In previous columns, we have reviewed New York's prohibition on splitting fees for professional services by physicians and other licensed medical professionals who are not in a common medical practice such as a partnership or professional corporation. Most states have some form of this prohibition, but New York's is unusual in that it is found in both statute and regulation. Education Law §6530 includes among the definitions of professional misconduct:

18. Directly or indirectly offering, giving, soliciting, or receiving or agreeing to receive, any fee or other consideration to or from a third party for the referral of a patient or in connection with the performance of professional services;

19. Permitting any person to share in the fees for professional services, other than: a partner, employee, associate in a professional firm or corporation, professional subcontractor or consultant authorized to practice medicine, or a legally authorized trainee practicing under the supervision of a licensee….

Education Law §6531 authorizes the suspension, revocation or annulment of a health care practitioner's license and other penalties if such professional:

…directly or indirectly requested, received or participated in the division, transference, assignment, rebate, splitting or refunding of a fee for, or has directly requested, received or profited by means of a credit or other valuable consideration as a commission, discount or gratuity, in connection with the furnishing of professional care or service….

Fee-splitting is also prohibited by the regulations of the Department of Education at 8 N.Y.C.R.R. §29.1(b), which defines as unprofessional conduct:

• Directly or indirectly offering, giving, soliciting, or receiving or agreeing to receive, any fee or other consideration to or from a third party for the referral of a patient or client or in connection with the performance of professional services;

• Permitting any person to share in the fees for professional services, other than: a partner, employee, associate in a professional firm or corporation, professional subcontractor or consultant authorized to practice the same profession, or a legally authorized trainee practicing under the supervision of a licensed practitioner. This prohibition shall include any arrangement or agreement whereby the amount received in payment for furnishing space, facilities, equipment or personnel services used by a professional licensee constitutes a percentage of, or is otherwise dependent upon, the income or receipts of the licensee from such practice, except as otherwise provided by law with respect to a facility licensed pursuant to Article 28 of the Public Health Law or Article 13 of the Mental Hygiene Law.

As unprofessional conduct, fee-splitting is punishable by revocation, suspension or annulment of the practitioner's license, and up to a $10,000 fine for each violation.1 There are a few narrow exceptions to this rule (e.g., a university faculty practice corporation can share in the professional fees generated by its faculty physicians).

The intent behind the fee-splitting prohibition is clear: to remove any improper financial incentive from a physician's consideration when diagnosing and treating patients. For example, if a surgeon pays a portion of the fee received for performing surgery to the internist who referred the patient to the surgeon, the internist has a financial incentive to refer patients for possibly unnecessary surgical procedures, and the surgeon likewise has a financial incentive to perform unnecessary surgical procedures.2

The overwhelming majority of physicians are caring, competent, and highly ethical practitioners who have their patients' best interests as their highest priority. The fee-splitting prohibition is aimed at preventing harm to patients by the small minority of physicians who may be susceptible to placing their own financial interests ahead of their duty to their patients.

The wording of New York's prohibition is so broad, and originated so long ago, that it now prohibits some perfectly legitimate transactions that would seem to present no danger to patients whatsoever. One obvious example is a physician who utilizes an outside billing service and pays for the service based upon a percentage of the revenue collected by the billing company.

When the fee-splitting prohibition was enacted, most physicians did their own billing using an employed secretary or billing clerk. As billing became more complicated, electronic billing services became more widely available, and it is safe to say that most physicians in private practice today use billing services and pay them based upon a percentage of billed fees or collections. Yet by doing so, physicians are violating the law. Think this is an exaggeration? An opinion letter of the general counsel for the New York State Department of Health specifically states that a billing service company is not permitted "to take a percentage of a medical practice's fees as payment for services it provides to the medical practice." And an Appellate Division decision from 1996 reinforced this position.

In Necula v. Glass3 a physician had been excluded from New York's Medicaid program after he was found to have entered into contracts with management companies that provided him with "facilities, supplies, equipment and non-physician staff necessary to operate his radiology practice [and paid] the companies a fixed percentage of his receipts for billing services and a fixed dollar amount for each procedure performed." The court found this to be illegal fee-splitting and upheld his exclusion.

New York's prohibition would also prohibit some other perfectly legitimate transactions that present no danger to patients. Let's take another obvious example. When the fee-splitting prohibition was enacted, there were few credit cards in circulation and few, if any, physicians accepted credit card payments for their services. Today, the vast majority of physicians in private practice in New York accept credit card payments. Yet by agreeing to do so and to pay the 3 percent or 4 percent fee to the credit card company, they are violating the fee-splitting prohibition. Will they be subject to disciplinary action for engaging in fee-splitting? In the words of Eliza Doolittle, "Not bloody likely!"4 However, some other arrangements between physicians and businesses can violate the prohibition and trigger disciplinary sanctions and other legal liabilities.

MSO Arrangements

Remarkable changes in the marketplace for medical services are taking place, and at unprecedented speed. These changes include the formation of large physician practices, and the attendant development of medical service organizations, or MSOs, which are general business corporations that provide most or all of the non-clinical items and services that support a physician practice. An MSO can provide the premises, equipment, supplies, utilities, medical recordkeeping, reception, scheduling, billing, janitorial and all of the non-clinical personnel required to support a medical practice. Owners of MSOs can include the physicians in the medical practice being serviced by the MSO as well as non-physician investors such as private equity firms.

MSOs are streamlining the costs of practicing medicine and allowing physicians to be more productive, spend more time practicing medicine, and freeing them from the mundane tasks of running the business side of their practices. However, many MSOs and the physician groups that contract with them are either unaware of or are choosing to ignore the fee-splitting prohibition. They are charging and paying for MSO services on the basis of a percentage of the medical practice's gross or net income.

Doing so poses considerable risks for the physicians involved as well as the MSO. The physicians agreeing to pay over a percentage of their practice income can be subject to professional medical misconduct proceedings, can have their licenses suspended or revoked, and can be fined $10,000 for each fee-splitting violation. While the MSO is not subject to the same professional disciplinary action, it is at risk of having its contracts with the medical practices voided by the courts, thereby forfeiting a considerable portion of the investment it made in establishing its business.

Advice

Unless and until the fee-splitting prohibition is amended and brought up to date by the Legislature, physicians and the entities that do business with them must be aware of the prohibition and its implications. We offer the following advice:

• When you hear the argument "But everyone else is charging a percentage," that may be true, but be aware that the physicians and the MSOs involved are violating the law and taking serious risks.

• In creation of an MSO arrangement, payment should be structured as either a flat fee, or on a fee-for-item or fee-for-service basis. Payments based simply on a percentage of the medical practice's gross or net revenue are illegal and can void the entire arrangement.

• An MSO and the physician who contracts with it must be very careful not to cede too much control over the medical practice to the MSO. The MSO, as a general business corporation, may not employ physicians, nurses or licensed professionals, nor can the MSO dictate or interfere with how those professionals practice. Ownership of the accounts receivable, medical records and other assets directly related to the practice of medicine must remain with the physician group.

• An MSO that sets up a so-called "captive" professional corporation, whereby the MSO can remove a physician as the owner of a professional corporation and replace him or her with another physician of the MSO's choosing will likely find that, if challenged, the arrangement will not withstand judicial scrutiny. Such an arrangement could be found to violate the prohibition on the corporate practice of medicine, in that it gives the MSO too much control over the medical practice.

The innovations in the delivery of medical care present great opportunities for better quality, better outcomes, and lower costs, and are very appealing to physicians. But physicians and MSOs must be aware of what the law permits and what it prohibits when entering into any practice management arrangements.

Francis J. Serbaroli is a shareholder in Greenberg Traurig and the former vice chair of the New York State Public Health Council.

Endnotes:

1. NY Education Law §6511

2. If Medicare or Medicaid patients are involved in such a scheme, both the internist and the surgeon could be prosecuted for violating the federal Anti-kickback Law 42 USC §1320a-7b(b), as well as held liable for severe penalties under the federal False Claims Act, 31 USC §3729-3733.

3. New York State Department of Health, Letter from General Counsel to unnamed party, Nov. 5, 1992.

4. George Bernard Shaw, Pygmalion, Act III.