory Opinions]{.underline}*.
>
> CAP arrangements that do not meet the requirements of a particular
> safe harbor under the Anti-Kickback statute may seek an advisory
> opinion from the OIG. In general, OIG advisory opinions are binding
> only on the OIG and the party or parties seeking the opinion. This
> limitation notwithstanding, the opinions often provide insight into
> the OIG's thinking on enforcement matters.
>
> Recently, the OIG issued several advisory opinions approving
> transactions traditionally viewed by the OIG as problematic, such as
> the provision of monetary donations or free or below market goods or
> services between potential referral sources. While these opinions do
> not involve parties to a CAP consortium, the justifications for such
> approvals may be instructive. In short, an arrangement between
> charitable, mission-driven entities which confers an important
> "community benefit" to underserved and vulnerable populations and
> furthers the missions of the participating entities may be permissible
> under the Anti-Kickback statute, so long as the arrangement does not
> present a high risk of over utilization of services or increased costs
> to Federal health care programs and includes safeguards to protect
> against prohibited referrals. CAP participants should use caution when
> reviewing these (and other) opinions and should seek legal counsel
> regarding their interpretation and appropriate application.
>
> 2\. [Federal False Claims Law.]{.underline}

The Social Security Act contains false claims prohibitions applicable to
health care benefit programs funded in whole or in part by the Federal
government (*[e.g]{.underline}.*, Medicare and Medicaid, Maternal and
Child Health Program (Title V), Social Services Block Grants (Title
XX).[^27] Criminal penalties are applicable if an individual knowingly
and willfully makes a false statement of material fact in any
application for benefits or payments under these programs or if he or
she fails to report any sums received to which he or she is not entitled
with the intent of fraudulently keeping these sums. Civil penalties also
apply if an individual knowingly presents a claim for payment under a
Federal health care program and DHHS determines that the individual
knows or should have known the claim was false or fraudulent.

Additional Federal legislation prohibits any filing of a false or
fraudulent claim against the Federal government.[^28] The Federal civil
False Claims Act is not limited to fraudulent health care claims, but
certainly includes them. Importantly, this law allows a citizen to file
a false claims action on behalf of the Federal government. These "*Qui
Tam*" or "whistleblower" actions filed on behalf of the Federal
government can result in substantial financial reward for the citizen
who filed the suit. Common examples of false claims under this law
include providers billing for services not rendered; billing for
services that are not medically necessary; duplicate billing; unbundling
services; filing false cost reports; and upcoding.

CAP network entities that are billing Medicare, Medicaid, or other
Federal health care programs on behalf of the CAP's participating
providers should be particularly mindful of these provisions. For
example, a CAP network entity that purchases and administers a billing
system may be liable for the upcoding of a particular provider if the
CAP network entity is billing on behalf of the provider. Given the size
of the penalties under the Federal laws, CAP entities must be
particularly vigilant to minimize any possibility of filing claims that
could be viewed as false or fraudulent.

3\. [Federal Physician Self-Referral Laws]{.underline}.

The Federal "Stark" law prohibits a physician from referring patients
for a \"designated health service\"[^29] payable under Medicare or
Medicaid to a health care entity if the physician (or an immediate
family member) has a direct or indirect financial relationship with the
entity. The statute is designed to discourage over-utilization of
Medicare and Medicaid services that may occur if a physician is in a
position to personally benefit from making referrals for a covered
service. In addition, many states have enacted anti-referral laws that
place significant limitations on physician "self-referrals" where the
services are covered under State health care programs.

Although the Stark law addresses the referral practices of physicians,
it operates by prohibiting (unless certain exceptions apply) the health
care entity that provides a service pursuant to a prohibited referral
from billing Medicare and by denying payment to a State Medicaid agency
of the Federal share for a service covered by Medicaid. In addition,
co-payments or similar amounts collected from patients, if associated
with a prohibited referral, must be refunded.

For purposes of the Stark Law, a physician is treated as a health care
\"entity,\" as are health care providers organized as partnerships,
corporations, or group practices, etc. Accordingly, the Stark Law can
affect CAP participants' ability to bill for services if the referring
physician (or an immediate family member of the physician) has a
financial relationship with the CAP provider to whom the referral is
made.

If an entity has a financial relationship with a physician, it must
identify an exception under the statute or regulations that applies to
the circumstance. Certain types of financial arrangements are
specifically excluded from Stark (e.g., group practices; investments;
equipment rentals; bona fide employment relationships; personal services
arrangements; rental of office space). In order to be covered by one of
these exceptions, arrangements must meet all of the requirements of the
exception.

As a general matter, State self-referral laws are frequently more
stringent than the Federal standards. CAP participants who are concerned
that certain features of their proposed programs may violate the Stark
Law should consult qualified legal counsel to determine whether the
arrangement is permissible under both Federal and State law.

G. [Other Federal Laws.]{.underline}

1\. *[Section 340B Discount Drug Pricing]{.underline}.*

Certain participants in CAP consortia may be able to access the discount
drug pricing program authorized under Section 340B of the Public Health
Service Act. Under the terms of the Section 340B Drug Pricing Program, a
covered entity ([e.g.,]{.underline} a Federally qualified health center
or a disproportionate share hospital owned by or under contract with a
state or local government) is entitled to purchase and pay for covered
drugs at favorable prices.[^30] The covered entity may operate a
pharmacy, subject to the Federal and State restrictions. However, these
drugs may be dispensed [only to the patients of the covered entity that
purchases the drugs]{.underline}. Diversion of the covered drugs to
individuals who are not patients of a covered entity constitutes a
violation of Section 340B and may subject the covered entity to
disqualification from the 340B program, an obligation to pay the
discount back to the pharmaceutical manufacturers, and audit by the
Federal government.

2\. *[Federal Tort Claims Act (FTCA)]{.underline}.*

Health centers that receive grant funds under Section 330 of the Public
Health Service Act have access to medical malpractice coverage for
certain employees and contractors under the Federal Tort Claims Act
("FTCA").[^31] FTCA only provides medical malpractice coverage for
activities which are within the health center's Section 330 scope of
project [and]{.underline} which are within the scope of the provider's
employment agreement or contract. Accordingly, obtaining FTCA coverage
for any new services and/or sites (possibly to include CAP-supported
activities operated by the FQHC) is dependent upon approval of a change
in the health center's scope of project by the Bureau of Primary Health
Care ("BPHC"), the agency within DHHS that administers the Section 330
program.

**III. ADDITIONAL STATE LAW CONSIDERATIONS.**

The above discussion references the applicability of State law
"counterparts" that CAP consortia may want to consider. Additional State
laws that may potentially affect a CAP consortium include: corporate
laws, laws governing licensure (both professional licensure and facility
licensure), Certificate of Need laws, employment laws, zoning and even
environmental laws if property is acquired or transferred. Moreover, CAP
consortia that are seeking to create a managed care organization as part
of their collaboration will need to consider the applicability of State
insurance laws to determine applicable surplus, net worth or other
solvency-related requirements.

A. [Incorporation Laws.]{.underline}

Many CAP consortia have had to decide whether to form a separate entity
to carry out the program's purposes and, if so, what type of
organization to form. If CAP collaborators choose to form a separate
entity, it may be structured as a for-profit or nonprofit corporation
([See]{.underline} the above discussion of Federal Tax Law), a general
or limited partnership, or a limited liability company. CAP participants
must consider State incorporation laws in making these determinations.
For example, if CAP collaborators choose to form a separate entity in
order to protect their own organizations from liability that may result
from the CAP program's activities, State laws (and the advantages they
may provide) may favor one corporate form over another and should be
carefully considered. In all cases, this decision will have important
Federal and state tax implications.

B. [Licensure and Other Regulatory Issues]{.underline}.

Licensure and related regulatory issues, such as Certificate of Need
requirements, may also affect how a CAP collaboration is structured. In
particular, collaborations that include the creation of a new health
care delivery site, a new type of entity ([e.g.,]{.underline} managed
care organization), or the expansion of a current delivery site to
provide a broader array of services are the most likely to be subject to
some level of State regulatory oversight. CAP collaborators that assume
risk for the services provided under the program, such as an integrated
delivery system that contracts with a local HMO, may require a license
under State insurance codes. In other cases, CAP consortia that create
an entity to receive and track information in order to bill third party
payors on behalf of the participants, may fall within the purview of
State third party administrator ("TPA") laws. Frequently, State
regulatory bodies will require a substantial presentation to demonstrate
the entity's qualifications and its ability to comply with the law
before granting regulatory approval, licensure, or a Certificate of
Need. It is not uncommon for such regulatory approval processes to be
time-consuming. Accordingly, early identification of the need for such
regulatory approvals is imperative.

C. [Community Benefit]{.underline}.

Several states have enacted "community benefit laws" that provide
additional funds to entities that provide financial or other community
benefits to underserved and vulnerable populations provided that these
entities meet specific requirements and can show a benefit to the
community. CAP participants should determine whether there are any such
community benefit laws that might justify their receipt of such funding
which, in turn, will be used to support the community benefits of
CAP-arranged services and/or a system to ensure services to underserved
populations.

**IV. CONCLUSION**

This issue brief provides an introduction to highly complex areas of
Federal and State law. Each CAP consortium is different from the next
and the relevance of some or even most of these laws will vary
considerably. The goal of this overview is to heighten the reader's
sensitivity so that issues may be identified early on and appropriately
addressed.

[^1]: This document has been prepared for HRSA by the law firms listed
    above. The U.S. Department of Health and Human Services has not
    verified the accuracy of data or analysis presented in the document.
    The opinions expressed in this document are the views of the authors
    and do not necessarily reflect the official position of the Health
    Resources and Services Administration or the Department of Health
    and Human Services. This document is designed to provide accurate
    and authoritative information in regard to the subject matter
    covered. It is issued with the understanding that the authors are
    not engaged in rendering legal or other professional services. If
    legal advice or other expert assistance is required, the services of
    a competent professional person should be sought.

[^2]: This document is designed to provide accurate and authoritative
    information in regard to the subject matter covered. It is issued
    with the understanding that the authors are not engaged in rendering
    legal or other professional services. If legal advice or other
    expert assistance is required, the services of a competent
    professional should be sought.

[^3]: However, if there is a for-profit partner in the venture, the
    nonprofit entities should be particularly careful that their
    contributions are fairly valued and that the venture does not come
    under the control of the for-profit partner. If so, the nonprofit
    entity (more specifically, its staff and the board of directors that
    authorized the transaction) could be charged with "giving away"
    charitable assets and breaching their fiduciary duty to the
    nonprofit entity. Further, if a tax-exempt entity is controlled by a
    for-profit entity, the tax-exempt entity will lose its exemption.

[^4]: [See e.g.]{.underline}, OMB Cir. A-122 (Cost Principles for
    Nonprofit Organizations); OMB Cir. A-87 (Cost Principles for State
    and Local Governments).

[^5]: Uniform Administrative Requirements for Grants and Agreements with
    Institutions of Higher Education, Hospitals and Other Non-Profit
    Organizations.

[^6]: The contract must specify, among other things, record-keeping and
    reporting responsibilities; requirements that the contractor notify
    and receive prior approval from the CAP grantee in the event that
    there is a material change in the scope of work (or the approved
    budget for such services); the contractor's obligation to comply
    with certain laws and regulations; the circumstances under which the
    CAP grantee can terminate the contract in case of vendor breach; and
    procedures by which the CAP grantee will monitor the activities of
    the contractor. [See]{.underline}, 45 C.F.R. § 45 *et seq*.; 45
    C.F.R. § 92 *et seq*.

[^7]: "Equipment" is defined as "tangible nonexpendable personal
    property, including exempt property, charged directly to the award
    having a useful life of more than one year and an acquisition cost
    of \$5,000 or more per unit." 45 C.F.R. § 74.2.

[^8]: [See,]{.underline} 45 C.F.R. §§74.32 *et. seq.*

[^9]: [See e.g.]{.underline}, Title 35 of the U.S. Code.

[^10]: The U.S. Office of Patents and Trademarks grants patents and
    protects trademarks of individuals and businesses.

[^11]: [See]{.underline}, 37 C.F.R. § 401 *et seq;* [See
    also]{.underline}, 45 C.F.R. § 74 *et seq*.; 45 C.F.R. § 92 *et
    seq.*

[^12]: [See]{.underline}, 45 C.F.R. § 74.36.

[^13]: [See]{.underline}, Pub. L. No. 104-191 (Aug. 21, 1996).

[^14]: [See]{.underline}, 65 Fed. Reg. 50312 (Aug. 17 2000).

[^15]: [See]{.underline}, 45 C.F.R. § 160 *et seq*.

[^16]: The effective date of the Privacy Regulations was extended to
    April 14, 2003. DHHS has accepted additional comments regarding the
    regulations. At the time of publication, it was unclear whether
    additional changes would be made to the regulations or the effective
    date.

[^17]: The Sherman Act, 15 U.S.C. §§ 1-7 and the Clayton Act, 15 U.S.C.
    §§ 12-27.

[^18]: Specifically, this refers to the Medicare and Medicaid Patient
    and Program Protection Act, including its Medicare and Medicaid
    anti-kickback and false claims and civil monetary penalties
    provisions (42 U.S.C. §1320a-7, 7a, and 7b); and the Stark Physician
    Self-Referral Prohibitions (42 U.S.C. §1395nn).

[^19]: 42 U.S.C. §1320a-7b.

[^20]: In addition to the safe harbors discussed below, the OIG has
    established safe harbors in various other relevant areas. CAP
    participants should review all safe harbors to determine whether
    their particular arrangements are permissible.

[^21]: 42 C.F.R. §1001.952(f).

[^22]: 42 C.F.R. §1001.952(a).

[^23]: 42 C.F.R. §1001.952(o).

[^24]: 42 C.F.R. §§1001.952(b), (c), and (d).

[^25]: 42 C.F.R. §1001.952(t) and (u).

[^26]: This Safe Harbor provides an exception for health centers seeking
    wrap-around payments from State Medicaid agencies.

[^27]: 42 U.S.C. §1395 *et seq*.; 42 U.S.C. §1396a *et seq.*; 42 U.S.C.
    § 701 *et seq.*; 42 U.S.C. §1367 *et seq*.

[^28]: 31 U.S.C. §§ 3729-3733.

[^29]: The "designated health services" subject to the Stark Law are:
    clinical laboratory services; physical therapy services;
    occupational therapy services; radiology, including magnetic
    resonance imaging, computerized axial tomography scans, and
    ultrasound services; radiation therapy services and supplies;
    durable medical equipment and supplies; parenteral and enteral
    nutrients, equipment, and supplies; prosthetics, orthotics, and
    prosthetic devices; home health services and supplies; outpatient
    prescription drugs; and inpatient and outpatient hospital services.

[^30]: Section 340B of the PHS Act (enacted into law as part of the
    Veterans Health Care Act of 1992) requires drug manufacturers to
    enter into agreements with DHHS to provide certain outpatient drugs
    to "covered entities," including public hospitals and Federally
    Qualified Health Centers, at prices designed to be, at a minimum, as
    low as the prices paid by State Medicaid Agencies. [See]{.underline}
    42 U.S.C. 256b, as amended by Section 602 of P.L.102-585 (November
    11, 1992).

[^31]: [See,]{.underline} 42 U.S.C. §233(a).