What Is . . . the Corporate Practice of Medicine and Fee-Splitting?: Fee-Splitting Prohibitions

By Ari J. Markenson, Esq., Winston & Strawn, LLP, New York, NY and Angela Humphreys, Esq., Bass, Berry & Sims PLC, Nashville, TN

Introduction

In most states, prohibitions against the corporate practice of medicine operate in tandem with fee-splitting prohibitions, which are intended to regulate who may share in the revenue generated by providing medical services. These laws typically impose restrictions on physicians, prohibiting them from dividing fees with individuals for referrals made or for professional services rendered. Often, these rules also cover a layperson or an entity that might be involved in such a transaction. Fee-splitting prohibitions are designed to prevent both professionals and nonprofessionals from introducing financial incentives to influence the selection of healthcare providers and services in a way that compromises the quality of care or best interests of patients.

While prohibitions on the corporate practice of medicine are established through a variety of means—by legislation, case law, or opinions issued by state attorneys general—fee-splitting prohibitions are most commonly established through legislation. Often, fee-splitting prohibitions are included in regulations covering professional practice, where fee splitting is commonly regarded as “unprofessional conduct” that subjects licensees to discipline. Fee-splitting prohibitions can also be found in insurance laws, fraud and abuse laws, and occasionally, criminal laws. In some states, however, the prohibitions are imposed through the appropriate regulatory agency’s adoption of the codes and standards established by professional societies or other external sources.

States take a wide variety of approaches to how fee splitting is defined, which professionals are subject to the rules, and how the prohibitions are enforced. The mechanics of these restrictions are often complex and scattered across many sections of the law and can result in significant penalties for professionals found to be in violation. Most states carve out exceptions, typically by permitting the formation of professional business entities through which fees may be divided among licensed professionals or by permitting percentage-based fee arrangements for various services, such as billing and collection services, as long as parameters are maintained.

While fee splitting is commonly established through legislation, its scope is refined through ongoing agency interpretation, case law, and other enforcement tools. The result is a highly nuanced patchwork of rules and conditions.

The Foundations of Fee-Splitting Prohibitions

            Purpose

Fee-splitting prohibitions serve two primary purposes, both of which are rooted in the idea that physicians should always place the highest priority on the best interests of their patients when recommending and providing care. First, fee splitting is intended to prohibit self-interested professionals (and nonprofessionals) from referring patients to a particular provider based on financial incentives rather than professional competence.1 Second, fee-splitting prohibitions aim to reduce the likelihood that a physician who knows that he or she must share fees with another individual will under- or overperform;2 for example, by carrying out unnecessary tests that generate large fees, or conversely, by forgoing inexpensive but necessary tests when doing so provides a physician with more time to treat patients needing more costly services. These two underlying goals have resulted in fee-splitting prohibitions that aim to eliminate any incentive that would sway a physician’s professional judgment and control of his or her practice.

            Authority and Enforcement

As noted above, most states that impose fee-splitting prohibitions do so through legislative action and regulatory enforcement.3 Application of those rules is then often modified through interpretation by agencies and courts. Fee-splitting prohibitions are typically embedded in professional practice acts and other occupational licensing laws; the standards and enforcement of this legislation are later developed by licensing agencies for their respective professions.4 In many states where no law or regulation specifically speaks to fee splitting (and sometimes, even when they do), administrative agencies have adopted and incorporated, by reference, secondary sources to form the basis of the prohibition. Professional organizations such as the American Medical Association (AMA) publish and maintain professional codes of ethics that clearly oppose the practice of dividing fees earned in exchange for healthcare services.5 States may then use these professional ethics standards prohibiting fee splitting as the underlying basis for enforcement of professional misconduct actions against practitioners.

Even in states that do not have an explicit statute or agency position, a physician that divides earnings with a third party who did not participate in providing those services—whether based on a referral relationship or otherwise—may be acting in a way that falls within the definition of unprofessional or unethical conduct and thus may be subject to discipline. In any case, regulators interpret and enforce rules in various ways, and fee-splitting issues can ensnare even careful individuals engaged in a healthcare practice.

The Rules and Exceptions

            Individuals Subject to Fee-Splitting Prohibitions

Fee-splitting prohibitions most commonly apply to physicians, but they may also apply to other healthcare professionals.6 In certain states, such as Arizona and California, the prohibitions are applied to a broad group of licensees of the “healing arts” and may extend not only to physicians and midlevel practitioners, but also to speech language pathologists, laboratory providers, hearing aid dispensers, midwives, counselors of various kinds (including social workers and behavioral health specialists), acupuncturists, and the like.7 Fee-splitting regulations also often apply to healthcare facilities and organizations.8 These examples are by no means comprehensive, but illustrate the scope of professionals to which the rules may apply. Regardless of which category of professionals they specify, fee-splitting laws are usually intended to cover many other individuals working in healthcare.9

While fee-splitting prohibitions are directed primarily toward healthcare professionals, some statutes go a step further and specifically cover nonprofessionals as well, as they may be on the other side of a prohibited transaction. Whether or not this is the case, the healthcare professional always carries the larger risk, given that the violation of a fee-splitting statute puts that professional’s license at risk.

            The Rules in Brief

Fee-splitting prohibitions can be grouped into two broad categories: (1) prohibitions against the referral of patients to specific providers for healthcare services or items, or the receipt of a referral of a patient for healthcare services or items, in exchange for remuneration;10 and (2) prohibitions against fee splitting among individuals for healthcare services that are not personally performed by each person sharing in the revenue.11 A state may enforce one, both, or neither type of prohibition.

            Prohibitions against Fees for Referrals

Prohibitions against fees for referrals cover any exchange of value in connection with the referral. California, for example, prohibits physicians and surgeons from offering or receiving any remuneration—whether financial or otherwise—in exchange for the referral of patients or clients.12 A violation of this prohibition is considered unprofessional conduct that may subject the licensee to sanctions, practice restrictions, and license revocation.13 Violations of the fee-splitting prohibitions also constitute misdemeanors in California and may bring penalties for licensees of up to $50,000 per offense and/or one year imprisonment.14

The solicitation or provision of patient referrals may also bring into play other fraud and abuse laws with much broader applicability, such as anti-kickback statutes or commercial bribery regulations.15 A growing number of states rely on these laws to enforce the prohibitions against nonlicensed individuals or entities who are providing or receiving referrals in exchange for generating business when that business is contingent upon patient involvement.16 In Florida, for example, fee-splitting prohibitions take the form of patient-brokering statutes that directly prohibit splitting fees generated from the provision of healthcare services; these statutes are often tied to anti-kickback prohibitions.17 While the patient-brokering statutes apply to anyone who participates in or facilitates impermissible fee splitting, it makes exceptions for certain financial arrangements within group practices, payment for consultation services, and remuneration provided to insurance agents operating under Florida’s Insurance Code.18 Violating Florida’s patient-brokering statutes may constitute a third-degree felony and may subject the individual in violation to up to five years imprisonment and fines ranging from $50,000 to $500,000, depending on how many providers and patients are involved.19

            Nonparticipation Prohibitions

In the second category of prohibitions, healthcare providers are prohibited from splitting fees for services or items provided to patients with any individual who did not participate personally in rendering the services or furnishing items to patients, regardless of how the patients selected the professional service or item. This rule may apply to a greater number of healthcare professionals and compensation arrangements than the fee-for-referral prohibition. For example, this rule can be triggered by lease agreements in which rent of the premises is tied to professional-services revenue,20 or percentage-fee arrangements for management services in which the compensation is based on a physician’s revenue. This is especially true when the management services involve marketing or advertising.21

The Exceptions

While fee-splitting prohibitions are designed to prohibit transactions and business relationships that compromise physician autonomy and the primacy of patient well-being, they may also have the potential to make impermissible certain collaborative arrangements between healthcare professionals that would benefit patients. As a result, state legislatures and regulating agencies have established numerous exceptions. However, exceptions generally require strict adherence to specific conditions. Careful analysis is thus required to determine whether an arrangement may fit within an exception. Five common categories of exception are discussed in detail.

            Formation of Corporate Entities

Exceptions allowing corporate entities that are adequately controlled by healthcare providers make it possible for physicians to increase scale and efficiency without compromising autonomy or patient care. States with these exceptions permit the formation of professional corporations, professional limited liability corporations, and professional partnerships, as well as other legitimate employment arrangements, as long as those entities meet certain requirements. For example, they must be owned exclusively by licensed professionals of the same practice or specialty or have a minimum number of shareholders or shareholders with investment interests in the entity to be licensed.22 Arizona, for instance, permits the formation of professional corporations and professional limited liability companies for the purpose of rendering healthcare services as long as at least one-half of the directors or members of the entity, as well as the president, are licensees and as long as no nonprofessional owns more than a minority share.23 In California, a wide range of healthcare licensees may form professional corporations in order to provide healthcare services, but typically, all shareholders, directors, and officers of such entities must hold licenses and are restricted as to how much ownership interest each may maintain in the professional corporation.24

            Percentage-Based Arrangements

Other exceptions allow percentage-based arrangements involving such services as practice management (e.g., the “friendly PC” model) or billing and collections support, provided that they are structured appropriately.25 Management fees based on a percentage of revenue generated by a healthcare professional are sometimes explicitly permissible, but under such arrangements, it is essential to ensure fair market valuation of the services provided.26 This category of exceptions provides an example in which case law and regulators within a state can send contradictory messages. For instance, in Florida courts have approved percentage-based management fees when based on a percentage of a professional’s gross income and when no patient referrals have been made.27 However, the Florida Board of Medicine holds percentage-based fee arrangements to be impermissible when a management services entity provides marketing or other promotional services on behalf of the healthcare professional or practice.28 It is thus essential to conduct a comprehensive review of the exception in question before attempting to rely on it.

            Ownership and Investment-Related Interests

Other exceptions allow for ownership and investment-related interests. California licensees, for example, are in many cases permitted to refer patients to a laboratory, pharmacy, clinic, or other healthcare facility in which they have an investment interest and accept a return for doing so—provided that the licensee’s return is based precisely on the amount of investment or percentage of ownership, and not on the number or value of patients referred.29 Physicians and surgeons also may accept payments or other consideration for services (other than the referral of patients) which are based on a percentage of gross revenue or a similar type of contractual arrangement if the consideration is aligned with the value of services performed by each.30 This permits lease agreements based on a percentage of revenue if the fair rental value of any premises or equipment leased is commensurate.31

            Payments to Third-Party Advertisers

California exceptions also address arrangements with third-party advertisers. California licensees may offer or sell services through a third-party advertiser if the third-party advertiser does not specifically and directly recommend or endorse the healthcare professional over any other.32 The fee paid to the third party must be commensurate with the benefit of services provided, and fair market value should be carefully assessed.

            Concurrent Services

Another common exception allows two or more licensed professionals performing concurrent services to share fees based on the proportion of services each one performs.33 This exception may include consulting arrangements, as long as the division of fees is commensurate with the value of the services performed by each person involved in the transaction.34 Certain states, such as Iowa and Washington, allow fee-splitting arrangements between professionals and nonprofessionals, or among professionals, even when one or more of them did not perform any services, as long as the patient has full knowledge of the arrangement and consents to it.35

Conclusion

The business realities of practicing medicine in the 21st century have heightened the importance of successfully navigating fee-splitting prohibitions and their exceptions. However, given the significant differences between states in this regard, it is essential to thoroughly research the regulations, case law, and agency opinions that may apply prior to structuring business arrangements involving engagement with and among healthcare professionals. Formation of professional business entities, participation in percentage-based management arrangements, and other similar relationships may be available to help develop compliant compensation structures, but an in-depth review is in order to identify potential pitfalls that may increase regulatory risk.

This article is adapted from the ABA Health Law Section’s new book, What is … the Corporate Practice of Medicine and Fee-Splitting?  This primer examines the corporate practice of medicine and fee-splitting prohibitions in healthcare, an area of the law that can lack clear legal guide rails.  For more information, go to www.shopABA.org.

  1. See, e.g., Am. Med. Ass’n, Code of Medical Ethics (2017);  Serbaroli, F.J., Avoiding the Corporate Practice and Fee-Splitting Prohibitions in Structuring Physician Arrangements (American Health Lawyers Association, AHLA Paper P04229908 (Apr. 22, 1999).
  2. See, e.g., E & B Marketing Enterprises, Inc. v. Ryan568 N.E.2d 339, 342 (Ill. App. 1991).
  3. See 50-State Summary Chart [located in the book itself].
  4. Id.
  5. See, e.g., Iowa Admin. Code § 653-13.20 (adopting the AMA Code of Medical Ethics and the American Osteopathic Association Code of Ethics); KY. Rev. Stat. § 311.597(4) (requiring physicians to comply with the AMA Code of Medical Ethics). For an example, see the AMA Code of Medical Ethics, Opinion Number 11.3.4 (finding fee splitting to be unethical and impermissible because “[p]atients must be able to trust that their physicians will be honest with them and will make treatment recommendations, including referrals, based on medical need, the skill of other health care professionals or facilities to whom the patient is referred, and the quality of products or services provided”). Am. Med. Ass’n, Code of Medical Ethics, Op. No. 11.3.4 (2017).
  6. See 50-State Summary Chart. It is important to note that states classify professionals differently, which results in the rules applying unevenly.
  7. See, e.g., Fla. Stat. § 468.365(1)(p) (respiratory therapists); 225 Ill. Comp. Stat. 55/85(a)(12) (marriage and family therapists); N.C. Gen. Stat. §90-456(1)(d) (acupuncturists).
  8. See, e.g., Ariz. Rev. Stat. § 36-407(D) (healthcare institutions); Conn. Gen. Stat. § 20-579(a)(11) (pharmacists and pharmacies); Conn. Agencies Reg. § 19a-36-D36 (clinical laboratories); Fla. Stat. § 400.176 (nursing homes); Ky. Rev. Stat. § 333.240(4) (medical laboratories); N.H. Rev. Stat. Ann. §§ 318:29(h), 318:1(VI)(a) (pharmacies).
  9. See 50-State Summary Chart.
  10. Id.
  11. Id.
  12. Cal. Bus. & Prof. Code § 650(a).
  13. Cal. Bus. & Prof. Code § 652.
  14. Cal. Bus. & Prof. Code § 650(g).
  15. See, e.g., 62 Pa. Cons. Stat. § 1407(a)(2) (anti-kickback law applicable to physicians); Tex. Occ. Code Ann. § 165.155 (anti-kickback law applicable to physicians); Wis. Stat. § 448.08(2) (anti-kickback law applicable to physicians). State fee-splitting prohibitions aside, many federal laws can impose similar restrictions; for the purposes of this article, federal law is not explored, but it should be considered when structuring fee arrangements.
  16. Unlicensed individuals and entities that do not directly furnish healthcare services can be targeted for violating fee-splitting laws in many scenarios. Statutory and regulatory language commonly prohibits “any person” from participating in such arrangements with healthcare professionals. See 50-State Summary Chart.
  17. Fla. Stat. §§ 456.054(2), 817.505(1)(a).
  18. Fla. Stat. § 817.505(3).
  19. Fla. Stat. § 817.505(4).
  20. See, e.g., Prosper Diagnostic Ctrs., Inc. v. Allstate Ins. Co., 964 So.2d 763 (Fl. Dist. Ct. App. 2007) (analyzing an arrangement for a lease agreement with an MRI center and holding that it violated the fee-splitting prohibition); Sachs v. Saloshin, 526 N.Y.S.2d 168 (N.Y.App. Div. 1988) (finding that the provision of fees earned from a dentist’s services may not be tendered under a lease agreement as that would violate fee-splitting statutes).
  21. See, e.g., E&B Marketing Enterprises, Inc. v. Ryan568 N.E.2d 339 (Ill. App. 1991) (holding that payment to a marketing company could not be based on a percentage of a physician’s billings as it constituted impermissible referral activity).
  22. Id.
  23. Ariz. Rev. Stat. §§ 10-2201, 29-841.
  24. See, e.g., Cal. Corp. Code 13401–13401.5; Cal. Bus. & Prof. Code § 2408.
  25. See, e.g., Cal. Bus. & Prof. Code § 650(b) (physicians, surgeons, and chiropractors may accept fees for services other than referrals that are based on a percentage of gross revenue, as long as the consideration is commensurate with fair market value); 225 Ill. Comp. Stat. 60/22.2(e) (permitting division of fees for services personally performed if such fees represent the fair market value of the services).
  26. Id.
  27. See, e.g., Practice Mgmt. Assocs., Inc. v. Gulley, 618 So.2d 259 (Fla. Dist. Ct. App. 1993) (finding that a percentage-based management fee based on weekly revenues from a chiropractic practice did not violate Florida’s fee-splitting prohibitions).
  28. See, e.g., In re the Petition for Declaratory Statement of Magan L. Bakarania, M.D. 20 FALR 395 (1998), affirmed Phymatrix Mgmt. Co. v. Bakarania, 737 So.2d 588 (Fla. Dist. Ct. App. 1999).
  29. Cal. Bus. & Prof. Code § 650(d).
  30. Cal. Bus. & Prof. Code § 650(b).
  31. Id.
  32. Cal. Bus. & Prof. Code § 650(g); see also People v. Duz-Mor Diagnostic Laboratory, Inc., 68 Cal. App. 4th 654 (Cal. Ct. App. 1998) (upholding an arrangement for payment of sales commission to a marketing company for marketing services).
  33. See 50-State Summary Chart.
  34. See, e.g., Fla. Stat. § 817.505(3)(2) (making exception to patient-brokering statute for providers rendering consultation services).
  35. Iowa Code Ann. § 153.32(4) (allowing dentists to divide fees for patient referrals or for assisting in patient care if the patient consents); Minn. Stat. § 147.091 (allowing referral of patients to healthcare providers in which the referring individual has a financial interest, as long as the interest is disclosed to the patient and the patient consents).
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Ari J. Markenson

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Ari J. Markenson is Co-Chair of the Health Care and Life Sciences Industry Practice and a partner in the New York Office of Winston & Strawn, LLP. He has more than 20 years of experience at the intersection of healthcare, law, and business. He advises healthcare industry clients on a broad range of matters, with significant experience in the representation of healthcare providers and suppliers. He represents private equity firms and lenders on healthcare transactions, including regulatory, M&A and portfolio company work, and works in an outside general counsel role. He advises clients on divestitures; due diligence; corporate matters; legal and regulatory compliance matters, including requirements and conditions for participation; fraud and abuse; state licensure; certificate of need approvals; and survey, certification, and enforcement issues. He is an active participant in many professional organizations related to healthcare, law, and business. He is a member of the Board of the American Health Law Association. He is a Past Chair of the New York State Bar Association—Health Law Section and still serves on the Executive Committee. He is currently an Adjunct Associate Professor at Columbia University Mailman School of Public Health and at the School of Health Sciences and Practice at New York Medical College where he teaches courses in healthcare policy, management, and law. He is also an Associate Adjunct Professor at the University of Maryland-Global Campus, The Business School, where he teaches a health law course. He has been acknowledged as a Best Lawyer in America, 2012–2021, and a NY-Metro Superlawyer in 2011 and 2013–2020. He is also AV® Preeminent™ Peer Review Rated by Martindale-Hubbell.  He may be reached at AMarkenson@winston.com.

Angela Humphreys

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Angela Humphreys is Chair of the Healthcare Practice Group at Bass, Berry & Sims PLC, which is ranked as the fourth largest health law firm in the country. She also leads the firm’s strategically vital private equity initiative by serving as Co-Chair of the Healthcare Private Equity Team. With more than 20 years of experience, she has counseled national healthcare organizations and private equity funds of all sizes on hundreds of transactions providing business-minded, proactive advice and regulatory guidance. She is often cited by clients for her responsiveness and ability to understand the big picture. Her clients include private equity firms and their portfolio companies, publicly traded companies and nonprofit institutions, including hospitals and health systems, health plans, surgery centers, laboratories, physician practices, and healthcare information technology companies.

She is known for providing counsel in the acquisition and disposition of healthcare companies and structuring of syndications, joint ventures, and both private equity and strategic investment opportunities. She advises her clients on a wide range of operational, physician contracting, governance, disclosure, and other critical regulatory matters. Over the last several years, Ms. Humphreys has become one of the country’s leaders in physician practice acquisitions by focusing primarily on private equity investment in this area, which has far outpaced other sectors for its strong growth and high returns.

She is a nationally recognized thought-leader in private equity and healthcare M&A and has been praised for her leadership and accomplishments in the healthcare industry, having recently been recognized by Chambers USA for Healthcare; Mergers & Acquisitions magazine’s The Most Influential Women in Mid-Market M&A; Top USA Women Dealmakers; and Law360 Health MVP.  She may be reached at ahumphreys@bassberry.com.