Department of Health and Human Services 
OFFICE OF 
INSPECTOR GENERAL 
FINANCIAL ARRANGEMENTS BETWEEN 
HOSPITALS AND HOSPITAL-BASED 
PHYSICIANS 
Richard P. Kusserow 
.-  INSPECTOR GENERAL 
W 
I 
OEI-09-89-00330  TABLE  O F  C O N T E N T S  
................................................. 
INTRODUCTION  1 
...................................................... 
FINDINGS  3 
............................................ 
RECOMMENDATIONS  5 
APPENDIX A.  HCFA Comments 
APPENDIX B.  AHA Comments 
APPENDIX C.  CAP Comments  I N T R O D U C T I O N  
PURPOSE 
This management advisory report (MAR) alerts you to potential violations of the anti- 
kickback statute (statute), section 1128B@) of the Social Security Act (42 U.S.C. 
section 1320a-7b@)).  We have identified potential violations in the financial 
arrangements between some hospitals and hospital-based physicians because these 
agreements appear to require physicians to pay more than the fair market value for 
services provided by the hospitals.  We are continuing to pursue illegal arrangements 
where referring physicians receive kickbacks from hospitals.  This MAR focuses on 
arrangements in which hospitals receive suspect remuneration from physicians. 
BACKGROUND 
Hospital-based physicians include specialists such as anesthesiologists, pathologists, and 
radiologists.  Each of these specialties is dependent on their position at the hospital to 
obtain referrals from other specialists practicing at their hospital.  h'addition, 
hospitals often perform a variety of services for these physicians.  In turn, the hospitals 
are dependent on the hospital-based physicians because they provide essential services 
to the hospitals.  Some hospitals have reduced payments to hospital-based physicians, 
and some are requiring payments from those physicians ostensibly to reimburse the 
hospital for the services it performs, or for other purposes, such as "contnibutions" to a 
capital fund. ! 
Medicare pays for the services of hospital-based physicians in a variety of ways. 
Usually, Medicare pays physicians directly for the services delivered.  However, when 
pathologists perform clinical laboratory services for hospital inpatients under Part A, 
some portion of Medicare's prospective payment amounts to the hospital is lor (ha: 
pathology service.  Medicare Part B payments for anatomic pathology services are 
more complicated.  Technical and professional components are paid separately.  The 
former go directly to hospitals and the latter to the pathologist. 
Legal Criteria 
Section 1128B(b) makes it illegal to offer, pay, solicit, or receive remuneration for 
referring patients or for arranging for or recommending the ordering of any service 
payable undez Medicare or Medicaid.  The statute is very broad, covering indirect or 
covert forms of remuneration, bribes, kickbacks, and rebates as well as direct or overt 
ones.  Unlike most applications of the statute concerning Medicare compensation 
arrangements, the focus here is on remuneration made to hospitals Lom physicians. 
The case law makes clear that the statute's proscriptions apply to those who can 
materially influence the flow of Medicare and Medicaid business.  Hospitals are in  such a position with respect to hospital-based physicians, since they typically can name 
who will be the recipient of the flow of business generated at the hospital.  The use of 
influence to steer health care business was the subject of a case decided in the First 
Circuit, U.S.  Court of Appeals.  In United States v. Bay State Ambulance and 
Hkpital Rental Service. Inc., 874 F.2d  20, 33 (1st Cir. 1989) a hospital employee, 
John Felci, was convicted of receiving illegal payments to influence the hospital's 
decision as to which ambulance company should receive the hospital's ambulance 
contract. 
Three other significant cases have interpreted the statute.  In United States v. Greber 
760 F.2d 68, 69 (3rd Cir.), cert. denied, 474 U.S.  968 (1985) the Court held that, "if 
one purpose of the payment was to induce future referrals, the Medicare statute has 
been violated."  The reasoning in Greber was adopted by the Ninth Circuit Court of 
Appeals in the United States v. Ka3871 F.2d  105 (9th Cir. 1989.)  In  the Court 
found that the statute is violated unless the payments are incidentally attributable to 
referrals. 
In United States v. Lipkis 770 F.2d  1447 (1985), the Ninth Circuit Court of Appeals 
reviewed an arrangement between a medical management company which provided 
services to a physician's group and a clinical laboratory.  The laboratory returned 20 
percent of its revenues obtained from the physician group's referrals to the 
management company.  The defendants alleged that these payments represented fair 
m. 
compensation for "specimen collection and handling services."  at 1449.  The court 
rejected this tlefense, noting "the fair market value of these services was substantially 
less than the [amount paid], and there is no question [the laboratory] was paying for 
referrals as well as the descriied services." _bid  Thus, applying the reasoning of the 
Ninth Circuit Court of Appeals in Lipkis, an inference can be drawn that illegal 
remuneration occurs when a contract between a hospital and hospital-based physicians 
calls for the rental of space or equiptnelli or provision of professional senices on 
terms other than fair market value. 
If  a provider's conduct falls within the purvkw of the statute, it can be prosecuted 
unless the conduct meets a statutory exception or regulatory "safe harbor."  56 Fed. 
Reg. 35952 (July 29, 1991).  FINDINGS 
Given the relationship between a hospital and its hospital-based physicians,  contracts 
which require the hospital-based physicians to split portions of their income with 
hospitals are suspect, although not per se violations of the statute.  In some cases that 
we have reviewed, there is little basis to require hospital-based physicians to turn over 
a percentage of their earnings to the hospital.  In addition, under Li~kisa,  court may 
draw the inference that a direct payment from a hospital-based physician to a hospital 
is made for an illegal purpose when the amount of the payment cannot be justxed 
based on the amount of services the hospital renders under the contract with the 
physician. 
We have reviewed agreements that provide payments or remuneration to hospitals far 
in excess of the fair market value of the services pmvided by them.  Because these 
arrangements may violate the statute, disclosure of the terms of these agreements are 
rare.  Therefore, it is very dificult to establish the prevalence of these agreements. 
Several medical societies and anonymous parties have shown us the following contract 
provisions without identlfylng names and locations: 
A hospital provides no, or token, reimbursement to pathologists for Part A 
services in return for the opportunity to perform and bill for Part B services at 
that hospital. 
4 
Radiologists must pay 50 percent of their gross receipts to a facility's 
endowment fund. 
Thirty-three percent of all profits above a set amount must be paid by a 
radiology group to a hospital for its capital improvements, equipment, and 
other departmental expenditures. 
A radiologist group was required to purchase radiology equipment and agreed 
to donate the equipment to the hospital at the termination of the contract. 
The hospital has an unrestricted right to terminate the contract at any time. 
When net collections for a radiology group exceed $230,000, 50 percent is paid 
to the hospital, and the hospital reserves the right to unilaterally adjust the 
distniutions if it determines that the physician group has not fulfilled the terms 
of the contract. 
A radiologist group pays 25 percent of the profits exceeding $120,000 tc the 
hospital for capital improvements.  Fifty percent of the profits exceeding 
$180,000 go to this purpose. 
A radiology group pays for facilities, services, supplies, personnel, utilities, 
maintenance, and billing senices furnished by the hospital on a fee schedule  that begins at $25,000 for 1989, and rises to $100,000 by 1993.  Payments are 
due only if the radiologist's gross revenue exceeds $1,000,000 in the previous 
year. 
A betermination of whether these agreements are illegal requires an entire review of 
the contract and the relationship between the parties.  In addition, it is recognized that 
at some income levels, agreements which require physicians to turn over a percent of 
their income over a threshold amount, may approximate the fair market value of the 
services the hospital provides.  This fact may diminish our enforcement concerns. 
All of these samples appear to violate the statute because they provide compensation 
to the hospitals that exceeds the fair market value of the services the hospitals provide 
under the contracts.  It also appears the remuneration is intended to provide the 
hospital-based physician with referrals from the, other physicians on the hospital's 
medical staff. 
These potentially illegal financial arrangements may have several unfortunate results. 
Hospitals may award the exclusive contract based on improper financial considerations 
instead of on traditional considerations centering on the professional qualifications of 
the physician.  In addition, the remuneraticn gives hospitals a financial incentive to 
develop policies and practices which encourage greater utilization of the services of 
hospital-based physicians payable under Medicare Part B.  Hospital-based physicians 
faced with lowered incomes may also be encouraged to do more procedures in order 
to offset thqpayments to the hospitals.  These problems are among the recognized 
purposes of having the anti-kickback statute on the books in the first place. 
Illegal arrangements may also complicate the developinent and updating of physician 
fee schedules.  Physician practice costs could be artificially idated by hospitals and 
physicians that enter into arrangements not based or, frk market values.  RECOMMENDATIONS 
The HCFA should instruct its intermediaries to:  (1) notify hospitals about potential 
legal liability when they enter into agreements not based on the fair market value of 
necessary goods and services exchanged; and (2) refer cases similar to the examples 
given above, or any other suspect arrangements to the OIG for possible prosecution or 
sanctions. 
To avoid potential legal liability, all contracts between hospitals and hospital-based 
physicians should comply with all the safe harbor provisions that may apply under the 
contract between the parties.  Of particular importance are the safe harbors that 
protect payments for personal senices and management contracts and for services of 
bona fide employees.  42 CFR  5  1001.952(d) and (i); 56 Fed. Reg. 35985,35987.  It 
is noted thar in some of the safe harbor provisions, we require that payments must be 
consistent with "fair market value."  The regulation explicitly provides that safe harbor 
protection is not available where any part of the payment takes into account the 
volume or value of referrals or business otherwise generated by either party.  This 
restriction is necessary because such payments directly violate the statute. 
HCFA and Industry Comments on Eader Version 
In response to an earlier draft of this report, we received comments from HCFA, the 
American Hospital Association (AHA), and the College of American Pathologists 
(CAP).  T~~!HCFAc omments are included in appendix A.  The AHA comments are 
included in appendix B, along with our response to these comments, and AHA'S views 
on our response.  Th.z CAP comments are included in appendix C. 
In response to thess comments, we have (1) clarified the legal basis for our discussion 
and (2) deleted sax recommentation that carriers identify suspect arrangements.  A P P E N D I X   A 
HCFA Comments  DEPARTMENT OF HEALTH 8 HUMAN SERVICES   A=- I 
Memorandum 
-  MAY  2  1991 
Date 
113 
From  Gail R. Wilensky, Ph.D.  1 
'  L 
Administrator  I 
Subject 
OIG Management Advisory Repon:  "Fiiancial Arrangements Between 
Hospitals and Hospital-Based Physicians," OEI-09-89-00330 
To 
The Inspector General 
Office of the Secretary 
We have reviewed the subject management advisory report which alerts 
HCFA to potential violations of  the anti-kickback statute of the Social Security 
- 
. 
Act  The report identifies as potential violations those financial arrangements 
between hospitals and hospital-based physicians which either require physicians 
to pay more than the fair market value for services provided by the hospitals or 
which compensate physicians for less than the fair market value of goods and 
services that they provide to hospitals. 
The report recommends that HCFA instruct its contractors to (1) notify 
physicians and hospitals about the potential legal liability when they enter into 
agreement&n ot based on the fair market value of necessary goods and senices 
exchanged; and (2) refer identified cases to OIG for possible prosecution or 
sanctions.  Our comments on these recommendations, as well as technical 
comments on the report, are attached. 
Thank you for the opprturiity to comment on this management advisory 
report.  Please advise us whether you agree with our position on the report's 
recommendations at your earliest convenience. 
Attachment 
0  Comments of the Health Care Financing Administration on the 
- 
OIG Manaeement Advisorv Re~ort "Financial Arraneernents 
- 
Between Hospitals and Hospital-Based Phvsicians" 
{OEI-09-89-00330) 
. 
OIG Recommendation 1 
HCFA should instruct its contractors to notify physicians and hospitals about 
potential legal liability when they enter into agreements not based on the fair 
market value of necessary goods and services exchanged. 
HCFA Response 
We do not disagree with a recommendation that physicians and hospitals be 
- - 
notified of  the potential legal consequences that can follow a violation of  the 
anti-kickback provisions.  However, OIG, not HCFA, is responsible for 
monitoring compliance with the anti-kickback statute, investigating potential 
violations, and initiating legai action against parties to alleged illegal kickbacks. 
Therefore, we believe that it would be more appropriate for the OIG to issue 
this warning as a fraud alert, rather than pfacing this responsibility on the 
Medicare contractors. 
f 
OIG Recommendation 2 
HCFA should instruct its contractors to refer identified cases to OIG for 
possible prosecution or sanctions. 
- 
HCFA Response 
We believe that it would not be meaningful for HCFA to attempt to implement 
the above recommendation on the basis of the very limited information given in 
OIG's report.  The report gives no suggestions as to what pwcdures &c' 
contractors shonld use to detect and identify violations in the arrangements 
between hospitals and hospital-based physicians.  This poses particuIar 
difficulties nrrw that the contractors, with the move away from cost-based 
- 
. 
reimbunempnt, no longer routinely audit the agreements between hospitals and 
physicians. 
More importantly, no regulations have been issued to define what specific 
agreements would be illegal under the anti-kickback statute.  Moreover, the 
criteria discussed in the &port cannot be easily applied to a concrete analysis of  Page 2 
specific agreements, and the report draws no clear line between legd and illegal 
arrangements.  For example, the report describes an arrangement where a 
hospital provides no, or token, payback to pathologists for Part A ~ewiccsin  
return for the opportunity to perform Part B services at that hospitaL  OIG 
gives this as an example of a possible violation of the anti-kickback statute. 
However, it is unclear from this repon how such an arrangement is to be 
distinguished from those in which a physician provides other &es  of  suvieu to 
a hospital in connection with the physician's admitting privileges.  Physicians 
have routinely furnished services to hospitals, such as serving on committees, 
performing administrative functions or supporting a hospital's  graduate medical 
program, in return for admitting privileges and the right to practice at those 
hospitals.  Without clearer and more specific Iegal criteria, we wouId be 
reluctant to ask the contractors to take on the responsibility of actively 
attempting to identify violations of the anti-kickback statute.  However, 
- 
contractors do already operate under an instruction to report any activities they  . 
come across while carrying out their audit function that they believe to be 
potentially ilIegal. 
General Comments 
o  HCFA is currently developing demonstrations which involve 
innovative financial arrangements between hospitals and hospital- 
b e d  physicians.  For example, the Medicare Participating Heart 
Bypass Center and the Cataract Surgery Alternate Payment 
demonstrations will tcst the conceyt of a negotiated bundled payment 
combining hospital, facility, and physician services for coronary artery 
bypass grafts (CABG) and cataract procedures, respectively.  OIG 
representatives actively participated in the design of each of these 
demonstrations and have assured HCFA that they do not consider 
either of them to be in violation of the anti-kickback statute.  Also, 
under HCFA's  point-of-service praposd, contractors will establish and 
run preferred provider r,ttwsrks.  These contractors will negotiate 
financial agreemeno for high volume procedures such as CABG. 
OIG should make clear in this report that such arrangements would 
not mstitute a potential violation of the anti-kickback statute. 
o  n e A merican Hospital Association (AHA) has sent us a copy of 
their March 11, 1991 letter to OIG concerning this report.  AHA 
claims that OIG did m t  take the hospital perspective into account 
when drafting the report.  The letter raises several important points 
which should be addressed by OIG in the final report.  Page 3 
Technical Comments 
o  We believe that the background discussion of hospital-based 
pathologists on pages 1 and 2 is vague, and even misleading, when it 
explains how Medicare pays for the ciinicai laboratory scmces 
pathologists perform for hospital inpatients.  ~ener*,  pathol0@~ 
do not order, perfom or interpret the findings of clinical laboratory 
tests,  The pathologist's role in connection with these sc~cesis  
supervisory in nature and the associated costs are payable as a 
senice to the hospital, either through the diagnosis related p u p  
(DRG)p ayment or on a reasonable cost basis in hospitals excluded 
from the prospective payment system (PPS). The report's description 
of payments for the technical component of anatomic pathology 
- - 
xm'ces implies that a separate payment is made to the hospital 
rather than indicating that payment for the tcchni'cal  component is 
made through the DRG amounts. 
o  We also believe that the report should address the practical 
differences in Medicare's ability to respond to the recirculation of 
physicians' fee revenue in PPS hospitak as compared with hospitals in 
which inpatient services are payable on a reasonable cost basis.  A P P E N D I X   B 
- 
AHA Comments  Richard P.  Kusserow 
Page 2 
March 11, 1991 
A.  fraud and abuse analysis is inavvropriate because 
contracts between hospitals and hospital-baaed 
physicians do not result in overutilisation of Hedicare 
services. 
The office of the Inspector General is charged with 
investigating potential violations of the Medicare fraud and 
abuse "anti-kickbackw statute.  The puuose of-the 
anti-kickback law is to prevent-overutilization of Medicare 
s e r v i w e r & - y   preventing unnecessary expenditures of 
fed=  funds.  Inducement of overutilization as a result of 
fzancial arrangements triggers involvement by the Inspector 
General in those arrangements. 
AHA does not understand how hospital contracts with 
hospital-based physicians such as those described in the report 
can be viewed as encouraging overutilization of services. .In 
order to apply a fraud and abuse analysis, the OIG would need 
to show that:  1) hospitals refer patients to hospital-based 
physicians, and are able to order services for patients; 2) 
hospitals (rather than other physicians) have the ability to 
drive the volume of hospital-based physician services utilized; 
and 3) hospitals refer more patients to the hospital-based 
physicians, directly or indirectly, as a result of contracts 
with the p hysicians. 
The reality of delivering hospital-based physician services 
reveals that these premises are not true.  With r-eg.rrd to a 
hospital's  ability to refer patients, the advisory report 
itself states that specialists obtain referrals from other 
physicians within the hospital environment.  The hosgital's 
role in ordering hospital-based physician services is tenuous. 
For example, emergency room physicians treat patients (and 
order additional necessary services) as individuals present at 
the emergency room; the patients are not referred t.o the 
emergency physicians. 
We believe that incentives for overutilization-d o not exist 
because contracts with hospital-based physicians do not impact 
utilization.  Consequently, the arrangements referenced in the 
report do not result in unnecessary costs to the Medicare  ---  -- 
program.  'The following words of an AHA member hospital 
administrator illustrate our position: 
Why, way  tell., should the Federal Government care 
about this Xssue when there is no direct relationship 
between patient flow and hospital-based physicians in 
connection with these contracts, nor indeed will the 
Federal Government be spending one nickel more whether 
the physicians agree to provide support to hospitals or 
whether they do not.  Richard P. Kusserow 
Page 3 
March 11, 1991 
B.  The advisorv report offers no evidentism basis for q 
potential fraud and abuse violation. 
- 
The advisory report offers no e v i d ~ f . s u e ~ t i ~ ~ a t i oorn ,  
.- 
even suspected overutilization, in connection yhh- 
hospital-based physician contracts.  While the report states 
that the contracts give hospitals "a  f.inanr.i;ll-incentive  to 
develop policies-anhp~actices- which e-ncourageg reater 
utilization of the services of hospital-based physicianstW it 
presents no basis for that conclusion and includes no examples 
of such potentially abusive practices. 
AHA is aware of studies documenting higher utilization by 
referring physicians.who own the equipment or facilities 
furnishing the referred serrices as compared to physicians who 
do not; however, AHA  is not aware of similar &udies..on 
hospital-based-physicians*  Moreover, the report does not show 
__..c- 
any--relationshipb etween volume of serrices where such 
arrangements exist as compared to volume where other physician 
compensation arrangements exist, or where a hospital purchases 
its services outside the hospital (for example.,  from a 
fr ee-standing laboratory or imaging facility) 
The Office of Inspector General's  authority to investigate  . 
financia4 relationships between hospitals and physicians is 
predicated upon overutilization of M-e-dicares ervices resulting 
from a v ~ ~ o a r r p f - U iaSntei -kickback law. -- Absent evidence of 
potential overutilizatio?, AHA believes M a t  interference in 
the hospital/physician contracting relationship is 
inappropriate. 
 -.2
The advisory report fails to offer a hospital 
C. 
perspective on h~p~ital-basepdh ysician contracts. 
The advisory report indicates that the OIG's  analysis is based 
upon contract provisions furnished by "several medical 
" 
societies and anonymous parties.  Such a one-sided perspective 
on business arrangements that-allegedly violate the fraud and  - 
abuse laws does not substantiate the accusations made in the 
report.  In November 1990, AHA initiated a meeting with OIG 
staff to discuss +he issue of hospital-based physician 
contracts.  At that meeting, AHA staff was informed that the 
OIG was developing a memorandum to HCFA and wag~ssuredt hat 
the hospital per~p~ect iverould-be considered, yet that 
--  -- 
perspectiire -is not re-f lected in--the-xeport. 
-  -  Richard P. Kusserow 
Page 4 
March 11, 1991 
OIG staff has indicated to AHA that it has no basis for knowing 
to what extent the arrangements referenced in the memorandum 
actually exist within the hospital field.  We understand that 
tlie medical societies and other.parties who provided the OIG 
with examples of contractual provisions are neither willing to 
make the entire contracts public, nor willing t.0 participate in 
a survey to determine the extent and nature of the contracts. 
Indeed, the advisory report itself states that disclosure of 
the terms of theseagreements is "rare."  One must question the 
motives of parties who are willing to provide only partial 
information on arrangements being characterized as potentially 
illegal. 
In fact, hospitals generally need to accommodate hospital-based 
physicians, especially in rural areas, in order to kees- 
physicians available and maintain necessary medical coverage 
for services.  For example, some hospitals must guarantee 
physicians a minimum number of visits or revenue due to a 
limited pool of potential patients.  In addition, physicians 
often desire percentage arrangements in order to avoid 
excessive expenses during  months, and occasionally. 
demand more in contract negotiations than a hospital would 
normally provide for hospital-based services.  Physicians who 
do not obtain desired terms are free to, and frequently do, 
choose to operate freestanding facilities rather than be 
hospital-@ased.  Respective parties'  "bargaining positionsn 
depend entirely on circumstances and locale and cannot be 
generalized. 
- 
-C 
The advisory report lists teaching physicians among the 
hospital-based specialists whose arrangements are potentially 
illegal.  As a common practice in most teaching facilities, .. 
revenues generated for patient care services are paid into 
physician fee pools from which physicians are compensated and 
the medical centers receive funds.  HCFA has addressed the 
issue of physician fee pools in the context-6TMZdieare 
-reimbursement at various times over the past 25 years,  -<See, 
for example, Intermediary  70-2,  HCFA Memorandum 
of October 1979 to Chicago Regional Medicare Director, HCFA 
Letter of February 1980 to Blue Cross ~ssociatian,a nd HCFA 
Letter of May 1984 in response to questions concerning fee 
pools in the teaching setting.)  In none of those-instances was- 
the suggestion of a fraud and abuse violation raised.  To now 
question the legality of such arrangements would be to suggest 
that some of this country's  premier health institutions have 
been engaged in criminal conduct for years. 
Finally, the release of the advisory report is having an 
immediate and detrimental effect on hospital/physician 
relationships--which only hints at the d~kruptiont hat would 
,/  Richard P. Xusserow 
Page 5 
March 11, 1991 
result if further action is taken without consideration of the 
hospital position.  Some physicians have already been 
instructed that "[u]se of the document should effectively serve 
to?counter hospital kickback demands during contract 
(m 
negotiations or renegotiations."  Letter dated February 
13, 1991 from American College of Radiology to .members.)  Even 
if research reveals evidence of potentially abusive 
arrangements between hospitals and hospital-based physicians, 
the e  've_~let.casLby-ther-e~p~o~e  would  compass 
c-ntracts  which have  ef fect-oX-*e  Medicare 
program. 
The qovernment has ad3ressed the issue of hos~ital 
revenues from hospital-based phvsicians8 services 
extensivelv in the past and has never viewed these 
arransements aa potential fraud and abuse violations. 
The report states that hospitals "recentlyw began to view 
hospital-based physicians as "potential new revenue sourcesen 
AHA does not understand the basis for this accusation, in light 
of the Medicare program's  25 year history of recognizing 
circumstances under which hospital-based physicians8 patient 
care revepues may accrue to the benefit of hospitals.  Since 
the inception of the Medicare program in 1966, hospitals have 
received revenues from their hospital-based physiciansf 
services, and the Medicare progray bas been aware of and has 
interpreted the implications of such revenues.  Yet the January 
1991 OIG memorandum represents the first instance of such 
revenues being viewed as potential ~Aolationso f the fraud and 
abuse statute (which was enacted in 1972 and amended with the 
anti-kickback provisions in 1977). 
Government communications both before and after enactment of 
the anti-kickback provisions-,basea ddressed questions about 
hospital-based physician arrangements without ev.er.questioning 
the legality of those arrangements under the fraud and abuse 
, 
laws.  In addition, HCFA has published both proposed and final 
regulations that clearly show the government was aware of 
hospital benefit due to hospital-based physician revenues, and; 
nevertheless, clearly reflect no fraud and abuse concerns. 
For example, a 1984 letter from HCFAfs Director of the Division 
of Audit and Payment policy addressed an arrangement under 
which physicians pay to hospitals amounts unrelated to the 
hospita18s operating or capital costs for their use of the 
hospital.  (Letter dated November 14, 1984, Ref. No.  FQA-581.) 
Another letter from HCFA8s Bureau of Eligibility, Reimbursement 
and Coverage to the American College of Radiology discussed 
hospital initiatives to require radiology groups and other  Richard P. Kusserow 
Page 6 
March 11, 1991 
physicians to return to the hospital some portion of their 
professional revenues.  (Letter dated November 15, 1986.)  In 
nqither of these communications, which respond to open 
idquiries by providers and other interested individuals, does a 
government official raise fraud and abuse concerns. 
Even more illustrative is the fact that HCFA r&ulation notices 
have discussed payments to hospitals by hospital-based 
physicians without considering whether these payments are 
illeaal under the anti-kickback statute.  The 1983 regulations 
&tifled  "Payment for Physician Services Furnished in- 
- 
. 
~os~ital,- Ssk illed ~Crsin&-Faci-lities and-Compr-&ive 
0ut;atient  ~ehabilitation-Facilitiesnr eflect-t hat eight years 
agor the government was aware that some hospitals were charging 
hospital-based~h~cians-forb illing services, office expenses 
In addition, HCFA was aware that the hospitalsf charges to 
their hospital-based physicians were in some cases based on a 
percentage-of the physiciansf ~ections~~-~Tlfiacits  
consdidicts the 1991 OIG report8s  r ~ ~ ~ n ~ a tthait o n  
"contrac.t.s. b etween hospitals and hospital-based physicians 
should:  be unrelated to physician income or billings."  In 
the 1983 rules HCFA reiterates its earlier position, within the 
context of physician compensation allocation, that physicians 
and hospftals are "free to negotiate the kind of financial 
agreement, such as salary, fees or compensation based on a 
percentage of either gross or net charges, that best.suits 
m. 
their c;ir~uastances.n  (Vol. 48, No.  42, Fed.  at p. 
- 
89244925--)  Indeed, the final regulations themselves recognize 
&at  papents may be returned by a hospital-based physician to 
the hospitzl.  (See 42 C.F.R.  Sec. 405.481(d)(2).) 
The government more recently recognized that hospital-based 
physicians may return a portion of their patient care revenues 
to their hospitals in HCFA regulations proposed on February 7, 
1989.  In the preamble to the proposed rule, HCFA addresses 
both provider/physician agreements under which physicians 
return a portion of the realized charge revenue to providers 
and agreements under which providers retain a portion of 
revenues received.  HCFA states the following in its discussion 
of allocation of compensation costs:  - -- - 
The revenues received by the provider in either of, 
these situations might be utilized by the provider or 
related organization to defray the costs of medical 
educational activities, patient care, or nonpatient 
care related activities, including the costs of 
services furnished by physicians in these areas.  (Vol. 
m. 
54, No.  24, Fed.  at p.  5955.)  Richard P.  Kusserow 
Page 7 
March 11, 1991 
AHA offers the foregoing historical examples to show  that 
arrangements under which hospitals may binefit from 
hospital-based physician revenues are not a "new* idea, as the 
ad@sory  report indicates.  The government has addressed these 
arrangements in the Medicare reimbursement context numerous 
times in the past, without identifying fraud q d  abuse 
concerns.  Neither Congress nor HCFA contemplated that 
financial arrangements whereby hospital-based physicians 
provide revenues to their affiliated hospitals constitute 
nkickbacku schemes under the fraud and abuse laws. 
E.  p e n  if such arranqamants were found to be potentiat 
violations of the fraud and abuse law, the OIG ehould 
publish notice of such a chanQe and allow all providers 
an opportunitv to comment. 
Even if possible fraud and abuse violations could be validated, 
it would be appropriate for the OIG to adhere to certain 
administrative procedures before declaring such arrangements 
potentially illegal.  The history of financial arrangements 
between hospitals and hospital-based physicians described above 
shows that the recommendations in the advisory report, if 
followed, would represent a .=astic  c h a n ~in  government 
policy.  Moreover, any possible abuse resulting from such 
arrangements would be minimal, while the potential sanctions 
are severe.  If HCFA is to view these long-standing 
arrangements in a new light, the appropriiLe action for the OIG 
would be to gather evidence of abuse, provide notice to the 
health care community, and allow an opportunity for providers 
(hospitals and physicians alike) to comment on these allegedly 
suspect arrangements. 
Congress enacted the anti-kickback provisions of the fraud and 
abuse statute in 1977.  In 1987, Congress directed the Office 
of the Inspector General to provide guidance in interpreting 
the statute as it relates to provider arrangements involving 
Medicare services.  The Department of Health and Human  Services 
responded to that directive by proposing "safe harbor" 
regulations, which have -yet tab ei ssued in final fo m. 
-- 
Hospitalibased physician contracts, as a broad category of 
potentially violative arrangements, were not addressed in those 
proposed regulations.  The OIGts use of a management advisory 
report to notify the health care ?omunity that an expansive 
group of agreements pptentiXlly violates the law raises 
questions of due p r o k ~ pr,ote~ct~i,  and proper 
administrative procedure.  AHA believes that hospitals and 
other providers deserve at least as much opportunity, and the  Richard P. Kusserow 
Page 8 
March 11, 1991 
proper forum, to comment on these arrangements as 
investor/referring physicians (and other providers) have been 
given in conjunction with the investment "safe harborsn 
proposed by the OIG. 
In the Karch  5, 1991 seeting between the OIG and members of the 
health care community, you indicated a willingness to work 
openly and cooperatively with providers.  AHA offers its 
assistance in resolving any questions you may have about 
agreements between hospitals and hospital-based physicians, and 
would like to arrange a meeting with you and your staff to 
follow up on this issue. 
- ,  
If you or m F l m b e r s - o f y o l l r a + a f f   any questions, please 
contact.@!el=  DeMartino _L_202/638-1100) tn our Washington 
office, or Zohn  Steiner (312/280-6510)--ino ur Chicago office. 
Sincerely yours, 
v 
Paul C.  Rettig 
Executiv* Vice-president 
CC:  Louis Sullivan, M.D. 
Secretary, Department of Health and Human Services 
Gail R. Wilensky, Ph.D. 
Administra,kor, Health Care Financing Administration 
Michael Mangano 
Off-ice of Inspector General  4 
DEPARTME"'  OF HEALTH & HUMAN SEwtCEs  Otflce of Inrpectw General 
L* 
WaWngton, D.C.  20x1 
MAY  2 0 1991 
Hr. Paul C. Rettig 
Executive Vice-president 
American Hospital Association 
50 F Street, NOW- 
Washington, PIC.  20001 
Dear Xr.  Rettig: 
Thank you for your letter of  March 11, 1991, expressing varioue 
concerns of  the American Hospital ~ssociationr egarding the 
office of Inspector General*  management adviaory report ( " m u )  
'Financial  Arrangement6 Between Hospitals and Hospital-Based 
Physicians.@  We appreciate hearing from you, and ve welcome this 
opportunity to respond to y o u  concerns. 
. 
" 
As  you know, thia XAR  states our conclunion that aome  financial 
arrangements between hospitalr and hospital-based physicians 
(such ae radiologists, pathologiotr and ~nesthe~iologiatom) ay 
violate the criminal anti-kickback mtatuta, 42 U.S.C.  1320a-  \ 
7b(b), putting both the hospital and the phynician in question at 
risk.  That-  focusses on thosa arrangemento which require much 
phy6iciansCto pay pore M a n  fair market value for items or 
services provided by the hospitals, or vhich compensate 
physicians for  than the fair market value of g d s  and 
cervices that they provide to hospitals. 
chief among your concerns are the proposition8 that the 
arrangements in question (1) are not covered by the atatuta at 
all mince hoopitale do not .refera patients, and (2) have not 
been shown to result in overutilization, and  in fact c&nnot 
result in overutilization.  You further atat.  (3) that the M R  is 
inappropriate in view of numerous issuanc8s by r 3 H~ea lth Care 
Financing ~dministration( aHCFA*) in this 6tubject. matter area, 
and (4) that the nhR should be tho mubject  of notice and comment 
procedures of the Administrative Procedure Act. 
To summarize our views on these propositions, we firmly believe - - 
that in these arrangements, hospitals  in a position to 
*referw Medicare and Medicaid businesa within the meaning of the 
statute.  Second, the otatute does not require  of 
overutilization because Congress made the judgement that the 
programs should not be subject to the risk of overutilization 
created by practices which violate the anti-kickbnck rtatute. 
Third, the pronouncements of HCFA relating to reimburoement  - 
Page  2  Xr.  Paul C.  Rettig 
issues are  irrelevant to the issue presented because they do not 
purport to address fraud or abuse issues.  The Secretary has 
delegated the responsibility for enforcing this statute to the 
Office of Inspector General (aOIGm), and we  we  mewing one of 
our primary statutory functions in alerting EICPA  and the public 
at large to potentially unlawful practicea.  Finally, the XAR 
does not atteapt to establish a binding mle of Iav, which would 
require notice and comment procedures of the Abinimtrative 
Procedure Act.  The KAR addresses the application of a criminal 
utatute to a particular course of conduct, a matter which is not 
appropriate for public notice and comment procedures. 
' 
~s  you know, the anti-kickback otatute prohibits the knowing and 
willful eolicitation or receipt of remuneration (directly or 
indirectly, overtly or  covertly) in return for the referral of 
businees paid for by Medicare or Medicaid.  There can be no 
question that a hospital is-subject to the anti-kickback statute 
when it solicits or receives remuneration in oxchange for 
directing the flow of business generated at the hospital.  Of 
course, it is the physicians practicing at the hospital (a.g., 
murgeons, neurologists, atc,) who  order tadiologiot, 
anesthesiologist and pathologist services for particular 
patients.  However. & is aenerallv thOmal  v u c  h w  
st. anesthwl-t  or ratholouist will p e m  
. 
The case lqw interpreting the anti-kickback statute raakee  it 
clear that the statute80 proscriptions apply to those who can 
,, 
~ t e a l ivnf luence the flow of Medicare and Medicaid business. 
It i n  not necessary for a_vi*lator to actually order the service 
in question.  The case of mited States v.  Bay  State Ambulance 
pnd ~os~itaRfen tal Services. Inc,,  874 F.2d  20 (1st Cir. 1989) 
involved an ambulance coa~paxiy~whicdhe sired to renev an existing 
contract with a hospital.  lae ambulance corapany gave 
remuneration to one John Felci, a hospital employee.  he one 
member of the hospital@s ((bidw committee which made its 
recommendation to the hospit&Vn  CEO, Felci nubsequantly voted to 
recommend approval of the contract to that ambulance company. 
The ambulance company end  FeIci were convicted of kickback 
violations.  It i s  important to note M a t  Felci neither generated 
the "orderw to obtain a contract for an uabulanoe company, nor 
did he control the decision on the award of the contract.  What 
the ambulance company did vas pay Felci to cucerci~ew hat 
influence he had over the flow of program business.  - 
0 
Similarly, hospitals are in a position to influence the flow of 
business to be perfcaned by hospital-based physicians, mince they 
typically can name vho  the recipient($)  (La., the radiologist, 
anesthesiologist or pathologist) of  that buuinaro will be.  If a 
hospital were  to extract $5 from a radiologist for wery 
x-ray  performed  at the hospital, there can bar  no doubt whatever 
that a kickback offense h a s ' h m  committed.  Yet, in many of the  - 
Page 3  Mr.  Paul C.  Rettig 
arrangements we have recently observed and described in detail in 
the KhR, practices similar in effect to this obvious kickback are 
occurring. 
You also take iesue with the WAR  because you contend that 
con'tracts between hospitalrr and hospital-based physicians do not 
result in demonstrable overutilization of Medicare mervicee. 
While preventing overutilization is unquemtionably one of the 
of the anti-kickback ftatute, your latter implies that 
  -Q
proof of overutilization i e  an  of the offenae.  However, 
the anti-kickback statute doem  not require much proof  to 
establish a violation.  (See: Bav  St-,  Ip. at 32, n.21)  One 
' 
reason is that overutilization is notoriously hard to police and 
to prove.  Another reason is that Congress was  not only concerned 
vith prohibiting arrangements which lead to demonrtrable 
overutilization, but a l ~ ovi th prohibiting arrangement8 which 
have the potentw for cauaing overutilization.  In other words, 
Congress aade the assumption'that health care provider8 vould 
respond to financial incentives, and the potential for 
overutilization clearly exists whenever a party is being paid for 
the referral of program-related business.  Our health care 
programs and their beneficiaries mhould not be subject to this 
increased rink of overutilization. 
Again, by selecting the physician who vill serve au the 
y 
hospital's radiologist, pathologist, mesUSesiologist, etc.,  the 
hospital is in the position of determining vhich physician will* 
receive thy referrals of the hoepital'm  program-related buuiness.., 
The underlying concern expressed in the KAR is that some 
hospitals use this position of power to create rituations which 
can cause overutilization.  For example, it a hoapital receive- 
-  - 
30 percent of a hospital-based radiologist's  billings over 
$250,060, the hospital has a otrong incentive to do whatever it 
a n e o increase the use of those ~ervicesi n the hospital.  Tqe 
; 
hospital can, by subtle or not-so-subtle aeane, cause that to 
happen.  For instance, under the guise of *defensive medi~fne,~ 
the hospital could encourage the increased use of diagnostic 
x-rays. 
In addition, where such an arrangement i 6  initiilly imposed  on a 
radiologist, the arrangement could potentially cause a 
radiologist to attempt to increase the amount of mervicee helshe 
renders in order to make  up the lost income.  Radiologists could 
accomplish-this through normal aonsultation with the other  -- 
physicians practicing in the hospital, e.g.,  suggesting or 
encouraging additional radiological S ~ N ~ C ~ P .  
With regard to your discussion of HCFA1s regulations an& other 
issuances, enforcement of the anti-kickback ftatute ia primarily 
the responsibility of OIG.  The HCFA  issuances do not purport to 
address fraud and abuse insues in general or kickback concerns in 
specific.  On the other hand, it is OIG's  obligation to respond  - 
Page 4  Mr.  Paul  C.  Rettig 
to potential kickback violations as they come to our attention. 
It appears that changing conditions in the health care industry 
have  led to the recent proliferation of contracts betveen 
hospitals and hospital-based physicians which cause kickback 
concerns.  We would be remiss ifw e  failed to addresl~a  potential 
legal violation which is potentially harmful to our health care 
programs and their beneficiaries. 
With regard to your concerns that the KAR doeo not include the 
hoapital  industry's  perspective and should have been published 
with opportunity for notioe and comment,  we aust point out that 
the  is not a reguhtion interpreting the anti-kbkback 
statute, like the .safe  harbor.  regulations.  Rather, the XAR  is, 
designed to furnish notice to HCFA  and the publio regarding a 
mignificant problem area under the anti-kickback statute.  It is, 
of  course, one of OIG1o central duties under the Inspector 
General Act Of 1978, 5  U.S.C.  App  3, to notify the Department and 
w e  public about possible viohtionn of  crininal law.  The point 
of this document was not to present variouo perspectives in an 
attempt to gain consensus, but rather, to ex8rcise our law 
enforcement functions to call attention to an abuse which we 
believe has the potential for causing ham.  An alternate way  of 
giving the provider community notice would be simply to initiate 
prosecutions or exclusion actions.  We  are quite sure that the 
provider community would prefer to have notice of our views  first 
in the form of a MAR or a Fraud Alert. 
T 
Again, the touchstone for analysis in the KAR is that the concept 
of  fair a a ~ k e tv alue ahould govern remuneration vhich flows from " 
hospital-based physicians to the hospital.  It io hard to 
understand vhy this iu a radical or onerous concept, particularly 
if it is necessa=  to eIff ectuate the latent of Congress as 
expressed in a cr minal statute. 
I hope this letter adequately explaXak Q J ~re sponse to your 
concerns with regard to the MR.  I f  you vieh to discuss this 
matter further, please contact D.  Hccarty Thornton, Chief Counsel 
to the Inspector General at (202) 619-0735. 
Si.ncezely yours, 
Richard P. Kusserow 
Inspector General 
cc:  Gail R.  Wilensky, Ph.D. 
Administrator, 
Health Care Financing Administration  ... 
- ..-  ! -  ".   .  P- ,-   
Capitol Place, Building U3 
50 F Sweet, N.W. 
Syire 1 100 
Washington, D.C. 20001  m  J 
Telephone 202.638- I 100 
I'DIG  A 
FAX NO. 202.626-2345 
y 
NGAS 
DIG-=  . 
DIG41 
HAND-DELIVERED  m-mre  7 
OGC/IQ 
Richard P.  Kusserow 
Office of Inspector General 
c  Department of Health and Human Services 
330 Independence Avenue, S.W.,  Room 5246 
Vashington, D.C.  20201 
September 6, 1991 
RE: 
Financial Arranqements Between Hosoitals and Hospital-Based 
Dear Yr. Kusserow 
Thank yo4 for providing us with a draft of the OIG management advisory report 
(MI on financial arrangements between hospitals and hospital-based 
physicians (HBPs), and for the .opportunity to share our comments with you. 
At the July 12, 1991 meeting between your office and health care field 
representztives, AHA and other hospital groups raised several fundamental 
issues concerning relationships between hospitals and hospital-based 
physicians.  We are disappointed that the revised M, while addressing some 
minor points, does not contain any substantive changes reflecting those 
concerns.  Bsspitals and the OIG essentially view hospital/HBP relationships 
differently:  where the OIG sees a potential fraud and abuse violation and 
kickoack scheme, hospitals see an agreement to enter into a mutually depend~nt 
relationship. 
First and foremost, we believe that the underlying premise in the .W  is 
mis~uided. As AHA  and others indicated at the July 12 meeting, the notion 
.  . 
that hospitals direct the flow of business in a manner vhich violates the 
fraud and* abuse statute reflects a misunderstanding of the traditional 
hospital/hospital-based physician relationship.  Yost SBPs request and receive 
exclusive contracts to provide services at a hospital; hospitals must ?r?vide 
the contracts to obtain health care for their patients.  The underpinnings of 
the ?lAR,  which must be accepted if a kickback analysis is to apply, are that 
hospitals enter these agreements and thereby "name who will be the recipient 
of the flow of business" (in efEect, refer patients to the physicians) 
for 
exchange  any payments to the hospital from revenues generated by virtue of 
the contract, and that the volume of "business" varies depending on the nature 
of the financial relationship.  We flatly reject these premises.  Richard P.  Kusserow 
- 
September 6, 1991  Page 2 
Second, the revised MAR fails to fully acknowledge that the relationship 
between hospitals and hospital-based physicians is mutually dependent, and 
that, more often than not, hospitals find it necessary to accommodate 
physicians' financial requests in order to secure needed physician services 
f6r their patients.  (The MAR states that hospitals are "somewhat dependent" 
on HBPs, but goes on to discuss how hospitals have reduced compensation or 
obtained additional payments from the physicians.  Yet the LIAR fails to 
discuss the other side of the equation, namely, the increased demands many 
physicians are placing on hospitals in light of changing physician payment 
schemes and economic conditions.)  The MAR assumes that hospitals hold the 
bargaining power and that HBPs, dependent upon the hospitals, must accede to 
hospital demands in order to ensure a viable practice.  This perception does 
not reflect the reality of furnishing health care semices. 
Third, with one exception, the examples of agreements listed in the :YAR  are 
identical to those in the original draft.  As discussed at the July 12 
meeting, assessment of these provisions is simply impossible without complete 
information about the agreements.  Nowhere does the .M identify what services 
the hospitals provided to physicians in exchange for the payments indicated. 
Rather, the MAR categorically states that the payments are "far in excess of 
the fair market value of the services provided," without presenting any 
evidence of this.  (AHA repeatedly has requ.ested the opportunity to review the 
contracts, with identifying information deleted, but the OIG repeatedly has 
refused.)  1n.light of the OIG's acknowledgement that review of the entire 
contract is necessary and that percentage amounts may approximate fair market 
value, presenting these provisions in isolation is, at the very least, 
misleading? 
Finally, the revised MAR, like the original draft, indicates that the 
remuneration in the arrangements listed "gives the hczpitals a financial 
incentive to develop policies and practices which encourage greater 
utilization" of services.  In response to questions about this statement, OIG 
staff stated that they know of no  examples or inciaents in which such hospital 
policies exist.  Neither does AHA. 
AHA appreciates the opportunity to provide these comments and the OIG's 
willingness to attach our March 11 letter and this letter as appendices to the 
final W.  If you or members of your staff have any questions or wish to 
discuss our comments further, please contact Gaslynn DeMartino in our 
Washington office (202/638-1100) or John Steiner in our Chicago office 
(3121280-6510). 
-  - 
cc: Gail R.  Wilensky, Ph.D. 
Administrator, Health Care Financing Administration  APPENDIX  C 
CAP Comments  CAP Washington Office 
- 
1 101 Vermont Avenue, NW  Suite 604 
College of American Pathologists 
Washington. DC 20005-3546 
2021371- 6617    2021371 -0028 (FAX) 
325 Waukegan Road  NorLhneld,I L 60093-2750 
February 22, 1991 
Richard P. Kwerow 
Inspector General 
Department of Health and Human Services 
330 Independence Avenue, SW 
Washington, DC 20201 
RE:  Management Advisow Report 
Dear Mr. Kusserow: 
The College of American Pathologists strongly supports and endorses your January 31, 1991, 
Management Advisory Report relating to hospital arrangements with hospital-based physicians 
(HBPs).  The report highlights a problem of growing significance under the Medicare program.  A 
growing number of hospitals have improperly retained the portion of DRG payments which covers the 
Part A services of HBPs in return for granting the hospital "franchise" to the HBPs.  Other hospitals 
are charging HBPs for supplies and services that are hospital operating costs covered under Part A 
and paid th~oughth e DRG rate.  The wide distribution of the Management Advisory Report, 
combined with enforcement actions against those hospitals which require HBPs to provide free or 
deeply discounted Part A services, should help curb this abuse of the Medicare program. 
Pathologist directors of hospital laboratories spend a significant amount of time and effort in 
providing senices that are needed to assure that quality laboratory services are available to patients. 
Clinical pathology services of general benefit to patients (e.g.,  quality control, assurh~la bratory 
compliance with federal and state standards) are to be paid through Part A  Increasingly, a growing 
number of hospitals have eliminated all or most of the compensation paid to the pathologists for these 
important Pan A se~ces.S ome hospitals extract remuneration from the pathologist in the form of 
free or deeply discounted clinical pathology services.  The hoSpital demands this remuneration in 
exchange for the pathologist's  "franchise" to provide and bill for anatomic pathology senices for 
hospital patients.  The College has long argued that these arrangements are a ~Yentiavl iolation 01 
the fraud and abuse provision, 42 USC 51320a-7b@).  The College strongly s u ~ p tOsI G's commit- 
ment to scrutinize and attack such improper arrangements. 
In addition to the fraud and abuse concerns, there are a number of public policy issues posed by these 
arrangement;r.  First, pathologists' ability to assure that quality laboratory services are available to 
patients is severely compromised.  Services that are essential to the appropriate diagnosis and 
treatment of patients are placed at severe risk because adequate resources to support their provision 
are withheld. 
Second, hospitals which refuse to pay for clinical pathology services profit unduly under the DRG 
prospective payment system.  As explicitly recognized in the Management Advisory Report, a portion 
of Medicare's DRG payments to the hospital are for clinical pathology services.  Since Medicare is  College of American Pathologists 
Richard P. Kusserow 
February 22, 1991 
Page 2 
paying for clinical pathology, a hospital that refuses to pay pathologists a fair amount for these 
senices plainly is extracting an inappropriate profit at the expense of the pathologists. 
Third, the arrangements discussed in the Management Advisory Report effectively unbundle senices 
that are covered by DRG payments.  The hospital forces pathologists inappropriately to incur costs 
that, under the Medicare program and common practice, are the responsibility of the hospital.  The 
College believes that such hospital arrangements amount to the unbundling of senices that are 
reimbursed by the DRG program in violation of 42 CFR 941250. 
In order to eliminate the abuses associmd with hospitals forcing pathologists to provide free or 
deeply discounted clinical pathology s e ~ c eosr  to pay for 'support  s e ~ b aSlre ady paid through Part 
A, the College recommends that the OIO prosecute hospitals that persist in maintaining abusive 
arrangements.  Pathologists and the College have vigorously opposed these abusive arrangements for 
years.  Prior to the issuance of the Management Advisory Repon, some pathologists were forced to 
accept one-sided contracts from hospitals.  The College strongly believes that the OIG should not 
prosecute those HBPs who are forced by the hospital to enter into these arrangements. 
Once again, the College endorses your January 31, 1991, Management Advisory Report.  Wide 
dissemination of the report, together with enforcement actions against hospitals that continue to 
engage in the proscribed behavior, should help eliminate the abusive arrangements. 
Sincerely,  f 
President  U 
LR Wlmps 
cc  Gail Wilensky, PhD 
-1.00  Inspector General 
horn 
~ I GFi nal Management ~dvisoryR eport:  "Financial Arrangements 
Subm Between Hospitals ar,d Hospital-Based Physicians," OE1-09-89- 
00330 
TO  Gail R.  Wilensky, 'Ph-D. 
Administrator 
Health Care Financing Administration 
The attached management advisory report alerts you to the 
existence of arrangements between some hospitals and hospital- 
based physicians which potentially may be inappropriate and 
illegal under the ~edicarea nd Medicaid anti-kickback 
statutes, section 1128B(b) of the Social Security Act.  We are 
continuing to pursue illegal arrangements where referring 
physicians receive kickbacks from hospitals. 
We recommend that you notify intermediaries about this problem 
and suggest that they refer identified cases to the Office of 
Inspector General.  We suggest that the following language be 
used in that notification: 
~~lkasnoet ify hospitals about potential legal 
liability under the anti-kickback statute when they 
enter into agreements with physicians not based on 
the fair market value of the g ~ J ssnd   services 
exchanged.  The Office of Inspector General has 
identified situations that may PC :llegal  when 
hospitals contract with hospital-bzaed physicians. 
To avoid potential legal liability, all contracts 
between hospitals and hospital-barzd physicians 
should comply with all the safe harbor provisions 
that may apply under the cc.stlact between the 
parties,  Of particular kprtance are the safe 
harbors that protect payments for personal services 
and management contracts'and for services of bona 
fide employees, 42 CFR   1001,952(d)  and (i); 56 
Fed, Reg, 35985, 35987,  It is noted that in some of 
the safe harbor provisions, we require that payments 
must be consistent with 'fair market value,'  The 
regulation explicitly prcvides that safe harbor 
protection is not available where any part of the  - 
Page 2  Gail R.  Wilensky, Ph.D. 
payment takes into-accountt he volume or value of 
referrals or business otherwise generated by either 
party-  This restriction is necessary because such 
payments directly violate the statute." 
1 
We appreciate the Health Care Financing Administration's 
comments on the earlier version of this report and the 
cooperation of your staff in finalizing this report.  We hope 
that you will find this report and its recommendations 
acceptable. 
In accordance with the requirements of the departmental 
conflict resolution process, please submit within 60 days your 
plan to implement the recommendations or explain why it is not 
possible to do so.  If you have any questions, please contact 
me or have your staff contact Penny Thompson at ETS  646-3138.