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Implications of malpractice insurance subsidies

By John W. Jones, Esq.

The medical malpractice insurance crisis both in Pennsylvania and other states throughout the country has reached epidemic proportions. Critics argue that large jury awards in medical malpractice cases and limited tort reform has resulted in outrageous and, in most circumstances, unaffordable malpractice premiums. With physicians leaving, retiring and seeking new professional opportunities as a response to the crisis, communities are faced with physician shortages and concerns over the provision of quality health care. Some jurisdictions have responded with proposals to cap non-economic damage awards and attorneys’ contingency fees, while at the industry level, hospitals and physicians are creating their own strategies, including forming captive insurance companies, risk pools and trusts. Without legislative reform, hospitals and physicians will continue to create alternative vehicles to share risk and finance these premiums. An approach which is gaining popularity is the malpractice insurance subsidy whereby a hospital at which the physician maintains staff privileges subsidizes the increase (or part of the increase) in the malpractice insurance premium for the physician. Notwithstanding their popularity, these arrangements are not without risk to the parties.

Anti-Kickback Statute

The federal Anti-Kickback Statute proscribes the offering, payment, solicitation or receipt of any remuneration in exchange for a patient referral or referral of other business for which payment may be made by a Federal health care program, including Medicare and Medicaid. Violations of the Anti-Kickback Statute can result in significant criminal penalties of up to $50,000 for each violation, as well as imprisonment.

OIG has historically taken the position that remuneration or payment to those in a position to refer clearly implicates the Anti-Kickback Statute. The argument is that the transfer of value to a physician may induce the physician to recommend his patients to the entity providing the payment. Since a physician is in a position of recommending or referring their patients to a hospital at which the physician maintains staff privileges, any value transferred to him by the hospital could, if not properly structured, present risk to the parties. The Department of Health and Human Services (HHS) has developed the obstetrical malpractice insurance subsidies safe harbor that defines certain malpractice insurance subsidies that would be unlikely to result in fraud and abuse. Although failure to satisfy a safe harbor does not equate to a violation of law, strict compliance with the safe harbor requirements is necessary to ensure an arrangement will not be prosecuted or sanctioned. Given the severity of the criminal and civil sanctions under the Anti-Kickback Statute, physicians need to be very careful when entering into insurance subsidy arrangements and ensure that any such arrangement is consistent with the obstetrical malpractice insurance subsidies safe harbor under the Anti-Kickback Statute.

Safe Harbor

Under the federal Anti-Kickback Statute, remuneration does not include any payment made by a hospital or other entity to another entity that is providing malpractice insurance (including a self-funded entity), where the payment is used to pay for some or all of the costs of malpractice insurance premiums for a physician, who engages in obstetrical practice as a routine part of his medical practice in a primary care Health Professional Shortage Area (HPSA). HHS designates areas as various types of HPSAs based on shortages of particular types of health care professionals or based on health care services available to particular populations residing in the area. The obstetrical malpractice insurance subsidy safe harbor requires that the area have a shortage of primary care professionals.

Under the safe harbor, the payment of the costs of malpractice insurance premiums must be made by the hospital or other entity to the insurance carrier or other entity providing the insurance, not to the physician directly. Additionally, to be eligible for the safe harbor protection, the physician must engage in obstetrics as a routine part of his medical practice. Routine part of medical practice has been interpreted to mean that the physician must provide substantial and regular obstetrical services. Further, the safe harbor protects the payment of costs of malpractice insurance premiums. Accordingly, for physicians who engage in obstetrical practice full-time, any costs attributable to malpractice insurance would be covered. For physicians who engage in obstetrical practice on a part-time or sporadic basis, however, only the costs attributable exclusively to the obstetrical portion of the physician’s malpractice insurance, and related exclusively to obstetrical services provided in a primary care HPSA would be protected. In sum, the premium paid must be for coverage of obstetrical services, not other types of services rendered by the physician.

The following additional requirements must be satisfied for a malpractice insurance subsidy arrangement to qualify for safe harbor protection:

The payment must be made pursuant to a written agreement between the parties, which sets out the payments to be made by the hospital, and the terms under which the payments are to be provided.

The physician must certify that for the initial coverage period, which cannot exceed one year, he has a reasonable basis for believing that at least 75 percent of his obstetrical patients treated under the coverage of the malpractice insurance will either:

· Reside in a HPSA or Medically Underserved Area (MUA). An MUA is either a rural or urban area designated by the Secretary of HHS as a having a shortage of health care services; or

· Be part of a Medically Underserved Population (MUP). An MUP is a population group designated as having a shortage of health care services, such as low-income, migrant agricultural workers and homeless population.

For each additional coverage period which, again, cannot exceed one year, at least 75 percent of the physician’s obstetrical patients treated under the prior coverage period (which cannot exceed one year) must have resided in an HPSA or MUA, or been part of a MUP.

Under the arrangement, there can be no requirement that the physician make referrals to, or otherwise generate business for, the hospital as a condition for receiving the benefits.

The physician cannot be restricted from establishing staff privileges at, referring any service to, or otherwise generating any business for any other entity.

The amount of payment made by the hospital may not vary based on the volume or value of any previous or expected referrals to, or business otherwise generated for, the hospital by the physician for which payment may be made in whole or in part under a Federal health care program.

The physician must treat obstetrical patients who receive assistance or medical benefits under any Federal health care program in a non-discriminatory manner.

The insurance provided to the physician must be a bona fide malpractice insurance policy or program, and the premium, if any, must be calculated based on a bona fide assessment of the liability risk covered under the insurance.

Advisory Opinions

OIG has issued advisory opinions concerning malpractice insurance subsidies. Accordingly, when structuring any malpractice insurance subsidy arrangement, it would be prudent for physicians to review these advisory opinions to determine if the OIG has opined on a similar arrangement. Although the opinions cannot be relied upon by a physician who did not request them, it can provide him with useful guidance as to OIG’s thinking on certain matters. In the few insurance subsidy arrangements in which OIG decided not to impose sanctions, it is important to note that the arrangements included some of the following characteristics:

· Arrangement was memorialized in a written agreement.

· The subsidy had temporary term for a fixed period of time.

· The subsidy covered only the increase (or part of the increase) in the malpractice insurance premium.

· The physician continued to pay his share (before the increase) of the premium.

· More than 75 percent of patients resided in an HPSA.

· The insurance provided was a bona fide insurance policy.

· The insurance covered the physician’s service regardless of where the services were performed (even if the services were performed outside the hospital).

· There existed significant community benefit under the arrangement.

payment for the premium did not vary based on referrals or other business generated by the physician for the hospital.

· The physician was not restricted from establishing staff privilege at other facilities.

· There existed minimal risk of undue benefit to the physician.

· The physician practiced in an HPSA.


Generally, Stark prohibits a physician (or immediate family member) who has a financial relationship with an entity from making referrals to that entity for the furnishing of designated health services for which payment may be made under the Federal health care programs, unless an exception or safe harbor is satisfied. Stark is often implicated under these types of arrangements because physicians are in a position to recommend or refer their patients for the provision of designated health services to the hospital providing the subsidy. Arrangements that satisfy the obstetrical malpractice insurance subsidies safe harbor under the Anti-Kickback Statute are eligible for safe harbor protection under Stark as well. Importantly, however, failure to strictly comply with Stark or a safe harbor could result in denial of payment, civil penalties, disgorgement of reimbursements received and exclusion from Federal health care program participation.

If properly structured, malpractice insurance subsidies offer physicians a practical alternative to financing their malpractice insurance premiums and, at least in the short term, addressing the financial burden created by the malpractice insurance crisis. These arrangements, however, are not without risk and should be properly tailored to comply with the federal Anti-Kickback Statute, Stark and other applicable laws and regulations.

John W. Jones, Esq., is a member of the Health Care Services Group at Pepper Hamilton LLP in Philadelphia, Pa.

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