By Daniel M. Bernick, Esq., MBA
Consider the following scenarios:
A primary care practice wants to add internal medicine subspecialties, such as a cardiologist or nephrologist or endocrinologist.
An OB/GYN practice wants to offer its patients access to a trusted fertility specialist.
A dermatologist wants to provide various vascular procedures that are not currently within his ability.
A general ophthalmologist wants to offer retina services;
In all these situations, a medical practice with an immediate and continuing patient relationship wants to leverage that relationship by offering new services. The practice can be primary care (family practice, internal medicine, pediatrics) or a general specialty practice (ophthalmology, OB-GYN, dermatology).
The expansion of services by the source practice has benefits for patients. Patients like “one stop shopping” and “full service” vendors. It more convenient for the patient to be seen at the usual location, and the specialty appointment can be made upon checkout from the primary care office visit, thus saving an extra phone call. The patient’s record is integrated, there is better continuity of care, and the opportunities for interaction and communication between primary care provider and specialist are increased.
Meanwhile, the source or host practice also benefits. The source practice can market itself as “full service,” and a “one stop shop,” which is a potent marketing tool. And revenue streams which were formerly referred out are now captured within the referring practice and used to offset existing overhead costs.
While the benefits to patients are substantial and real, the new endeavor must be approached carefully. No one wants to set up a situation in which the “in-sourcing” of specialty revenue streams is attacked by the government as a “fee split” with the specialist or a “kickback.” There’s also Stark to worry about. But if properly structured, the arrangement can withstand scrutiny on all these fronts, and be legitimate and legal.
One time-honored way for a medical practice to expand its menu of services is to hire the specialist on a full time basis, just like any other new hire. However, this is often not feasible; a smaller referring typically lacks the volume needed to support a full-time specialist. Even if the source practice has the volume, a full time specialist may be hard to recruit.
Thus, the practical choice is generally to hire the specialist on a part time basis. This is typically a very “doable” option; many times specialty practices in the area have a young doctor who is not as busy as he or she could be. The part time job provides valuable experience to the young doctor. It also enables the young specialist’s “regular” employer to lay off some of its salary costs on the part time employer. Oftentimes the part time primary care employer is outside the specialty practice’s regular service area. This reduces the primary care practice’s concerns that the specialist may send the patients seen at the part-time practice back to his “home” practice for follow ups. It also reduces the specialty practice’s concerns that it is “cannibalizing” its own revenues by supplying a specialist to the referring practice.
In some specialties, the “itinerant specialist” is a time honored tradition, such as the retina doctor who goes from one general ophthalmology practice to another. In others it is just starting, as new technologies and services become available.
Thus, a legitimate legal arrangement is for the host medical practice to employ the specialist on a part-time basis, and to bill and collect for that specialist’s services. Even though the specialist has his or her own practice, there is nothing wrong with serving as a part-time employee of the host practice. If structured properly, this complies with the federal anti-kickback statute, the federal Stark statute, and (most likely) any state fee-splitting or self-referral laws. It also fully complies with the Medicare assignment rules.
When the specialist is a W-2 employee of the primary care practice, there is a fair amount of flexibility in terms of the method used to compensate the specialist. A fixed (reasonable) salary is fine, as is a per diem payment, a payment per unit of service rendered, or even a percentage of collections. The only critical limitations, for Stark purposes, are that the compensation be “fair market value” (i.e., within the range paid by other practices for that type of service) and not reflect anything other than personally performed services (e.g., no payment for the technical component of tests or studies ordered by the specialist but performed by staff, such as x-rays or lab tests).
A variant on this scenario is to structure the arrangement as an independent contractor arrangement. In this arrangement, as in the W-2 employee scenario, the specialist provides his services “on site” at the host practice and his services are billed and collected by the host Practice. However, as a contractor, the specialist is paid on a 1099 basis, rather than as W-2 salary. Alternatively the money is paid is paid directly to the specialist’s professional corporation, pursuant to a contractor agreement between the two medical practices. Either way, there is no tax withholding, and the specialist is responsible for the full social security SECA tax at 15.3 percent, as opposed to just the employee’s share of FICA at 7.65 percent.
Yet another alternative is for billing and collection to be done directly by the specialist, rather than by the host practice. In other words, the primary care practice site is treated by the specialist as if it were a new satellite location of the specialty practice. The host practice may schedule the patient, collect all insurance information, and provide a fully equipped site for the office visit, but ultimately it is the specialty practice that bills the patient according to its usual fee schedule and provider numbers. The specialist practice normally prefers this latter type of set up, as there are much greater legal constraints on what the host practice can retain for itself, financially.
As noted, in a direct employment relationship, there are few constraints on the compensation paid to the specialist. The host practice can typically retain 40 percent, 50 percent, 60 percent or other percentage of the collections that are billed for the specialist’s services, so long as the percentage is justifiable as “fair market value” for services rendered and does not include anything other than personally performed services. In the independent contractor scenario, generally the same guidelines apply in determining the amount of compensation that can be paid, under Stark.
By contrast, in the scenario where the specialist bills on his or her own behalf, the question is not what is the fair market value of professional services rendered. The question is what is fair market return to the host medical Practice for use of support services, space, and equipment. The range of reasonable answers to the first question is far broader than the range of reasonable answers to the second. For example, the OIG has indicated that it views with suspicion any charge to the specialist for use of space that exceeds the host practice’s own rental cost, pro-rated to reflect the (small) amount of usage by the specialist. Thus, in the view of the OIG, if the specialist comes in one day every other week, and uses only two out of the host practices’ ten exam rooms, the host practice will only be able to lay off 2/10ths (pro-rata use of space) of 1/5th (one out of five days per week) of 26/52nds (every other week) of its total annual rent costs, for a net two percent of total rent costs! The OIG does not make law, but its views need to be considered, and in this area its views are rather limiting.
The same general analysis applies to charges for staff time, utilities and other overhead expenses. Once they are fully prorated based on time and usage, it generally is nowhere near what the host practice could obtain by taking a percentage of the specialist’s collections, especially for high value in office procedures. While less beneficial in financial terms for the host practice, this latter lease/support services structure alternative is certainly a very solid approach from a legal standpoint.
One argument in favor of the less lucrative support services arrangement is that the host practice may not wish to assume any kind of malpractice exposure for the specialist’s services. The primary care physician may feel that he (the primary care doctor) lacks ability to supervise the specialist’s quality of care adequately, or that the specialist may not maintain his records up to Medicare standards, thus potentially triggering an audit and/or recoupment claim.
One further complication with the support services arrangement is maintenance of charts. If the specialist is billing and collecting on behalf of his own practice, then theoretically, he should be maintaining his own charts and records at the host practice, and he should also be able to take these charts with him when the arrangement is terminated! This may not be as desirable for the primary care practice. By contrast, a contractor or direct employment relationship makes it easy to retain control in terms of the specialist’s ability to walk off with patient names and charts.
Whatever approach is desired, be sure to seek legal assistance when structuring these arrangements. There are significant legal risks if they are not approached and documented appropriately.
One format to be wary of is any type of joint venture between two medical practices. This is a very tough format to structure from a legal perspective, and is difficult to insulate from legal risk.
Daniel M. Bernick,, Esq., M.B.A. is an Attorney and Principal of Health Care Law Associates, P.C. and The Health Care Group in Plymouth Meeting, Pennsylvania.