Medicare Revises Incident-to Rule

Medicare recently revised its rule pertaining to the provision of incident-to services (services and supplies that are furnished as an incidental part of a physician's personal professional services) to allow the provision of such services by leased employees. The old rule required that the individual furnishing the incident-to service be an employee of the physician or of the entity employing the physician. This requirement has long been the subject of controversy given many physician's desires to contract independently with individuals to provide such services rather than employ them directly.

The Health Care Financing Administration's ("HCFA") new rule permits incident-to services to be performed by a "leased employee" of the supervising physician, physician group practice or of the legal entity that employs the physician. The employee leasing relationship must be in writing and the physician or related entity must exercise control over the leased employee with regard to the rendering of medical services to the same extent as it would over a true employee. In fact, the leased employee relationship must fit the common law test for a true employer/employee relationship. HCFA is in the process of developing more detailed specifications in this regard.

Although this is good news for physicians, there is a down side. The leased employee may be considered a true employee by the Internal Revenue Service ("I.R.S."). The physician or other entity leasing the employee must then withhold taxes and otherwise treat the individual as an employee, or be subject to penalties and fines. It is important, therefore, to carefully review the advantages of using a leased employee versus the risks of being subject to penalties and fines by the I.R.S. for failure to withhold taxes.