“Medical director” creates enforcement red flags

“Medical director” creates enforcement red flags particularly when medical spas or health care ventures award the title willy-nilly.  In this post, we discuss legal pitfalls and offer some legal strategy for healthcare companies wanting to capture the derived glory from “medical director” affiliation.

Spotting compliance trouble

There are times when it makes sense to have a “medical director.”

For example, a physician who owns a professional medical corporation or is head of a medical group may have many other medical doctors working within the organization, as well as PA’s, RNs, and other healthcare providers.  In such cases, it makes sense to have one physician who is “medical” director of the entire medical organization.

However, having a general corporation or LLC award the title simply to show the presence of an MD in the midst of a healthcare venture, can raise regulatory scrutiny.

The federal government weighs in on fraud and abuse

On the federal side, the government is concerned with issues such as:

  • physician self-referral
  • physician kickbacks
  • false claims to Medicare and Medicare
  • over-utilization of medical services (medical unnecessary care)
  • patient steering
  • unfair competition from unfair referrals

Federal physician self-referral law limits physician referrals when the medical doctor has a financial relationship with the entity for certain “designated healthcare services.”

Federal anti-kickback law prohibits asking for or receiving anything of value, to induce or reward referals of federal health care program business.

Federal law contains exceptions to self-referral law, and safe harbors for the anti-kickback statute.

Compliance program basics

The feds recommend a proactive approach to compliance, and urge that physicians, medical groups, and healthcare ventures that provide Medicare-reimbursable services create a compliance program to help you craft and implement a health care compliance program.

The 7 fundamental elements of a healthcare compliance program are:

  • Written policies and procedures
  • Compliance professionals
  • Effective training
  • Effective communication
  • Internal monitoring
  • Enforcement of standards
  • Prompt response

Among other things, legal counsel can craft a compliance program for you, and also review your compensation arrangements against:

  • OIG Compliance Program Guidance
  • OIG Fraud Alerts, Special Advisory Bulletins, and other Guidance
  • OIG Advisory Opinions

In one of practical compliance tips, OIG says what our healthcare compliance lawyers tell many clients:

Just because your competitor is doing something doesn’t mean you can or should.

To which we say: Amen.  It’s better to have it and not need it (although you do need it), then need it and not have it.

OIG issues fraud alert on physician compensation arrangements

In 2015, OIG issued a fraud alert entitled, Physician Compensation Arrangements May Result in Significant Liability.

In this fraud alert, OIG warned:

Physicians who enter into compensation arrangements such as medical directorships must ensure that these arrangements reflect fair market value for bona fide services the physicians actually provide…..

OIG noted that it had recently reached settlements with 12 individual physicians who entered into “questionable” medical director arrangements.

OIG found the medical director arrangements improper because:

  • the “medical director” payments to physicians took into account the physicians’ volume or value of referrals, and
  • did not reflect fair fair market value for the services to be performed;
  • further, the physicians did not actually provide the services called for under the arrangements

Any of these three would be an enforcement red flag.

The Department of Justice (DOJ) makes good on the medical director, Fraud Special Alert

Shortly on the heels of the Fraud Alert on physician compensation arrangements, DOJ announced a $17 million False Claims settlement with a nursing home.

The case involved alleged kickbacks in a medical director compensation arrangement.

The medical director arrangements were said to be sham as the medical directors performed almost no actual services in exchange for their medical director compensation.  Rather, the medical directors used their positions to increase referrals to the nursing home that compensated them.

Again, when structuring compensation arrangements with physicians in general – including medical director positions – look for these enforcement red flags:

  • The physician compensation should not take into account the value or volume of referrals.  So for example, beware of “per patient” or “close rate” compensation.
  • The physician compensation must reflect fair market value for the services the medical doctor will ofer.
  • The physician must provide value (services) in exchange for the compensation.

As we’ll note again below, we would add more bullets:

  • Specifically define the physician duties in a written agreement, so they are clear.
  • Find objective criteria to measure performance of these duties, to help reduce the risk that this will be seen as a sham arrangement.

State authorities take issue with medical directors

“Medical director” creates enforcement red flags at the state level, too.  See our previous post, If someone asks you to be medical director, run!

In that post, we noted that in our law practice, we’ve seen a lot of variations of the medical director concept and significant compliance issues with the way health care ventures have structured their arrangements with MD “partners.”  The settings have included:


Some legal strategy points

We recommended that to manage enforcement red flags with “Medical Director”positions, healthcare ventures seek legal counsel to structure arrangements with an eye to corporate practice of medicine and fee-splitting concerns.

“Medical director” creates enforcement red flags, we tend to recommend that healthcare ventures utilize a management company (MSO) model when feasible and when it makes sense to do so.

When medical management company, healthcare entrepreneurs, and startup ventures want to claim the prestige of an affiliated medical doctor, yet not run afoul of compliance issues, we recommend that the MD be compensated at fair market value for a well-defined, non-clinical role.

Objectively measure performance to help protect charges that this is a sham arrangement.

There are other legal strategies we can bring to bear.  It all depends on the context and what the client is trying to achieve.

Compliance is not a one-size fits all.

But the healthcare clients who seek out legal advice ahead of time tend to fare better in the market, be more knowledgeable about the boundaries and pitfalls, and stay out of the regulatory fire where even large healthcare groups and companies have been burned.

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Michael H Cohen Healthcare & FDA Lawyers

Contact our healthcare law and FDA attorneys for legal advice relevant to your healthcare venture.

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