The Legal Dangers Physicians Face When Working with Third Parties

corporate practice of medicinePhysicians regularly work with businesses who want the doctors to use their products. To encourage physicians to choose their practice over competitor practices, vendors often offer incentives. Doctors need to know which incentives are legitimate, which relationships create a conflict of interest, and which business relationships can result in state or federal charges that the doctor violated civil or criminal law. An experienced healthcare business attorney can help you manage your practice and respect the relevant healthcare laws. Michael H. Cohen Law Group does more than just advice clients. We have written books on integrative medicine, legal ethics and other legal medical issues.

Doctor Relationships between Physicians and Third-Party Payers

In addition to the federal government, other entities often pay physicians for their services and medical items. These third-party payers include:

  • Commercial insurers
  • State Governments

Just as there are many federal healthcare laws, many states have laws that regulate payments by commercial insurers and by state governments. The combined federal and state laws generally regulate the following matters (you’ll need to consult a respected healthcare lawyer for your state for a review of your state’s healthcare laws):

  • Proper billing and coding. Insurers, the federal government, and the state government rely on physicians to provide services to patients that are necessary and cost-effective. Medical treatment should provide the best quality care. Claims are usually based solely on the presentation of properly coded documents and bills that accurately reflect the work that was done. Some examples of improper billing are submitting bills:
    • For services that weren’t provided the patient
    • For services done without proper medical supervision or authority
    • For unnecessary services
    • For services done by a doctor who was excluded from federal healthcare participation
    • For poor quality services
    • For services covered in other billing documents
  • Upcoding. Physician relationships with payers that doctors need to understand are what codes apply for which medical programs and which services. Today, billing is done extensively through computer programs. The right service must match the right code. Doctors who upcode (use a code that generates a higher rate than deserved) can be subject to civil penalties and other consequences. Medicare, for example, uses what are called Evaluation and Management (E/M) codes. These codes distinguish between new patient services which are more time-consuming (and thus deserve more compensation) than follow-up medical visits. Medicare pays a higher rate/fee for newer patients than existing patients – but only if the right codes are entered. Doctors cannot upcode by billing an existing patient as if they were a new patient to get this higher Medicare rate.

Doctors also cannot upcode by improperly using a code modifier which allows for a higher rate if the service was provided on the same day as another medical service. The use of the modifier code is improper if the additional service wasn’t needed, was really the same as the other service, or is generally considered part of that other service.

  • Proper medical documentation. Physicians should keep complete medical records and documents to support the necessity of the services provided, the quality of the services given the patient, and the results of the treatment provided. Proper documentation is essential for the patient’s care because it is often used by other members of the medical practice (if for example, a doctor is on call and can’t see his/her patient). Medical documentation is often used by other treating doctors, as well, who rely on the accuracy of the medical information they receive. As a practical matter, good medical documentation is often useful in litigation to support a patient’s worker’s compensation, personal injury, disability, or other legal claims.

Physicians Relationships with Other Medical Providers

Investments in a healthcare business of another physician have many legal risks. An experienced healthcare medical relationship lawyer can help you evaluate those risks.

Many physicians invest in healthcare businesses such as laboratories, entities that provide imaging services, and other related health services. Relationships between pain management doctors and physical therapists or chiropractors, for example, are fairly common. These relationships are bound by federal and state laws that aim to prioritize the needs of the patient and to prevent a doctor from making a referral to a business he/she has an interest at the expense of quality care. In short, these laws recognize that physician relationships with other medical providers creates a conflict of interest that must be addressed. Referrals to medical businesses can violate the Anti-Kickback Statute and Stark Law.

Physicians who wish to enter in to a medical relationship with other healthcare providers need to review many legal and practical questions. A few tip-offs that the business relationship may be improper or may result in civil or criminal charges are:

  • Is your interest in the business disproportional to your investment?
  • Are incentives being offered to enter into business relationship such as below-current interest rate loans and promises that you won’t be liable?
  • Are payments being offered that reflect the fair market value of your services?
  • Are you being asked to refer patients based on a quota or a financial barometer instead of what’s good for the patient
  • Is the venture being fully funded by other investors?
  • Do the other investors have the proper medical licenses and certifications?

These are just a small sampling of the many questions physicians need to consider before entering into a professional medical business relationship.

Recruitment of Physicians

Hospitals need quality medical personnel to provide the best care possible to their community. To get the best doctors, hospitals often provide incentives to get the physician to come to their hospital instead of another hospital. Doctors and hospitals should both understand which incentives are legal and which ones the federal or state government considers illegal. Hospitals obtain many federal and state payments which means the government expects the hospital to place the healthcare of their patients first.

Examples of incentives that may be illegal and should be reviewed with a trusted healthcare lawyer are:

  • Payment for services that are above fair market value – above the industry standard for your type of medical practice.
  • Payment for nonmedical services that are meant to induce the doctor to refer patients to the hospital. For example, below market-value rent for a medical office.

Doctors should understand the difference between being an employee and an independent contractor. Hospitals usually have much more control over an employee’s medical practice and often offer incentives, such as healthcare insurance, that are not available to independent contractors. For example, independent contractors have unique concerns about kickbacks that need to be reviewed.


If you’re a successful physician, chiropractor, acupuncturist, or other licensed healthcare provider, and you want to provide overflow patients to another practitioner you hire, is it a kickback […]

Physician Relationships with Doctor and Pharmaceutical/Medical Device Supplier Relationships

Some pharmacies and medical device suppliers are so desperate to establish a working relationship with a medical practice that they make offers that violate the law. Doctors should question any incentive which isn’t based on standard medical practice and which offer exchanges (cash, or other forms of remuneration) for less than the fair market value of the services the doctor is providing.

  • Consulting fees. For example, doctors should question opportunities to work as a consultant for the pharmacy or supplier. Physicians should question being paid exorbitant fees for speaking about the vendor’s products. Some valid questions that should trigger a phone call to a healthcare attorney are:
    • Could the vendor get the same services from other doctors for lower rates?
    • Does the vendor really need your advice?
    • Is the pharmacy or supplier expecting you to refer your patients to them? If so, what are the expectations of the vendor?
  • Free incentives. Physicians should be leery of offers for a free lunch or dinner, all-expense paid trips and gifts. Doctors should be certain that their work relationship with vendors is based on independent medical judgment. Doctors should refer patients to pharmacies and suppliers because of the quality of product and quality of service provided – not because they suspect or know the referral might lead to more business.
  • Free samples. Doctors who accept free samples can, with some exceptions, give these free samples to their patients. Doctors cannot sell free samples to their patients or other doctors. They also can’t bill Medicare for the value of the samples.

Physicians should separate their free sample stock from their commercial stock. When doctors give the stock to patients, they should inform the patients that the stock is free. If the free samples are covered by any controlled substance laws (most drugs are covered), then the physician must comply with those laws or risk criminal prosecution and the loss of the license to practice medicine.


Does FDA deem your product to be a medical device, or is it just a consumer product that would not be regulated by FDA? Here are basic steps you can take to work through the puzzle.

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