Split-Fee Soup: A Recipe for Disaster

By: David Hirshfeld

When people ask me what I do, I used to say “I’m a transactional health care attorney.  I represent health care practitioners in their business deals.  I don’t do malpractice.”  That response does little to wipe the blank stare off my questioner’s face, and even I have to stifle the urge to yawn.  My new and improved response is that “I spend a lot of time advising health care practitioners how they can share fees with people who refer them patients.”  Now I get invited to all sorts of cocktail parties !!!

Practitioners split fees with one another for a variety of reasons; and they very often do not realize that a particular arrangement involves a split-fee arrangement, or that split-fee arrangements are often illegal in Florida.  The purpose of this article is to provide practitioners with a general overview of the concepts underlying the prohibition against split-fee arrangements in Florida, in the context of three common business arrangements.

Source of the Law.

Split-fee arrangements become problematic when the split is such that it constitutes the payment in exchange for the referral of a patient or health care service.  Paying for referrals is professional misconduct and a criminal act in Florida.[1]  Unfortunately, it is not always easy to recognize that a particular situation constitutes a payment for referrals.  The actual laws in this regard are vague.  Florida’s Board of Medicine has published approximately twenty-five opinions on split-fee arrangements; but those opinions, although informative, only actually bind the parties who were before the Board.

Common Arrangements Involving Split-Fees.

Percentage of Collections of the Independent Contractor.

Practices often desire to engage a professional as an independent contractor (i.e. on a 1099 basis), and to pay that contractor a percentage of the collections generated by that contractor.  The motivation for this type of arrangement is obvious: the practice wants to incent the contractor to work hard, and the contractor wants to be rewarded for all of his hard work.  The problem arises from the fact that when the practice assigns a patient to the contractor, that assignment of the patient constitutes a referral.  Once you have a referral by the practice to the contractor, any revenue that flows from the contractor to the practice may constitute a payment for that referral.  The decisive analysis is what percentage of the total fee for treating the patient is retained by the practice?

The general rule is that the portion of the fee retained by the practice must be based on the practice’s cost of providing items and services to the contractor and the patients (s)he treats, that are necessary for the episodes of care.  If and to the extent that practice retains a fee that does not reflect its cost, the practice may be considered to be taking a fee from the contractor in exchange for referring the patient to the contractor.

There is no bright line test with respect to what percentage of a fee the practice can safely retain, but there are certain factors that should be considered.  The overhead of the practice is important.  If the practice retains a percentage of the fee that far exceeds the practice’s overhead, then the arrangement is susceptible to challenge.  In addition, if the contractor is to provide services on behalf of the practice both in the practice’s office and in hospitals and/or clinics, then the percentages ought to vary depending on the location of service.  The practice’s costs associated with care rendered in its office are likely different from the costs associated with care rendered outside its office, so the percentage of fees retained from the various settings should likewise be different.

Marketing Arrangements.

Practices often wish to hire companies to market the medical practice.  The practice and the consultant understandably prefer for the consultant to be paid based on results; that is, that amount by which the practice has grown since the marketing consultant began work.  Since the sole purpose of a marketing arrangement is to generate referrals to the practice, there is a strong prohibition against a medical practice paying a marketing consultant a percentage of the practice’s revenue in exchange for marketing the practice.

Marketing arrangements are sometimes part of larger practice management arrangements, but are often stand-alone arrangements with professional consultants.  The prohibition against percentage fees for marketing arrangements is so strong in Florida that I often advise my clients to isolate those arrangements from all percentage-based arrangements.  I usually suggest that marketing services be specifically excluded from practice management and/or professional service agreements and dealt with separately.  I am much more comfortable with a time-based marketing fee, such as an hourly or annual fee, that is owed by the practice regardless of any increase in patient flow.  I recognize that a time-based marketing fee does not create direct incentive for the marketing consultant to perform but, depending on the nature of the practice and its marketing goals, there can be other tactics available to assure performance.

Selling Receivables.

Practitioners with a large base of patients whose injuries have been caused by the negligence of others often have large accounts receivable on their books for years.  The reason is that these “personal injury patients” sometimes do not have insurance, or do not submit their bills to their insurer.  The theory is that patient’s medical care will be paid for if and when their negligence lawsuit is resolved, assuming there is enough money from the settlement or verdict to go around to all the health care practitioners and attorneys involved.  Practitioners become financially squeezed because the underlying negligence lawsuits often take years to resolve.

Practitioners with a large mix of personal injury patients, and other practitioners, sometimes desire to sell their accounts receivable.  The practitioner agrees to accept a fraction of the receivable’s face value in exchange for immediate and certain payment.  This sort of factoring arrangement is fine and safe unless the factor purchasing the receivables somehow has a hand in referring the underlying patient to the practice.  If a factor brings a patient to a practice, purchases the receivable attributable to that patient at a discount, then collects more than it pays for that receivable; the arrangement may be challenged as a split-fee arrangement intended to compensate the factor for the referral.

Split-fee arrangements are very common, and not always easy to recognize.  Through this article I hope to develop practitioners’ intuitions with respect to prohibited split-fee arrangements in Florida.  Practitioners should note that in addition to issues created by Florida law, Federal law also prohibits payments intended to induce referrals of patients or services that are reimbursed by Federal health insurance programs such as Medicare.  In my experience, split-fee arrangements that pass muster under Florida law can usually be tweaked to fulfill the requirements of Federal law.