The 10 Biggest Legal Mistakes Physicians Make in Negotiating Contracts for In-Office Ancillary Services

Excerpted from The Biggest Legal Mistakes Physicians Make: And How to Avoid Them

Edited by Steven Babitsky, Esq. and James J. Mangraviti, Esq. (©2005 SEAK, Inc.)

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Executive Summary

In light of the financial challenges facing physicians in the operation of their practices, including reduced reimbursement levels and soaring medical malpractice premiums, physicians are turning to alternative sources of revenue to supplement their incomes. One such alternative is the offering of ancillary services in their offices. However, physicians often lack the expertise to develop and operate such ancillary services on their own, are reluctant to invest the resources that it takes to acquire the necessary equipment and technical support staff, or both.

To meet this need, suppliers of ancillary equipment and services are proposing contractual arrangements to physicians to offer various types of ancillary services in their office with relatively little financial risk to the physicians. While this can be a successful strategy for physicians to augment their practice income, physicians often make easily avoidable mistakes when entering into such arrangements that can result in significant financial and legal risks for the physicians.

Mistake 1        Agreeing to a Deal That Sounds Too Good to Be True

The old maxim, “If a deal sounds too good to be true, it probably is,” often applies to physicians who contract with outside vendors for in-office ancillary services. Vendor representatives have become very aggressive in marketing “turnkey” arrangements to physicians, whereby the vendor promises to provide all the services and equipment necessary to operate the ancillary service, with little or no financial investment or other effort required on the part of the physician. The terms of any such “sweetheart” deal must be carefully reviewed, since the fine print of the contract drafted by the vendor’s attorney often contains onerous provisions that place an undue burden on the physician.

In addition, these types of arrangements have drawn close scrutiny from government enforcement entities, particularly the Office of Inspector General (OIG), which issued a special bulletin on the matter, Contractual Joint Ventures, in April 2003. In the bulletin, the OIG expressed concern over the proliferation of these types of “questionable” arrangements and characterized as “problematic” arrangements that exhibit the following elements:

  • A physician is expanding to a related line of business that is dependent on referrals from the physician and primarily serves the physician’s existing patient base.
  • The physician neither operates the new service himself or herself, nor commits substantial financial or human resources to the venture, but instead contracts out substantially all of the operations to an outside entity in an exclusive arrangement that includes noncompetition provisions.
  • The vendor is an established provider of the same service as the physician’s new line of business, and absent the contractual arrangement, would be a competitor for the new line of business.
  • The physician and the vendor share the economic benefit of the new business; and the aggregate payments to the vendor depend on the volume or value of business generated for the new service by the physician.

Action Step     Although it may be counterintuitive, physicians should avoid entering into arrangements that are too favorable to them in light of the criteria outlined in the OIG’s bulletin. Physicians should enter only arrangements that involve a reasonable amount of financial risk and effort on their part.

Mistake 2        Selecting the Wrong Vendor

When approached by a vendor’s marketing representative, physicians often like what they hear and rush to sign a contract, not realizing that there are often other alternative vendors available for any given ancillary service. This presents an opportunity for physicians to send out a request for proposal to different vendors and consider competing offers from them before signing a contract. The financial terms of, and legal risks presented by, such arrangements can vary greatly from vendor to vendor.

Action Step     Physicians should not accept the first proposal they hear, but instead should research what other vendors are available and send out requests for proposals. Background checks should be done on any proposed vendor to determine the satisfaction rate of other physicians doing business with that vendor, the vendor’s success rate, and whether the vendor or any of its shareholders or officers have ever been investigated or convicted for a Medicare or Medicaid fraud violation. Physicians should also consider alternative sources for such services, including management companies, local hospitals, and other physician groups in their area.

Mistake 3        Failing to Qualify for Protection Under an Antikickback Safe Harbor

The antikickback statute prohibits the payment or receipt of any remuneration in return for the referral of an item or a service to be reimbursed under the Medicare and Medicaid programs. Violations are punishable by monetary penalties of up to $15,000 per violation, exclusion from the Medicare and Medicaid programs, and jail terms of up to five years. In light of the OIG’s bulletin, it is clear that the OIG views contractual joint ventures for ancillary services as a potential violation of this law. However, an arrangement can be structured to fit under applicable safe harbors for personal service contracts and leases.

Action Step     Any contract with an outside vendor for an in-office ancillary service should avoid the problematic provisions described in the OIG’s bulletin. The parties should structure the contract to meet the applicable safe harbors under the antikickback statute, which require: a written contract with a term of at least one year; fixed compensation that is set in advance and does not take into account the volume or value of referrals (i.e., per use and percentage of revenue arrangements should be avoided); and the compensation paid should reflect the fair market value of services actually rendered.

Mistake 4        Failing to Qualify for Protection Under a Stark Exception

The Stark law prohibits a physician from making a referral for a designated health service to an entity with whom the physician, or an immediate family member, has a financial relationship. Violations are punishable by monetary penalties of up to $25,000 per violation, denial of reimbursement, and exclusion from the Medicare and Medicaid programs. The offering of an in-office ancillary service by a physician presents potential Stark issues to the extent that the physician is ordering a service from himself or herself, and to the extent the physician would be making a referral to the vendor with whom the physician has the contract to provide such services.

The Stark law defines “designated health service” to include the following services often offered by physicians in their offices: clinical laboratory; physical therapy; occupational therapy; radiology and other diagnostic imaging; radiation therapy; durable medical equipment; parenteral and enteral nutrients, equipment, and supplies; prosthetics, orthotics, and prosthetic devices; home health services; and outpatient prescription drugs. If a proposed in-office ancillary service does not involve any of these designated health services, the Stark law does not apply. However, if a designated health service is involved, the arrangement will have to be structured so as to qualify for protection under one of the Stark exceptions.

There is a Stark exception for in-office ancillary services referred by the same physician or another physician in the same group practice as the referring physician. To qualify for this exception, the ancillary service must be provided or supervised by the referring physician or another physician in the same group practice; offered in the same building in which the physician, or another member of the same group practice, offers physician services; and billed by the physician or the physician’s group practice.

Any contract with an outside vendor must be structured to meet the applicable personal service contract and lease exceptions, which contain substantially the same requirements as the corresponding safe harbors described in Mistake 3, except that the Stark exceptions specifically permit per use, per unit of time, and/or percentage of revenue compensation, so long as the level of same reflects fair market value and is not dependent on the value or volume of referrals between the parties.

Action Step     The offering of any in-office ancillary service that involves a designated health service should be structured in a way that meets the Stark in-office ancillary service exception. The contract with the vendor should be structured to meet the applicable Stark personal service contract, lease exceptions, or both.

Mistake 5        Agreeing to an Excessive Management Fee

Many vendors often propose excessive management fees, including both a base fee and a percentage of the revenue generated from the ancillary service. Paying an excessive management fee can have not only an adverse financial effect on the physician, but can also aggravate the antikickback and Stark issues presented by the arrangement.

Action Step     Physicians should negotiate the management fees proposed by the vendor to a reasonable level and try to avoid any fees based on a percentage of revenue. Fees should be limited to the fair market value of the services actually provided by the vendor. Fee quotes should be obtained from one or more alternative vendors.

Mistake 6        Failing to Check Terms of Office Lease for Restrictions on Offering of Ancillary Services

Many office leases, particularly those involving space in a medical office building located on a hospital campus, contain restrictions on the ability of physician tenants to offer ancillary services in their office. Breach of such a provision could result in a financial penalty being imposed on the physician, an eviction action, and/or injunction preventing the offering of the ancillary service.

Action Step     Before entering into any contract with a vendor for the offering of an in-office ancillary service, physicians should review the terms of their office lease carefully and obtain any required consent from their landlord in advance.

Mistake 7        Agreeing to Overly Restrictive Covenants

Most vendors propose clauses in their contracts that give them the exclusive right to provide the ancillary service for the physician, but prohibit the physician from offering a competing ancillary service. The presence of such a clause is one of the factors identified in the OIG bulletin that may give rise to a fraud and abuse violation. These clauses often extend for years beyond the termination of the contract, even if the contract is terminated through no fault of the physician, and leave the vendor free to provide services in competition with those provided by the physician.

Action Step     Restrictive covenants should be avoided if at all possible. If they are unavoidable, they should be reasonable in terms of time and geographic area, and they should be mutual (i.e., the vendor should also be prohibited from providing services to a competitor of the physician). Such clauses either should not extend beyond the termination of the contract or should not apply if the contract is terminated for cause by the physician or without cause by the vendor.

Mistake 8        Failing to Require the Vendor to Have Adequate Insurance

While most vendors require that the physician maintain a certain level of insurance for professional and general liability, the typical contract a vendor proposes does not contain any corresponding insurance obligation on the part of the vendor. If the vendor will play an active role in providing the in-office ancillary service, either through its employees or subcontractors, or through equipment it acquires, the vendor’s breach of any applicable standard of care could expose the physician to liability.

Action Step     Physicians should insist on contractual provisions requiring the vendor to maintain adequate levels of insurance and to provide them with certificates of insurance evidencing that they have done so.

Mistake 9        Failing to Provide Required Level of Physician Supervision

In their enthusiasm to sell their products and services, a vendor’s representatives often promise physicians that the ancillary service will be offered in the physicians’ office with little or no effort required on the part of the physicians. However, Medicare reimbursement rules often require a certain level of physician supervision over in-office ancillary services as a condition of the physician being able to bill Medicare for such services. Depending on the service involved, the level of physician supervision required can range from setting appropriate clinical standards and being available for consults, to availability in the office at the time the services are being rendered, all the way to physical presence while the service is actually performed.

Action Step     Physicians should not rely on the representations of vendor sales representatives, but should check for themselves the applicable Medicare regulations before entering into an arrangement so that they can determine what level of physician supervision will be required on their part in order to offer the ancillary service in question.

Mistake 10      Committing to Long-Term Contracts

Vendors typically want physicians to enter into contracts that obligate the physicians to them for many years and often leave the vendors with the right to terminate the contract if certain volume levels are not achieved, or if the vendors simply decide they want out of the deal.

Action Step     Contract terms should be limited to one or two years and the physician should retain the right to terminate the contract if the vendor fails to perform or if the physician reasonably determines that continuation of the contract is no longer in his or her financial best interest.

Conclusion

While the addition of in-office ancillary services can be a successful strategy for enhancing practice income, physicians entering into contracts for such services should be mindful of the issues involved and consult with experienced legal counsel to avoid these common mistakes and the adverse financial and legal consequences they entail.

Additional Resources

  • “Attorneys React to OIG Advisory Bulletin on Contractual Joint Ventures in Healthcare,” BNA Health Law Reporter, Vol. 12, No. 21 (May 22, 2003)
  • Office of Inspector General-Special Advisory Bulletin, Contractual Joint Ventures (April 2003)
  • “OIG Targets Contractual Joint Ventures,” Healthcare Financial Management (Sept. 2003)

Written by:

Thomas J. Onusko, Esq.

Peer reviewed by:

Matthew E. Albers, Esq.

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