Do healthcare markups violate fee-splitting laws?

Healthcare Startup Wants to Make a Profit Without Violating Fee-Splitting Laws

A telemedicine healthcare startup wants to create a profitable healthcare venture by connecting patients with medical doctors, and also getting a markup off of goods and services sold to patients.

What’s wrong with this picture?

Can the healthcare venture succeed, or will it face healthcare legal roadblocks (such as self-referral, Stark, anti-kickback, and fee-splitting issues at the outset)?

Legal Issues with Markups: The Anti-Markup Rule

Apart from anti-kickback prohibitions, one of the areas of legal concern here is the anti-markup rule.

There is a federal anti-markup rule and there are also state anti-markup rules.  For example, on the federal side, see:

Anti-Markup Rule –

As Noridian, the Medicare carrier for California (among other states) says:

  • The anti-markup payment limitation applies to diagnostic tests that were formerly referred to as ‘purchased diagnostic tests’
  • The anti-markup provision applies when a physician or other supplier orders a diagnostic test (payable under the MPFS and excluding clinical diagnostic laboratory tests) and bills for the technical component (TC) or professional component (PC) of the test that is performed or supervised by a physician or other supplier who does not ‘share a practice’ with the billing physician or other supplier that ordered the test

Diagnostic Tests: Purchased or Personally Performed.

Whenever the healthcare startup or physician tries to make a markup off a laboratory test, or other diagnostic test, the anti-markup rule must be considered in addition to anti-kickback prohibitions.

Anti-Kickback Principles

Even if the anti-markup rule does not technically apply, there are still anti-kickback issues when physicians or healthcare startups make money off a markup to the consumer or user.

It is important here that the healthcare venture be rewarded not for the referral to the particular telemedicine physician, but rather for its own productivity or effort to the user, consumer, or patient.

For the moment, let’s focus on the state law side, using California as an example.

California Business & Professions Code Section 650(a) provides:

… the offer, delivery, receipt, or acceptance by any person licensed under this division or the Chiropractic Initiative Act of any rebate, refund, commission, preference, patronage dividend, discount, or other consideration, whether in the form of money or otherwise, as compensation or inducement for referring patients, clients, or customers to any person, irrespective of any membership, proprietary interest, or coownership in or with any person to whom these patients, clients, or customers are referred is unlawful.

This basic prohibition against kickbacks and fee-splitting, applies, among other things, to “any person licensed under” Division 2 (Healing Arts).

This includes a whole laundry list of types of healing arts practitioners (for example, MDs and DO, as well as chiropractors, acupuncturists, massage therapists, and physical therapists).  The list also includes healthcare entities such as pharmacies.

The Safe Harbor for Services at Fair Market Value

Federal law contains a specified safe harbor from the anti-kickback laws for services provided at fair market value.

The state law prohibitions often parallel federal law.  For example, in California, Business & Professions Code, Section 650(b), provides:

The payment or receipt of consideration for services other than the referral of patients which is based on a percentage of gross revenue or similar type of contractual arrangement shall not be unlawful if the consideration is commensurate with the value of the services furnished or with the fair rental value of any premises or equipment leased or provided by the recipient to the payer.

As always, the $100,000 (or more) question is whether enforcement authorities would view the markup or spread as falling within the allowance of 650(b), or within the prohibition of 650(a).

See our prior posts:

Kickbacks, Fee-Splitting, Corporate Practice of Medicine, Stark, MSOs: Guiding Healthcare Ventures through the Maze

Fundamentally, you’re worried about legal rules prohibiting kickbacks, fee-splitting, corporate practice of medicine, as well as Stark law; you don’t know whether the MSO or management structure […]

Physicians Fee-splitting & Nurse Fee-Splitting More Common Than You Realize

An RN who is working on getting her NP recently called our law firm, asking whether he was engaging in illegal “fee-splitting” in her compensation arrangement with a physician. Physician […]


Is it fee-splitting to hire another medical doctor, chiropractor, acupuncturist, or other health care practitioner in your office and give them a “cut” of patient revenues? Fee-splitting, […]

When Chiropractors work with Medical Doctors, fee-splitting issues arise

When Chiropractors work with Medical Doctors, fee-splitting issues arise.  This is like Harry met Sally without the New Year’s scene.

What is a “Referral”

The question as to what is a “referral” has already been answered in a very broad way by various healthcare law authorities.  In simple form, generally giving the patient information that they can receive healthcare services here or there, is a “referral.”

An important concern is that if the arrangement involves Company making money off the consumer, then the arrangement probably cannot be justified in the way as a management and marketing arrangement between Company and Physician.

Beyond Section 650, there are additional provisions of California law—like similar laws in other states–that reinforce the point that California public policy disfavors markups in healthcare arrangements.  These include:

  • Business & Professions Code Section 655.5 (which limits the physician markup on lab tests).
  • Health & Safety Code Section 445 provides that no person:

shall for profit refer or recommend a person to a physician, hospital, health-related facility, or dispensary for any form of medical care or treatment of any ailment or physical condition.  The imposition of a fee or charge for any such referral or recommendation creates a presumption that the referral or recommendation is for profit.

Whether or not these particular terms are satisfied, the enforcement policy is clear.

A Platform Fee

Some telemedicine companies style the charge to the user as a “platform fee” or “technology fee.”

The idea is that the user is to pay fair market value for access to everything that the healthcare startup provides, including convenient audio-visual connections to available healthcare providers.

Again, given the broad legal reading of “referral” often adopted by state enforcement authorities, even the simple acting of providing someone with a list of providers (physical or digital) is a referral; and an aggressive enforcement agency could see this as getting paid for the referral (i.e., a prohibited kickback or an illegal joint venture which involves prohibited kickbacks).

One cannot eliminate all legal risk from healthcare ventures.  Being able to justify fees in terms of fair market value for services rendered should be helpful in case of investigation or enforcement.

Additional Concerns

Remember that telemedicine legal issues, anti-kickback and fee-splitting (and anti-markup) concerns, and so on, are simply part of the overall Rubik’s Cube of healthcare regulation and legal risk.  For example, there are still questions about HIPAA compliance (and who has what Business Associate obligations); still issues about standard of care; still risk management strategies such as, for example, getting the right cyber-liability insurance; and other legal and regulatory issues.

When embarking on any healthcare startup, contact a healthcare lawyer familiar with anti-kickback, fee-splitting, and self-referral laws so you can learn whether there are ways to navigate legal prohibitions.  Our anti-kickback lawyers structure many healthcare ventures.

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