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Does your Medical Director Agreement meet the test?

By Deborah J. Robinson, Esq.

In 2005 every physician recognizes that agreements and joint ventures between physicians and hospitals must conform to regulatory requirements. The significance of this fact is apparent not only in hospital compliance memoranda and articles warning physicians about these requirements, but in lawsuits and active investigations as well. What many physicians may not appreciate, however, is that even “simple” Medical Director and Consulting Agreements can create problems. Consider the following:

United States vs. McClatchey. On June 13, 2000 the Tenth Circuit Court handed down an important interpretation of the anti-kickback statute. Dennis McClatchey was an officer at Baptist Medical Center in Kansas City and had been involved in several contractual arrangements with two physicians, the LaHue brothers. The hospital provided each of the physicians with $75,000 per year as compensation for their Medical Director position. These agreements began in 1985 and continued even though McClatchey was told that the physicians were not providing some of the services and that the services were not required. In 1998, the government charged the LaHues and three hospital executives with violations of the anti-kickback statute, alleging that the payments greatly exceeded the value of any services rendered by the LaHues and were intended to induce the physicians to refer patients to the hospital. A jury convicted McClatchey and three other defendants of conspiring to violate the anti-kickback statute. The trial court granted McClatcheymotion for acquittal, holding that there was insufficient evidence for a reasonable jury to find that McClatchey had the requisite specific intent to violate the anti-kickback statute. The Tenth Circuit Court reversed and reinstated the jury’s guilty verdict. An appeal was denied.

Alvarado Hospital Medical Center. The United States Attorney announced on July 17, 2003 that a federal grand jury in San Diego handed up a 17 count indictment charging Tenet Health System Hospitals, Inc. and Alvarado Hospital Medical Center with criminal violations relating to payments to physicians to induce them to refer patients to Alvarado Hospital. The hospital’s CEO was also indicted. This indictment not only alleged improper payment of relocation expenses for physicians but also alleged improper payments pursuant to “personal service contracts” for managing, marketing and expanding physician practices. In general, the indictment claimed that the agreements were designed to financially benefit existing practices in order to induce increased referrals. Although this case is largely credited to the increased interest and tightening of rules on physician recruitment agreements, it is noteworthy that physician contracts, in general, are implicated.

Wall Street Journal, July 28, 2005. This issue reports that federal prosecutors are investigating whether a chain of medical imaging centers in Florida offered kickbacks to physicians who referred patients to the facilities. In addition to allegations that lease arrangements were “cut rate” and intended to induce the referral of patients, another scheme, according to the complaint, was to create “Medical Director positions” for referring physicians and “clinical investigation agreements” for physicians funded by a radiology foundation established by the owner of the imaging center.

All of these cases or investigations are replete with examples of situations where the government has found, or alleges to have found, relationships that are not legitimate and not based on fair market value. This is a continuing warning to physicians who are contemplating or involved in Medical Director and other consulting agreements to assure that the arrangements do meet specific safe harbor exceptions. Because these arrangements are generally with hospitals and because the government links these arrangements to the Stark list of “designated health services” and does not generally consider these arrangements falling under the exception for “remuneration for a hospital unrelated to designated health services,” the arrangements fall under the parameters of the Stark law. (Although the anti-kickback statute can be implicated as well, we can assume that compliance with the Stark exceptions will also satisfy the anti-kickback statute.) Therefore, the personal service exception and fair market value exception are the most useful exceptions for analyzing these relationships.

In looking at the personal service exception, the requirements are straightforward and summarized below:

· The arrangement must be set out in writing, signed by the parties and specify the services covered under the arrangement.

· The agreement must cover all of the arrangements between the physician and the entity. (This condition requires either a cross-reference to other arrangements or maintenance of a master list by the hospital.)

· The aggregate services of the arrangement may not exceed those that are reasonable and necessary for the legitimate business purposes of the arrangement.

· The term of the arrangement must be for at least one year and, if terminated during that time, the parties may not enter into the same or substantially the same arrangement within the first year of the original term of the agreement.

· The compensation must be set in advance, must not exceed fair market value and must not be determined in a manner that takes into account the volume or value of referrals.

· The agreement must not involve the counseling or promotion of a business activity that violates state or federal law.

Other than the mechanical requirements of these provisions, the critical determinants are that: (i) the aggregate services do not exceed those that are reasonable and necessary for the legitimate purpose, and (ii) the payment is “fair market value.” The issue of fair market value has always been challenging when structuring physician compensation to take into account administrative, and not clinical, time.

What is striking now is that there are two safe harbor methodologies in the Stark regulations to identify hourly payments for personal service arrangements for physicians. The methodologies are as follows:

“An hourly payment for a physician’s personal services (that is, services performed by the physician personally and not by employees, contractors, or others) shall be considered to be fair market value if the hourly payment is established using either of the following two methodologies: (1) The hourly rate is less than or equal to the average hourly rate for emergency room physician services in the relevant physician market, provided there are at least three hospitals providing emergency room services in the market. (2) The hourly rate is determined by averaging the 50th percentile national compensation level for physicians with the same physician specialty (or, if the specialty is not identified in the survey, for general practice) in at least four of the following surveys and dividing by 2,000 hours. The surveys are:

· Sullivan, Cotter & Associates, Inc. – Physician Compensation and Productivity Survey.

· Hay Group – Physicians Compensation Survey.

· Hospital and Healthcare Compensation Services – Physician Salary Survey Report.

· Medical Group Management Association – Physician Compensation and Productivity Survey.

· ECS Watson Wyatt – Hospital and Health Care Management Compensation Report.

· William M. Mercer – Integrated Health Networks Compensation Survey.”

From a practical perspective, hospitals or hospital legal counsel will likely determine those hourly rates based on these benchmarks. Physicians may have some leeway in negotiating rates where different specialties are involved. However, hospitals will be generally advised to maintain consistent contractual guidelines.

In summary, every physician should be able to answer the following questions when deciding whether to enter into an agreement with a hospital: Are the services valid and defined in the contract? If paid on an hourly basis, does the hourly rate either meet a Stark methodology or is there an objective finding for fair market value? Once the contract terms are identified and the agreement reduced to a written document, is there a mechanism for continuing to quantify the services rendered such that this will be available for future audit if necessary?

Applying these simple tests can give a physician peace of mind that he/she will not be in the position of the LaHue physicians and have to prove to the government or whistleblower that the services provided are necessary, fair and reasonable.

Deborah J. Robinson, Esq., is a partner in the law firm of Houston Harbaugh and Director of the Health Law Division of the firm.

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