Rock Your Practice with an MSO—MSO Compliance vs. using Independent Contactor Practitioners

Here’s why an MSO rocks, both financially and from a compliance standpoint, for growing healthcare practices and ventures.

Growing Pains in Your Healthcare Practice or Healthcare Venture?

We’ve had many clinical practices and healthcare ventures come to us asking how to mitigate risk of anti-kickback and fee-splitting enforcement as their healthcare clinic, medical group, or health and wellness venture grows.

They’re facing legal and financial growing pains (groan).

Compliance anxieties seem to stymie every path. That is, until they book a legal strategy session and find the way forward.

Navigating Stark & self-referral, anti-kickback and fee-splitting issues

Fee-splitting and kickback dangers lurk in many guises, particularly as telemedicine, wearable tech, virtual reality healthcare delivery models, and other emerging technologies change the landscape of healthcare services.

These issues can also plague brick-and-mortar practices, from the solo medical doctor, chiropractor, acupuncturist or naturopathic physician who is growing and wants to add a clinical practitioner, to the more established medical group or healthcare clinic that seeks to add staffing.

See, for example, our post on Fee-Splitting 101 for Medical Doctors, Chiropractors, Acupuncturists, and Others.

Consider this post, Rock Your Practice, an update—a Fee-Splitting 202 for Medical Doctors, Chiropractors, Acupuncturists, and Other Clinicians – and Healthcare Ventures.

Kickbacks in the multi-disciplinary Healthcare Clinic

Dr. Gina’s Integrative Medicine Clinic recently consulted our healthcare and FDA lawyers about how the clinic was organizing its practitioners. All the clinicians were independent contractors.

Setting aside for the moment the classification issue (i.e., as employees for independent contractors), let’s look at the self-referral, anti-kickback, and fee-splitting issues.

First, self-referral. Let’s assume that there are no Medicare/Medicaid reimbursement monies involved; in other words, we won’t review federal law, but can focus instead solely on state law.

Stark (or self-referral) arises when the physician refers patients to an entity in which the clinician has a financial interest (for example, you refer patients to a clinical lab that you own). That scenario did not arise here.

As well, Stark (and typically the state self-referral statute) only involves certain “designated health services.” If those “DHS” are not present, then we can leave the self-referral statute and move on to the anti-kickback statute.

Kickbacks can arise in a variety of contexts; a key definition is that compensation depends on value or volume of referrals, as opposed to for the work itself.

Put another way, compensation varies by result, not by effort.

Perils of Contractors

Employing the clinicians poses less legal risk than having them as independent contractors.

As we explained in Fee-Splitting 101 for Medical Doctors, Chiropractors, Acupuncturists, and Others, if you hire an acupuncturist into your integrative medicine center and charge $100 for the acupuncture session, but pay the acupuncturist $40 for the session, this could be seen as fee-splitting with respect to the $100 patient payment. In other words, the $60 could be viewed as a as a reward for your referring the patient to the acupuncturist.

Many state statutes could come into play, such as for example in California, Business & Professions Code 650 (California prohibition against kickbacks), 2273(a) (prohibition against steering patients), and Health & Safety Code 445 (prohibition against profiting from medical referrals).

However, most clinicians do not want to employ another clinician, unless they have to. If there is supervision and “control,” then employment is probably advisable in order to avoid the heavy fines of misclassification. But if the other clinician is truly independent, then the preference is to have an independent contractor.

As often happens, compliance risks increase as the economics get more favorable. As we said in our earlier post:

What may start out as an economically advantageous situation becomes a potentially illegal fee-splitting or kickback arrangement.

Below we explain why.

The Safe Harbor for Employment Situations

As we noted with the $100/$60 split scenario above, if you’re a chiropractor or an acupuncturist and you want to hire a second chiropractor or acupuncturist, doing so as an independent contractor poses anti-kickback risk.

Employment is safer, because there is often a safe harbor to the anti-kickback statute based on employing the other clinician. In the employment scenario, you price the service at fair market value and pay a reasonable salary, then retain the rest as profit. You do not pay the clinician on a per-patient basis (although an hourly salary is allowed). You are not getting a “cut” from the other clinician’s healthcare service.

There is often an anti-kickback safe harbor for a personal management services contract. This effectively involves independent contractors, but we style the agreement to fit the safe harbor.

One of the requirements is usually that, among other things, the aggregate compensation be set in advance (as opposed to fluctuating depending on collections). This means that paying the contractor hourly suggests compensation that fluctuates by patient, and is not set in advance.

Compare an employment situation, where an hourly employment wage can be paid.

Why the MSO Rocks

If it’s cost-prohibitive to have the other clinicians as employees, the alternative arrangement we usually recommend is that of the medical (or management) services organization, or MSO.

The MSO aims to fall within the safe harbor for arrangements at fair market value.

The MSO rocks because the MSO can provide services to the clinician at fair market value, and thus justify the percentage of the fee that it takes, as compensation for the MSO’s management and administrative services.
These MSO services can include services such as:

  • Front desk, booking, and scheduling
  • Accounting
  • Billing and collection
  • Providing administrative personnel
  • Providing sublease (space)

Assuming fair market value can be justified if ever questioned, the MSO arrangement is designed to separate the clinical from the administrative functions, and move the business toward a more favorable, compliant position.

Note that the absence of safe harbor does make the arrangement per se illegal. However, it’s best to utilize safe harbors so as to mitigate risks of enforcement scrutiny.

Physician Independent Contractors

It’s quite common for physicians to have part-time arrangements, working for other physicians.

Let’s say that one medical doctor (Dr. B) is working 10 hours a week in the gerontology, dermatology, or pediatrics office of another medical doctor (Dr. A) as a part-time independent contractor. Dr. A presents Dr. B with an independent contractor agreement, which specifies that Dr. A retains 50% of Dr. B’s net collections (net meaning, adjusted for bad credit and patient refunds).

This is a somewhat different scenario than the lone wolf chiropractor or acupuncturist bringing another on board as independent contractor, for several reasons.

First, this kind of arrangement is common in the industry, and is often designed simply to get another physician to take on overflow patients without added payments going in either direction.

As well, the difference is that usually Dr. A is not marketing for Dr. B’s independent practice, but simply providing an overflow of patients and doing some administrative work to facilitate Dr. B’s clinical work.

If, in our scenario, Dr. A takes 50% of Dr. B’s net collections, as fair market value for the rental of the space, plus other services (say, for example, overhead and staffing)—and there is no premium paid to Dr. A for the number or value of patients that Dr. B services, then the arrangement could potentially work. And what we really have is an expense-sharing arrangement, rather than a fee-splitting arrangement. It is the costs that are shared, not the profits.

If this assumption is incorrect—for example, if it turns out that Dr. B is being underpaid for his clinical work, and Dr. A is being overpaid in the arrangement, then a regulator could argue that the difference between the payment to Dr. A and fair market value for the services Dr. A provides, represents an illegal inducement or compensation for Dr. A, the clinic or practice owner, to refer patients to Dr. B. This would then be considered a kickback.

Flat Fee Recommended for Marketing

Where marketing services are involved, we recommend a flat fee.

Marketing arrangements are often scrutinized. Percentage-based arrangements can be seen as compensation that depends on value or volume of patients.

Other Hidden Traps

Even though an independent contractor or management agreement may seem fairly standard, there are some hidden traps in these agreements and arrangements.

Some of the red flags we pointed out to Dr. Gina’s Integrative Medicine Clinic included:

  • An HR service for the clinicians she ultimately decided to designate as employees—because they were full-time or because she exerted some control over their clinical work.
  • Language delineating who owns the patient files, in each case, and who can have access to copies and under what circumstances.
  • Actual written agreements with the practitioners rather than a monthly check and a handshake arrangement.
  • Subleases.
  • Review of scope of practice issues to ensure that practitioners remain within legal boundaries. For example, practitioners trained in Tibetan medicine in a foreign country, who do not have a medical license in any state in the U.S., cannot diagnose and treat. (even if they call it something else).Similarly, massage therapists should not be doing cupping “under the acupuncturist’s license.” The notion of “under” someone else’s license is much misunderstood. Massage therapists typically do not have cupping, a technique used in traditional oriental medicine, as part of their scope of practice.
  • Review of prohibitions against corporate practice of medicine, psychology, or other professions.

With these suggestions, Dr. Gina felt that she had some of the major healthcare compliance issues addressed, and we were able to implement a plan to turn down the volume on her legal risk.

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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