Fraud and abuse case study , ACP Observer Jul 98

American College of Physicians: Internal Medicine — Doctors for Adults ®


Fraud and abuse case study

Does this management contract violate the law?

From the July/August 1998 ACP-ASIM Observer, copyright 1998 by the American College of Physicians-American Society of Internal Medicine.

By Michael J. Werner, JD

This is the third in a series of hypothetical case studies designed to illustrate how the fraud and abuse laws can be applied to everyday scenarios. It focuses on the anti-kickback statute.

Case study

A Group of Internists (AGI) is a three-person general internal medicine group. AGI is considering entering an agreement with PPMC, a medical practice management company. Under the proposed agreement, AGI would provide all physician services, hire additional physicians if needed and pay all physician compensation. PPMC would furnish the initial capital for a new office, furniture and operating expenses and would provide operating services such as accounting, billing, hiring of nonmedical personnel and marketing. PPMC would also negotiate contracts with various payers, including Medicare, for AGI.

In addition to its business venture with AGI, PPMC will be setting up physician networks throughout the surrounding area. The agreement specifies that if PPMC requires, AGI would refer patients to these physicians. In exchange for its management services, PPMC would get a percentage of any new revenues that AGI receives.

Should AGI enter into this contract?


No. This arrangement would likely violate the federal anti-kickback statute, which states that it is illegal to "solicit, pay, offer, or receive any remuneration, in cash or in kind, for the referral, or to induce the referral, of a patient, or for ordering, providing, recommending or arranging for the provision of any service" payable by the federal health care programs. Financial gain by an entity that provided any kind of remuneration would be suspect.

Physicians who engage in prohibited conduct—conduct with the specific intent to induce referrals or orders for services—are violating the law and can face criminal charges. Physicians can also face civil penalties for offering inducements to patients to order or receive items or services from a particular provider, supplier or practitioner if the physicians know—or should know—that their actions will influence patients. The term "should know" applies when physicians act "in deliberate ignorance" or "in reckless disregard" of whether their actions will influence patients.

The HHS Office of Inspector General (OIG) has expressed concern with percentage compensation arrangements, which reimburse individuals based on a proportion of their partners' revenues. The crux of the OIG's concern is that these arrangements inherently provide incentives for business partners to generate referrals to each other for services. The preamble to the regulations implementing the law states that the anti-kickback statute "prohibits offering or acceptance of remuneration...for the purposes of 'arranging for or recommending purchasing ...or ordering any...service or item.' Thus, we believe that many marketing and advertising activities may involve at least technical violations of the statute."

In the above example, PPMC would receive a percentage of AGI's net revenue as compensation for its management services, including business from managed care contracts arranged by PPMC. In addition, PPMC would be establishing networks of physicians to whom AGI may be required to refer patients. Thus, the arrangement between AGI and PPMC would include financial incentives to increase patient referrals, effectively violating the law. Specifically, PPMC would receive money by generating business for AGI.

The anti-kickback statute and corresponding regulations provide exceptions to these prohibitions that can be applied to a variety of situations, including when physicians participate in risk-sharing arrangements. If an activity falls under one of these "safe harbors," it is immune from prosecution by federal enforcement agencies.

The only safe harbor that potentially applies to the AGI-PPMC agreement is the one that governs personal services and management contracts. This safe harbor protects contracts for personal services and management services for physicians only if:

1. The contract is in writing and signed by the parties;

2. It specifies the services to be performed;

3. The services are to be performed on a part-time basis, and the schedule for performance is specified in the contract;

4. The agreement is for at least one year;

5. The aggregate amount of compensation is fixed in advance and based on fair market value; and

6. The services performed under the agreement do not involve the promotion of business that violates federal or state law.

It is likely that the OIG would conclude that the proposed arrangement between AGI and PPMC does not fall within this safe harbor because it does not comply with all six standards. For example, the proposed compensation is not an aggregate amount that is fixed in advance.

If AGI physicians remain unsure about whether this arrangement would be lawful, they can request an advisory opinion from the OIG. The opinion would only be binding for this proposed venture.

Requests for an advisory opinion must be made in writing and include a complete and specific description (including all documents such as contracts, leases and employment agreements) of all relevant information. The government charges a $250 processing fee and about $100 an hour to respond to requests. HHS is required to respond within 60 days. Further instructions on obtaining opinions can be found on the OIG Web site (

For more information about the fraud and abuse laws, see "Understanding the Fraud and Abuse Laws: Guidance for Internists," published in the April 15, 1998, issue of Annals of Internal Medicine.

Michael J. Werner is Counsel for Legislative Affairs and Policy in ACP-ASIM's Washington office.<

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