Independent Contractor Physician—Kickback or Compensation?

ByMichael H. Cohen, JD
If you’re a successful physician, chiropractor, acupuncturist, or other licensed healthcare provider, and you want to provide overflow patients to another practitioner you hire, is it a kickback if you pay that second practitioner as an independent contractor?

Are payments to an independent contractor physician a kickback?

Kickback Basics

Let’s review some kickback basics, to start.

Stark (or self-referral) arises when the physician refers patients to an entity in which the physician has a financial interest (for example, the physician refers patients to a clinical lab that the physician owns).

Stark only involves certain “designated health services.”  For example, the physician refers the patient to a clinical lab that the physician owns.  That does not sound like the situation here, where the physician simply refers to another doc in the physician’s office.

Kickbacks can arise in a variety of contexts; a key definition is that if compensation depends on value or volume of referrals, as opposed to for the work itself, then there is a kickback.

If there is a self-referral problem, then you must find an exception.  On the other hand, if there is a kickback problem, then the arrangement is not necessarily illegal, but we look to a safe harbor and see if there is a fit, and evaluate the arrangement as a whole.

Employee and Personal Services Arrangement Safe Harbors

The safe harbors that one uses with respect to anti-kickback prohibitions, in this kind of situation of overflow patients, typically involve either:

(1) A bona fide employee (i.e., the employer can pay the employee a salary, yet profit from the employee’s services), or

(2) if an independent contractor, a personal services arrangement, in which the aggregate compensation is set in advance (as opposed to being a percentage of collections).

A kickback issue arises when the independent contractor physician is paid on a net collections basis, which means that essentially, compensation varies by value or volume of patients.

For this reason, we typically prefer to use the MSO model.  The MSO model is very clean.  The MSO (management services organization) provides management and administrative services, and in exchange collects a fee.

The physician either wears two hats – clinician and MSO – or, preferably, has a professional medical corporation for the clinical role, and creates a separate corporation or LLC to serve as the MSO.

See our prior posts:

The MSO model tries to use to the personal services and management safe harbor.
Under California law, the equivalent is the more amorphous, Business & Professions Code Section 650(b).

The Independent Contractor Arrangement—Kickback?

The independent contractor arrangement is very common, and we’ve reviewed many such agreements.  It is somewhat problematic as mentioned above but very pervasive.

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From an anti-kickback perspective, the key is that the net collections reflect fair market value (FMV) for the services the independent contractor physicians provide, and that the balance (which gets retained by the hiring physician) also represent fair market value for the services that the hiring physician provides back to the independent contractor doctor.

For example, these services could involve overhead, staffing, a medical assistant, and space.

These are essentially MSO functions, only here they are provided by the hiring physician or his professional medical enterprise.

If the independent contractor is being underpaid for his medical services and the hiring physician is being overpaid, then a regulator could argue that the differential against fair market value, represents an illegal inducement or compensation for the hiring physician to refer patients to the independent contractor physician—and is therefore an illegal kickback.

Medical Marketing Services

Where marketing services for medical practices are involved, we recommend that those services be explicitly called out in the agreement (or in a separate marketing services agreement), and be designated for a flat fee.  The reason is that marketing services can generate enforcement scrutiny on kickback grounds.

This is different than management services such as rental of space and the all the admin functions that the underlying practice provides.

Important Independent Contractor Provisions

It is important that both sides have legal review of the independent contract provisions themselves to be sure nothing vital is missing.

For example:

  • There should be a provision about the timing for paying the independent contract physician, as well as timing for billing and collection from the patient – and what will happen if the hiring physician neglects to perform these functions. Failure to specify these details in writing can lead to collections disputes, and litigation.
  • Who is responsible for whose negligence? What if the hiring physician makes billing errors? Some thought should be given to indemnification.
  • The agreement should be readable. The more readable the agreement, the less likely to generate litigation in case of a later disagreement.
  • Non-competition language may or may not be enforceable, depending on the state. Certainly both parties should pay attention to related provisions, such as prohibitions against solicitation and those safeguarding confidentiality (trade secret provisions).

Reading this article does not create an attorney-client relationship with its author or with the Michael H. Cohen Law Group. This is an informational and educational piece; it does not constitute legal advice. If you’d like legal advice, consult an attorney for advice specific to your situation.

Author: Michael H. Cohen, JD
The Michael H. Cohen Law Group counsels health technology companies and providers on healthcare legal issues and FDA legal and regulatory matters. Legal counsel includes corporate and transactional healthcare mattershealthcare regulatory compliance, and healthcare litigation and dispute resolution. Attorney Michael H. Cohen is an internationally recognized authorspeaker on healthcare law and FDA law, and expert in developing legal strategies for healthcare ventures, including integrative medicineanti-aging and functional medicinetelemedicine and concierge medicine.


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