A physician’s decision about whether to become an independent contractor or an employee is often dictated by a few tangible factors (e.g., tax code and employee benefits) and a myriad of intangible factors (e.g., whether the arrangement is likely to be short or long term, permanent or temporary, part-time or full time, sporadic or routine). Many physicians don’t need to think about it at all, since the decision is made by whoever is offering the deal. But the one critical element physicians must consider but often do not is whether structuring the deal in a certain way will land them at the short end of an investigation by the HHS Office of Inspector General (OIG) . . . or worse.
In fact, there are differences between the way independent contractor and employer–employee arrangements are analyzed under both the antikickback safe harbor regulations (which describe arrangements that are considered exempt from scrutiny) and the federal physician self-referral law (the Stark Law). Both the antikickback law and the safe harbor regulations include an exception for bona fide employment arrangements: The antikickback statute excepts from its reach “any amount paid by an employer to an employee (who has a bona fide employment relationship with such employer) for employment in the provision of covered items or services.”1
Accordingly, the OIG safe harbor regulations provide that the term “remuneration,” as used in the antikickback statute, does not include any amount paid by an employer to a bona fide employee for employment in the furnishing of any item or service for which payment may be made in whole or in part under Medicare or a state health care program. For purposes of this safe harbor, the term “employee” has the same meaning as it does for tax purposes.
Likewise, the Stark Law’s prohibition on compensation relationships between referring physicians and the entities to which they refer is inapplicable to bona fide employment relationships that meet certain requirements, and productivity bonuses based on personally performed services are specifically allowed.
While independent contractor arrangements may be structured to meet safe harbor requirements under the antikickback law and to qualify for the “personal services” exception under the Stark Law, there are considerably more “i”s to dot and “t”s to cross. And whether a physician is an employee or an independent contractor makes a big difference in analyzing whether a physician’s practice meets the Stark Law’s “group practice” definition.
For these reasons, the conventional thinking among health care lawyers is that physician employment arrangements are less risky than independent contractor arrangements. While this may still be true in general, two Stark Law–based settlements in the past few years—a $69.5 million settlement and a $118.7 million settlement—involved employment relationships. Those employment arrangements resulted in losses to the hospitals involved and could not be justified but for the employed physicians’ referrals to the hospital systems involved. While certain “bad facts” may have been partially responsible for the investigations and the extraordinary amounts of the settlements, these cases have nonetheless resulted in closer examination of the financial substance—as well as the form—of physician compensation relationships, whether they are structured as independent contractor or as
Regardless of the legal structure of a compensation arrangement, it is critical that the compensation that is established is justifiable as fair market value, taking into consideration the nature of the services provided, the physician’s expertise and prevailing rates of compensation in the market. Departures from established compensation rates or standards should only be made for reasons that are commercially justifiable and documented, and it is essential that each compensation arrangement be supportable on the basis of evidence of actual need for the physician’s services and reflect services actually provided.
The bottom line is that group practices that rely on the “in-office ancillary services” exception for Stark Law protection should be aware that the difference between an employee and an independent contractor may mean the difference between maintaining their protection and jeopardizing it. And to the extent that compensation arrangements with hospitals seem too good to be true—or substantially vary over time based on factors unrelated to personal productivity—an experienced health care attorney should be consulted.
- Social Security Act 1128B(b)(3)(B)