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In a decision that has implications for contracts between medical groups and physician management companies across Florida, the 4th District Court of Appeal has affirmed a lower court ruling that portions of a Vero Beach clinic’s contract with its management firm constituted illegal fee splitting. In March 1998, Dr. Allen Friedenstab was fired by his Vero Beach medical group. Within a month of leaving the clinic, he ignored a noncompete agreement he had signed with the group and opened an OB/GYN practice in the same town. The medical group, Gold Vann & White, sued him for breach of contract. But Friedenstab claimed he was not bound by the noncompete agreement because it was based on an illegal business arrangement between the clinic and its physician management company, PhyCor of Vero Beach, a local unit of Nashville-based PhyCor. In April 2001, Indian River Circuit Judge Scott Kenney summarily dismissed the medical group’s suit, ruling that the clinic’s contract with PhyCor was invalid because it involved fee splitting. Fee splitting, which involves one medical provider paying another for a patient referral, is against state law. The clinic appealed. Last week, the 4th DCA affirmed Judge Kenney’s ruling that portions of the contract were illegal. But the three-judge panel reversed his summary judgment and remanded the case to the trial court for further fact-finding. Friedenstab’s attorney, Craig Rappel of Rappel & Rappel in Vero Beach, called the 4th DCA opinion a legal victory, although his client isn’t happy about having to go back to court. “This was a gray area and we finally got a straight-shot analysis on this issue,” he said. But the medical group’s attorney, Richard Goldstein, a partner at Goldstein Tanen & Trench in Miami, said that the agreement between Gold Vann & White and PhyCor is still valid because it entails more than a commission for new business. Physician management companies like PhyCor boomed in the mid-1990s as doctors across the country struggled to hold their own against burgeoning managed care and hospital networks. By organizing through physician management companies, the doctors thought they would gain greater resources and leverage. But in recent years, the physician management industry cratered as the relationship between medical groups and management companies soured, said Gabriel Imperato, a veteran health care attorney and managing partner at Broad and Cassel in Fort Lauderdale. Three years ago, the Florida Board of Medicine issued an advisory opinion that prohibited doctors from paying management companies a percentage of their revenues to run their offices and recruit patients. The board looked into the issue at the request of Hillsborough County cardiologist Magan Bakarania, who was considering joining a local practice and wanted to know whether its contract with a physician management company was legal. Under the contract, the practice had agreed to pay PhyMatrix Corp. of West Palm Beach $450,000 a year plus 30 percent of the group’s annual revenues for managing and expanding the practice. In its analysis, the board likened the arrangement to paying kickbacks for patient referrals, a violation of the Patient Brokering Act. PhyMatrix Mgmt Co. challenged the board’s decision in court, but it was upheld by the 1st DCA in June 1999. Most of the management companies still in business heeded the board’s Bakarania decision and revised their contracts with physician groups to include a fixed-payment arrangement rather than a percentage deal, Imperato said. But for the handful that may have failed to take proper action, the 4th DCA’s recent ruling places the validity of those contracts in peril, Imperato said. “This case did not expand the holding in Bakarania but definitely confirmed it as a reliable precedent,” Imperato said. In its ruling in Friedenstab’s case, the 4th DCA found that a provision in PhyCor’s management service contract with the Vero Beach medical group fit the definition of fee splitting. The provision required the group to pay PhyCor 25 percent of all revenue from new contracts with managed health care insurers. Because PhyCor’s duties under the service agreement included marketing the practice, which could potentially generate more business, the appellate court viewed the contract as an indirect way of getting paid for patient referrals. But the 4th DCA panel sent the case back to the trial court, ruling that there was still a viable issue as to whether PhyCor’s service agreement with the medical group still stands if the illegal part is taken out. Goldstein claims that the agreement is still valid because marketing was a small part of PhyCor’s responsibilities. The marketing PhyCor did for the doctors only amounted to placing ads in the Yellow Pages and making public speaking arrangements, he said. Additionally, PhyCor never made any money under the provision giving it 25 percent of new managed care contracts because it never acquired new business, Goldstein notes. Friedenstab had signed a 1989 employment agreement with the medical group that contained a provision forbidding him from practicing within 35 miles of Vero Beach for 18 months if he ever left the clinic. The noncompete provision expired after 10 years. But two years before the provision ended, Friedenstab and the other group physicians agreed to give up the 10-year limitation on their noncompete covenant as part of their 1997 deal with PhyCor. In return, PhyCor agreed to reduce its service charges and pay the doctors a consideration for giving up the sunset date. According to Rappel, Friedenstab’s consideration for signing the revised employment agreement was PhyCor’s promise to reduce the percentage fee it was collecting from the practice. But that consideration was based on a part of the contract that has been declared illegal, Rappel said. Therefore, Friedenstab’s noncompete agreement with the medical group is unenforceable, Rappel said. Goldstein claims, however, that Friedenstab received compensation independent of the terms of PhyCor’s service agreement with the medical group. Friedenstab is now practicing medicine with his wife in Vero Beach.

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