This inspection / management advisory report originally went out under the number of 
the larger inspection it relates to:  OEI-09-89-00330. 
 
  Richard  P.  Kusserow 
From 	
InSpector  General 
OIG  Management  Advisory  Report:  "Financial  Arrangements
Sublecr 	
Between  Hospitals  and  Hospital-Based  Physicians," 
OEI-09-89-00330 
-- 
To 
Gail  R.  Wilensky,  Ph.D. 

Administrator 

Health  Care  Financing  Administration 

This  management  advisory  report  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-

bated  physicians.  These  agreements  1)  require  physicians  to 

pay  more  than  the  fair  market  value  for  services  provided  by 

the  hospitals,  or  2)  compensate  physicians  for  less  than  the 

fair  market  value  of  goods  and  services  that  they  provide  to 

hospitals. 

BACKGROUND 

Hospital-based  physicians  include  specialists  such  as 

anesthesiologists,  emergency  room  physicians,  pathologists,

radiologists,  and  teaching  physicians.  Each  of  these 

specialtiec  4~s dependent  on  the  hospital  environment  to  obtain 

referrals  from  other  specialists  practicing  at  their  hospital. 

In  turn,  the  hospitals  are  somewhat  dependent  on  the  hospital-

based  physicians  because  they  provide  essential  services  to  the 

hospitals. 

Hospit,,!r;  recently  began  to  view  these  physicians  as  potential

nek  i-'qnue  sources.  Some  hospitals  have  reduced  payments  to 

hospital-based  physicians,  and  some  are  requiring  payments  from 

those  physicians. 

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  payments  to  the  hospital  are  for 

thaz  pathology  service.  Different  methods  of  payment  may  apply

in  each  instance. 
 Page  2  - Gail  R.  Wilensky,  Ph.D 
Medicare  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 
The  statutemakes  it  illegal  to  offer,  pay,  solicit  or  receive 
remuneration  for  referring  business  payable  under  Medicare  or 
Medicaid.  Unlike  most  applications  of  the  statute  concerning
Medicare  compensation  arrangements,  the  focus  here  is  on 
remuneration  made  to  hospitals. 
The  statute  is  very  broad,  covering  indirect  or  covert  forms  of 
remuneration,  bribes,  kickbacks  and  rebates  as  well  as  direct 
or  overt  ones.  Three  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  1ield  that,  "if  one-

purpose  of  the  payment  was  to  induce  future  referrals,  the 

Medicare  statute  has  been  violated.lt  The  reasoning  in  Greber 

was  adopted  by  the  Ninth  Circuit  Court  of  Appeals  in  the  United 

States  v.  Kats  871  F.2d  105  (9th  Cir.  1989.)  In  Kats  the  Court 

found  that  the  statute  is  violated  unless  the  payments  are 

"wholly  and  not  incidentally  attributable  to  the  delivery  of 

goods  and  services." 

In  United  States  v.  Lipkis  770  F.2d  1447  (1985),  the  Ninth 

Circuit  Court  of  Appeals  reviewed  an  arrangencnt  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  compensation  for 

"specimen  collection  and  handling  services  I:  Ibid.  at  1449. 

The  court  rejected  this  defense,  noting  '.&e  fair  market  value 

these  services  was  substantially  less  than  the  [amount 

Of 
paid],  and  there  is  no  question  [the  laboratory]  was  paying  for 

referrals  as  well  as  the  described  services."  Ibid.  Thus,

applying  the  reasoning  of  the  Ninth  Circuit  Court  of  Appeals  in 

Liokis,  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  equipment  or 

provision  of  professional  services  on  terms  other  than  fair 

marJ<et  value. 
 Page  3  - Gail  R.  Wilensky,  Ph.D 
If  a  provider's  conduct  falls  within  the  purview  of  the 
statute,  it  can  be  prosecuted  unless  the  conduct  meets  a 
statutory  exception  or  "safe  harbor"  (when  finalized).  It 
should  be  observed  that  there  is  no  statutory  exception  or 
contemplated  "safe  harbor"  provision  which  applies  to  the 
conduct  described  herein. 
Analysis  -- 
Contracts  which  require  physicians  to  split  portions  of  their 

income  with  hospitals  are  highly  suspect,  although  not  per  se 

violatic,s  of  the  statute.  Usually  there  is  little  basis  to 

require  hospital-based  physicians  to  turn  over  a  percentage  of 

their  earnings  tJ  the  hospital.  In  addition,  in  many

arrangements  the  fees  hospitals  receive  are  vastly  in  excess  of 

the  value  of  the  services  (such  as  billing  services)  they 

provide  to  the  hospital-based  physicians. 

Examples  of  ,\sreements 

We have  reviewed  many  agreements  that  provide  payments  or 

remuneration  to  hospitals  in  excess  of  the  fair  market  value  of 

the  services  provided  by  them.  Because  many  of  these 

arrangements  may  violate  the  statute,  disclosure  of  the  terms 

of  these  agreements  are  rare,  and  therefore  it  is  very

difficult  to  establish  the  prevalence  of  these  agreements. 

Several  medical  societies  and  anonymous  parties  have  shown  us 

the  following  contract  provisions  without  identifying  names  and 

locations. 

0 	 A  group  of  emergency  room  physicians  pays  a  hospital 
half  of  its  cash  receipts  exceeding  $600,000  annually. 
A  hospital  proVides  no,  or  token,  payback  to 
0 
patholoaists  for  Part  A  services  in  return  for 
the 
opportun'ty  to  perform  Part  B  services  at  that 
hospl,C. 
0 	 Radiologists  must  pay  50  percent  of  their  gross 
receipts  to  a  facility's  endowment  fund. 
0 	 Thirty-three  percent  of  all  profits  above  a  set  amount 
must  be  paid  by  a  radiology  group  to  a  hospital  r^cr  its 
capit,?  improvements,  equipment,  and  other  deparZ?.ental 
expenditures. 
0 	 A  radiologist  group  was  required  to  purchase  ra5iclog:T 
equipment  and  agreed  to  donate  the  equipment  to  ~!:e 
hospital  at  the  termination  of  the  contract.  T"e 
hospital  has  an  unrestricted  right  to  terminate  r:k~ 
contract  at  any  time.  Page  4  - Gail  R.  Wilensky,  Ph.D 
When  net  collections  for  a  radiology  group  exceed 
0 	
$230,000,  50  percent  is  paid  to  the  hospital,  and  the 
hospital  reserves  the  right  to  unilaterally  adjust  the 
distributions  if  it  determines  that  the  physician  group 
has  not  fulfilled  the  terms  of  the  contract. 
A  radiologist  group  pays  25  percent  of  the  profits 
0 	
exceeding  $120,000  to  the  hospital  for  capital 
improvements.  Fifty  percent  of  the  profits  exceeding 
$180,000  go  to  this  purpose.' 
A  radiology  group  pays  for  facilities,  services, 
0 	
supplies,  personnel,  utilities,  maintenance,  and 
billing  services  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  $l,OOO,OOO  in  the 
previous  year. 
CONCLUSION 

All  of  these  examples  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  payment  of  the  remuneratio 
 n 
is  intended  to  provide  the  hospital-based  physician  with 

referrals  from  the  other  physicians  on  the  hospital's  medical 

staff. 

These  illegal  financial  arrangements  may  have  several 

unfortunate  results.  The  remuneration  gives  the  hcspitals  a 

financial  incentive  to  develop  policies  and  practices  which 

encourage  greater  utilization  of  the  sewices  of  hospital-based 

physicians.  Additionally,  hospital-based  physicians  flced  with 

lowered  incomes  may  be  encouraged  to  do  more  procedures  in 

order  to  offset  the  payments  to  the  hospitals.  These  problems 

are  among  the  recognized  purposes  of  having  cll~  ?nti-kickback 

statute  on  the  books  in  the  first  place. 

Illegal  arrangements  may  also  complicate  the  development  of 

physician  fee  schedules  if  physician  practice  costs  are 

artificially  inflated  by  arrangements  not  based  on  fair  market 

values. 
 Page  5  - Gail  R.  Wilensky,  Ph.D 

RECOMMENDATION 

The  HCFA  should  instruct  its  contractors  to:  (1)  notify

physicians  and  hospitals  about  potential  legal  liability  when 

they  enter  into  agreements  not  based  on  the  fair  market  value 

of  necessary  goods  and  senrices  exchanged;  and  (2)  refer 

identified  cases  to  the  Office  of  Inspector  General  for 

possible  prosecution  or  sanctions. 

To  reduce  potential  legal  liability  all  contracts  between 

hospitals  and  hospital-based  physicians  should: 

0 	 be  based  on  the  fair  market  value  of  services  (The 
nature  and  value  of  all  services  performed  should 
be  stated  separately  and  the  fair  market  value 
should  be  documented), 
0 	 be  unrelated  to  pnysician  income  or  billings  (these 
agreements  3re  not  per  se  illegal  but  are  suspect),  and 
0 	 be  limited  to  goods  and  services  necessary  for  the 
provision  of  medical  services  by  the  hospital-
based  physicians,  and  typical  of  what  hospitals
provide  hospital-based  physicians. 
It  should  be  noted  explicitly  that  these  criteria  do  not 
establish  a  "safe  harbor."  Compliance  with  these  criteria  will 
not  immunize  parties  from  liability  under  the  statue. 
We would  appreciate  your  COX~Tnts  on  this  report  within  30 
days.  If  you  have  any  questio,ls  please  contact  me  or  have  your
staff  contact  Barry  Steeley  at  FTS  646-3138.