Advisory Opinion Questions Percentage Fee Arrangement with Physician Practice Management Company


The Office of the Inspector General ("OIG") of the Department of Health and Human Services issued Advisory Opinion #4 of 1998 (Advisory Opinion No. 98-4). This OIG's Opinion is significant because it suggests that a physician who pays a practice management company a percentage of the physician's net revenues may violate the federal Anti-Kickback Statute when the services provided by the practice management company include marketing and billing activities. However, it also suggests that percentage payment arrangements for management services may be acceptable where the services do not include marketing or billing.

The Proposed Arrangement

Opinion 98-4 involves a physician practicing in corporate form who proposed to enter into an arrangement with a practice management company to operate a family practice and walk-in clinic. Under this arrangement, the physician corporation would be responsible for providing physician services, and for hiring and compensating the clinic's physicians and other medical personnel. In addition to providing space and equipment, the practice management company would be responsible for the following:

  • providing operating services for the clinic (directly or through sub-contractors), including accounting, billing, purchasing, direct marketing, and hiring of non-medical personnel and outside vendors;
  • providing additional management and marketing services for the clinic, including negotiating and overseeing provider contracts with third-party payors (including indemnity plans, managed care plans, and federal health care programs).

The practice management company would also form provider networks, some of which could include the physician corporation in addition to other health care providers. If required by the practice management company, the physician corporation would agree to refer its patients to the other providers in such networks. The physician corporation would compensate the practice management company based upon a blend of various payments, including a percentage of the physician corporation's monthly net revenues for the practice management company's management and marketing services.

The OIG's Opinion

After describing the Anti-Kickback Statute and safe harbor provisions in general terms, the OIG analyzed the proposed arrangement in light of the safe harbor for personal services and management contracts. Because this safe harbor requires, among other things, that the aggregate amount of compensation be set in advance, the OIG concluded that the proposed arrangement would not qualify for safe harbor protection.

As the OIG noted, however, failure to qualify for safe harbor protection does not mean that an arrangement violates the Anti-Kickback Statute. Rather, it must be shown that the intent behind the remuneration is to induce a person:

  • to refer an individual for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program, or
  • to purchase, lease, or order any good, facility, service, or item for which payment may be made in whole or in part under a Federal health care program, or
  • to arrange for or recommend purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part under a Federal health care program.
    See 42 U.S.C. § 1320a-7b(b).

Because the OIG will not consider the issue of intent in its advisory opinions, it could not definitively conclude that the proposed arrangement would violate the Anti-Kickback Statute. However, the OIG indicated that the arrangement was "problematic," as follows:

The compensation that Company B [the practice management company] receives for its management services is a percentage of Company A's [the physician corporation's] net revenue, including revenue from business derived from managed care contracts arranged by Company B. Such activities may potentially implicate the anti-kickback statute, because the compensation Company B will receive will be in part for marketing services. Where such compensation is based on a percentage, there is at least a potential technical violation of the anti-kickback statute. [OIG, Advisory Opinion No. 98-4, at 5.]

The OIG also commented that the arrangement did not appear to contain any controls to prevent overutilization (potentially resulting from requirements that the physician corporation refer patients to other network providers), and expressed its "longstanding" concern that percentage billing arrangements may increase the risk of upcoding and similar abusive practices.

In Advisory Opinion No. 98-4, the OIG addresses common practices of physician practice management companies. The OIG plainly opposes the provision of marketing services by such companies, at least where compensated on a percentage basis, because such arrangements involve payments for recommending items or services reimbursable under federal health care programs. Networking services may also present the same problem, depending upon the specific services provided. The OIG has indicated its opposition to percentage fee arrangements in the past.

Interestingly, the Opinion's failure to raise other issues seemingly implies that the other physician management services are permissible. Notably, however, the OIG found that these other aspects of the arrangement were not eligible for safe harbor protection because the fees were partially cost-based, and, therefore, not set in advance. See Advisory Opinion No. 98-4, at 4. Whether logical inferences can be drawn from silence on these other aspects is uncertain, however.

Summary

OIG Advisory Opinions may provide somewhat useful guidance as to the OIG's views, as a technical matter, buy they are not precedential and apply only to the individual or entity requesting the Opinion. However, Opinion 98-4 provides an indication of how the OIG would view a similar physician arrangement.