Protecting Your Practice When Regulations Reign

In the business and human resources (HR) worlds, news of the Fair Labor Standards Act (FLSA) regulations reigned.

By Christine V. Walters

August 2016

No doubt everyone has heard by now that on May 18th the US Department of Labor filed these “final” FLSA regulations. When they were published in the Federal Register on May 23rd, however, an “Announcement of Policy” was also published with an enforcement exception.

In all, business owners, managers, and HR professionals are asking what options are available to comply with the regulations regarding exempt employees, while reducing the adverse fiscal impact to their company or organization. The following is a brief and high-level review of some of the key changes and at least five options available to you. Remember, an employee must meet all three of the following tests in order to be properly classified as exempt.

Minimum salary test: This was modified and increased to $913/week or $47,476/year.
Duties tests: There were no changes to the duties tests.
Salary basis test: This was modified and actually gives employers a little more flexibility to meet the minimum salary test. You may now still classify an employee as exempt even if the guaranteed minimum salary is below $47,476 if (1) you pay to an employee at least quarterly a bonus that provides him with a salary of at least $47,476/year, and (2) the total bonus payments are not more than 10 percent of the annual minimum salary or $4,747.60.

Beware #1: This can be tricky if the bonus is tied to performance and the employee does not earn the bonus in a quarter. There is a “catchup” provision but if not followed you may be liable for overtime hours worked in the quarter in which the bonus was not paid.

The new regulations will go into effect for most covered employers December 1, 2016. There is an enforcement exception (deferral) for certain residential homes and care facilities with fewer than 15 beds.¹ So what do you do now with any employee you currently have classified as exempt but to whom you also pay an annual salary of less than $47,476? The following options all assume the person is properly classified as exempt today.

Increase the person’s guaranteed minimum salary to meet the new threshold of $47,476 and keep the employee properly classified as exempt. Let’s say an employee’s guaranteed minimum salary today is $45,000. You may increase that effective December 1, 2016, to $47,476 and maintain the employee’s exempt status. The downside of this option is that it may result in wage compression and internal inequities that might require a concomitant increase in pay to those employees whose current salary is just above $47,476.
Simply convert the exempt employee to nonexempt and start paying overtime for all hours worked over 40 in a workweek. Calculate the employee’s hourly rate by dividing the current base salary by 2,080 (hours assumed for a full-time employee). The good news to the employee is that, if he or she is currently averaging more than 40 hours per workweek, the wages are likely to increase since the employee will be paid overtime for those hours worked over 40 in a workweek. The downside is this will increase your labor costs, and you need to ensure that budgetary impact is considered prospectively.
This is nearly the same as Option #2 but you limit or prohibit overtime hours worked. This option has a few challenges. I think it may not be realistic for a variety of reasons: (1) you still have to pay the overtime rate even it is worked without authorization, and (2) if there is that much work for the employee today I suspect it will be there on and after December 1 so someone is going to have to do it.
Follow Option #3, limit or prohibit the overtime, and then hire a part-time employee whom you will pay straight time; thus you avoid paying your current employee the overtime.
This is my favorite but don’t let that sway you. Convert the employee to nonexempt at a rate that should keep his or her current, total annual compensation the same as it is now, including with the overtime. You can use a formula to calculate an hourly rate that will provide the employee with the same total compensation he or she currently has, including overtime. The only figure you need in advance is the average number of hours the employee has worked per week over the last 12 months. If you have not been tracking or recording time worked by your exempt employee, then estimate, guesstimate, or simply ask the employee and proceed on good faith.

Beware #2:

Beware #3:

References

1. www.federalregister.gov/articles/2016/05/23/2016-11753/defining-and-delimiting-the-exemptions-for-executive-administrative-professional-outside-sales-and. Accessed July 2016.

Christine V. Walters, JD, MAS, SHRM-SCP, SPHR, is an independent human resources and employment law consultant for DBA FiveL Company out of Westminster, Maryland. She can be reached at info@FiveL.net.

Aboveboard

Recent compliance enforcement actions provide good learning opportunity for practices.

By Paul J. Welk, PT, JD

June 2016

The last few months of 2015 and early 2016 were not an ideal time for the coverage of physical therapy compliance issues in the media. During an approximately four-month period, a number of enforcement examples were widely publicized, and the Department of Health and Human Services Office of the Inspector General (OIG) issued a report that detailed concerning tendencies in physical therapy billing in skilled nursing facilities (SNFs). This article will briefly summarize the OIG report and three key enforcement examples during this time period. The purpose of these summaries is not to set forth a detailed description of the alleged mistakes of others, but rather to provide an opportunity for readers to consider actions to be taken in their practices to avoid similar regulatory scrutiny.

In a September 2015 report entitled “The Medicare Payment System for Skilled Nursing Facilities Needs to be Reevaluated,” the OIG “found that Medicare payments for therapy greatly exceeded SNFs’ costs for therapy. [The OIG] also found that under the current payment system, SNFs increasingly billed for the highest level of therapy even though key beneficiary characteristics remained largely the same. Increases in SNF billing—particularly for the highest level of therapy—resulted in $1.1 billion in Medicare payments in (fiscal years) 2012 and 2013.” Based on these findings, the OIG recommended that the Centers for Medicare & Medicaid Services (CMS): (1) evaluate the extent to which Medicare payment rates for therapy should be reduced; (2) change the method for paying for therapy; (3) adjust Medicare payments to eliminate increases that are unrelated to beneficiary characteristics; and (4) strengthen overall oversight of SNF billing.¹

Within a few months of the publication of the OIG’s report, two enforcement actions related to therapy services in SNFs received significant media attention. First, on December 18, 2015, the US Attorney’s Office, Eastern District of Louisiana, announced a $10.3 million settlement against a splint supplier and its founder to resolve allegations that they violated the False Claims Act by improperly billing Medicare for splints provided to patients in skilled nursing facilities.² The allegations centered on misrepresentations that patients were in their homes or other places that were not skilled nursing facilities in an effort to circumvent applicable bundled payment rules. This particular case initiated with a whistleblower, a former sales executive, who is set to receive at least $1.89 million of the recovery amount in connection with the settlement.

On January 12, 2016, the US Department of Justice (DOJ) announced a $125 million settlement to resolve a lawsuit alleging that a contract therapy provider violated the False Claims Act by knowingly causing skilled nursing facilities to submit false claims to Medicare for rehabilitation therapy services that were not reasonable, necessary, and skilled, or that never occurred.³ The government alleged that the contract provider’s policies and procedures, including setting unrealistic financial goals and scheduling therapy to achieve the highest reimbursement levels, resulted in unreasonable, unnecessary services and artificially and improperly inflated bills. The government further alleged that the contract therapy provider’s initiatives presumably placed patients in the highest therapy reimbursement level, rather than considering the specific patient evaluation to determine the level of care; boosted the amount of therapy reported during reference periods; scheduled and reported therapy services despite the treating therapist’s recommendation for discharge; and reported estimated or rounded minutes instead of actual minutes for therapy provided. In addition to announcing the DOJ’s settlement with the contract rehab provider, on the same day the DOJ also announced settlements with four SNFs for their role in submitting false claims to Medicare based on the services provided by the contract provider. This settlement related to facilities in Massachusetts, New York, Pennsylvania, Texas, and Maryland. Of particular interest to members of the private practice community, this settlement stresses the compliance obligations placed on contract therapy providers, as illustrated by a comment in the DOJ’s press release which noted that “[all] providers, whether contractors or direct billers of taxpayer-funded federal healthcare programs will be held accountable when their actions cause false claims for unnecessary services.” It is also important to note that this settlement resulted in a payment of nearly $24 million to the whistleblowers, a physical therapist and occupational therapist who formerly worked for the contract therapy provider.⁴

Finally, on December 23, 2015, the US Attorney’s Office, District of Delaware, announced a $710,000 settlement to resolve allegations of health care fraud under the False Claims Act by a three-clinic outpatient physical therapy practice.⁵ The settlement alleges that the private practice submitted claims to Medicare for physical therapy services performed by physical therapists and physical therapy assistants without the adequate supervision of a Medicare-enrolled physical therapist. In connection with the settlement, the practice and its parent company entered into a corporate integrity agreement⁶ with the Department of Health and Human Services Office of Inspector General.

Although these cases illustrate generally unwanted publicity for the physical therapy profession, the fact patterns and outcomes illumine a number of important issues for practices to consider on the compliance front. The compliance issues highlighted in these four documents include: (1) the fact that physical therapy services are clearly an area of concern for government regulators; (2) the importance of understanding payment rules and regulations, including those related to bundled payments, a payment methodology that will certainly become more prevalent on a going-forward basis; (3) the need to adequately address billing and compliance issues raised by employees and others in light of the potential financial benefits available to whistleblowers; (4) the need to adequately document the medical necessity of the services provided; (5) the fact that it is not only the billing provider that is subject to liability for compliance issues, but also the contracted service provider; (6) the importance of understanding conditions of payment; and (7) the importance that regulatory agencies place on a physical therapy provider having a compliance officer, compliance committee, written policies and procedures, adequate employee training programs, and other similar compliance best practices, as set forth in detail in the referenced Corporate Integrity Agreements. By considering these enforcement examples and identified issues, physical therapy private practices can better identify areas of compliance risk and take adequate steps to promote practice compliance. For those readers seeking further compliance guidance on these issues, in addition to the materials set forth in the footnotes, the Department of Health and Human Services, Office of Inspector General, publication entitled “OIG Compliance Program for Individual and Small Group Physician Practices”⁷ is an excellent resource.

Please note that this article is not intended to, and does not, serve as legal advice to the reader but is for general information purposes only.

REFERENCES

1. The Medicare Payment System for Skilled Nursing Facilities Needs to be Reevaluated. The Department of Health and Human Services, Office of Inspector General (September 2015). Available at www.oig.hhs.gov/oei/reports/oei-02-13-00610.pdf. Accessed March 2, 2016.

2. Splint Supplier and Its President to Pay Over $10 Million to Resolve False Claims Act Allegations (December 18, 2015). Available at www.justice.gov/usao-edla/pr/splint-supplier-and-its-president-pay-over-10-million-resolve-false-claims-act. Accessed March 2, 2016.

3. The United States Department of Justice, Office of Public Affairs, Press Release (January 12, 2016). Available at https://www.justice.gov/opa/pr/nation-s-largest-nursing-home-therapy-provider-kindredrehabcare-pay-125-million-resolve-false. Accessed March 2, 2016.

4. Corporate Integrity Agreement between the Office of Inspector General of the Department of Health and Human Services and Rehab Care Group, Inc. and Kindred Health Care, Inc. (January 11, 2016). Available at http://oig.hhs.gov/fraud/cia/agreements/RehabCare_Group_Inc_and_Kindred_Healthcare_Inc_01112016.pdf. Accessed March 2, 2016.

5. Outpatient Physical Therapy Practice, Old Towne Physical Therapy, to pay $710,000 to Resolve False Claims Act Allegations, Press Release of the United States Attorney’s Office, District of Delaware (December 23, 2015). Available at https://www.justice.gov/usao-de/pr/outpatient-physical-therapy-practice-old-towne-physical-therapy-pay-710000-resolve-false. Accessed March 2, 2016.

6. Corporate Integrity Agreement between the Office of Inspector General of the Department of Health and Human Services and U.S. Physical Therapy, Inc. and Old Towne Physical Therapy Limited Partnership (December 21, 2015). Available at http://oig.hhs.gov/fraud/cia/agreements/Old_Towne_Physical_Therapy_Limited_Partnership_12212015.pdf. Accessed March 2, 2016.

7. OIG Compliance Program for Individual and Small Physician Practices (October 5, 2000). Available at http://oig.hhs.gov/authorities/docs/physician.pdf. Accessed March 2, 2016.

Paul J. Welk, PT, JD, is a Private Practice Section member and an attorney with Tucker Arensberg where he frequently advises physical therapy private practices in the areas of corporate and health care law. He can be reached at pwelk@tuckerlaw.com.

Surviving Regulation

When public policy impacts your practice.

By Christine V. Walters, JD, MAS, SHRM-SCP, SPHR

April 2016

If you ever feel just a bit of pressure or wonder why you started or joined your practice, you are not alone. Many business owners and managers from myriad industries might not regret their entrepreneurial spirit but do periodically take pause to wonder, “If I knew then what I know now would I do it all over again?” The pressure of regulatory, legislative, and legal compliance can be overwhelming. This is just one more area of conflict that private practice owners and managers must navigate on the path to success, not to mention the path to mere survival.

Consider just a few snippets of data related to increasing employment mandates.

The Hill reports, “2015 was a record-setting year for the Federal Register, according to numbers the Competitive Enterprise Institute in Washington, D.C., released [in December]. This year’s daily publication of the federal government’s rules, proposed rules, and notices amounted to 81,611 pages as of Wednesday [December 30, 2015], higher than [2014’s] 77,687 pages and higher than the all-time high of 81,405 pages in 2010—with one day to go in 2015.”¹ This does not include the 60 Executive Orders and Memoranda some of which mandate paid leave, overtime, nondiscrimination, and other employment provisions.

The categories of protected classes continue to increase as 22 states currently have laws barring discrimination based on sexual orientation with more reportedly² on the horizon in 2016, including those adding gender identity and/or expression. The National Partnership for Women and Families reports³ that as of July 2015 paid sick leave mandates had been enacted in 23 jurisdictions in the United States.

I find most legislative and regulatory reform is born out of good intentions. Paid leave mandates espouse supporting parents who must choose between working to earn wages or staying home to care for a sick child. Discussions with elected officials sponsoring new employment legislation reveal the issue frequently originates with one constituent’s story. An employee has a problem or challenge at work, contacts his or her state delegate or senator, and voilà! A bill is born.

So what is a business owner or manager to do? Advocate: It is a verb and a noun—so do it and be it.

Be an Advocate! Think about all that you currently do for and offer your employees. Do you stand above the market? How do you carve yourself out from the competition? Once you have defined your “best practices,” ask yourself, “Do I want my state-elected officials to flatten the market and make every other business do what I have already created, paid for, and administered for the benefit of my employees?” If your answer is “yes,” then so be it. For many employers that is not the desired result. Think of it. How can you shine in a flattened market where all employers are required to meet the standards of the highest or those deemed to be the best? How many awards currently recognize employers that are outstanding? Chambers of Commerce, professional and trade associations, and many more recognize employers for all sorts of “best” or proactive practices. As the market flattens through regulatory and legislative mandates, the opportunities for recognition are reduced.

There are many lists touting projected employment trends for 2016. Here is mine in no particular order.

Decriminalization and legalization of (medical) marijuana will continue to impact workplace policies and practices on substance use, abuse, testing, and fitness for duty.
Workplace wellness programs—as of this writing the U.S. Equal Employment Opportunity Commission (EEOC) is poised to release related regulations,⁴ while states and local jurisdictions consider related issues such as bans on electronic cigarettes and vaping.
Ban-the-box laws prohibiting or limiting employers’ ability to inquire about criminal history prior to extending a bona fide offer of employment.
Fair or predictive scheduling bills propose to require employers to pay an employee whose scheduled workday or hours are reduced or canceled with minimal notice to pay the employee for the day’s wages or a portion thereof.
Paid (family, sick) leave proposals to require certain employers, including some with as few as 10 employees, to provide specific amounts of paid leave under specified terms.
Pregnancy accommodation to provide even greater protection and accommodation for pregnant applicants and employees than is currently provided under the Americans with Disabilities Act and the Pregnancy Discrimination Act.
Pay transparency legislation gives employees the legally protected right to discuss their own wages or those of a coworker with other coworkers (often with or without the coworkers’ permission).
Minimum wage increases—at least 29 states plus the District of Columbia⁵ require a minimum wage higher than the federal with similar requirements under Executive Order for covered government contractors.
Healthy workplace bills (anti-bullying legislation)—at least 31 legislatures⁶ have introduced legislation that would increase liability for employers for workplace bullying, which is defined more broadly than workplace harassment.
Workplace flexibility—bring your own device (BYOD), flexible staffing, electronic messaging, and all the wage and hour implications that come with these practices will continue to have the attention of the U.S. Department of Labor, which is expected to issue a Request for Information (RFI) in early 2016. Stay tuned for related regulations.

Now Advocate! Choose just two, maybe three of the topics above (or any others) that may impact your business, human resources, and employment-related practices. Assess your baseline measures and then calculate the fiscal and employee relations impact that related legislation would have on your business. Equipped with those metrics, reach out, build relationships, and advocate. Whether you support or oppose a proposed initiative, advocacy is the message here. Employers need to shape public policy that works for them and their employees. No one knows that better for your practice or business than you.

How? Identify the sponsor of related legislation, whether it is a U.S., state, or local representative. See them in person, or when that is not feasible, call them to schedule a conversation. Draft your talking points in advance. Connect with and follow the elected representation on social media: Facebook, LinkedIn, Twitter, etc. This will help them connect your name with your face—making the in-person dialogue more familiar. Tell your business story; explain what your position is and why. Do not forget the “why”; it can be a powerful tool in negotiation.

This article does not constitute the rendering of legal advice. You should consult with your practice’s legal counsel for advice on employment-related matters.

References

1. http://thehill.com/regulation/administration/264456-2015-was-record-year-for-federal-regulation-group-says. Accessed January 2016.

2. www.usnews.com/news/us/articles/2016-01-02/states-plan-renewed-debate-on-lgbt-rights-religious-freedom. Accessed January 2016.

3. www.nationalpartnership.org/research-library/campaigns/psd/state-and-local-action-paid-sick-days.pdf. Accessed January 2016.

4. www.federalregister.gov/articles/2015/04/20/2015-08827/amendments-to-regulations-under-the-americans-with-disabilities-act. Accessed January 2016.

5. www.dol.gov/whd/minwage/america.htm. Accessed January 2016.

6. http://healthyworkplacebill.org. Accessed January 2016.

Practice Acquisitions

Covenants not to compete as part of purchase and sale transactions.

By Paul J. Welk, PT, JD

February 2016

As loyal readers of Impact magazine have certainly noted over the past number of months, there is significant activity involving physical therapy practice acquisitions. In connection with these transactions, a number of documents are negotiated and executed including letters of intent, purchase and sale agreements, employment agreements, promissory notes, and others depending on the terms of the specific transaction. While all of the terms of the transaction are important to the parties, one of the most frequently negotiated provisions is the covenant not to compete (“noncompete”) entered into by the selling physical therapist. This article will explore, through the use of a case example, the basics of a noncompete, including its common elements, the difference between noncompetes in purchase agreements and employment agreements, and common positions taken by buyers and sellers in connection with the negotiation of such documents.

Let us consider the case of a practice owner, Christine, who owns Superstar Physical Therapy, Inc. Superstar operates two locations, one in Smalltown and one in Bigtown, and has been owned by Christine for 20 years. At the closing of a sale transaction in which Christine sells all of the shares of Superstar to the buyer, Christine enters into a purchase agreement that contains a five-year noncompete starting from the date of closing. This noncompete prohibits Christine from providing physical therapy services within a 25-mile radius of any location of Superstar in operation as of the closing (i.e., Smalltown and Bigtown). Additionally, Christine enters into a new employment agreement at the closing, which contains a two-year noncompete and begins on the date of termination of employment. This noncompete prohibits Christine from providing outpatient physical therapy services within a ten-mile radius of any practice location of Superstar at which Christine provided services during her employment.

With that factual scenario as background, we can now consider certain issues. As general background, the enforceability of a covenant not to compete is typically analyzed under state law through the court system. The question of enforceability generally arises if a party violates the terms of a noncompete, for example, if Christine became unhappy with the buyer and opened a new clinic two miles from Superstar’s Smalltown clinic six months after the closing of the sale transaction. Certain states disfavor covenants not to compete while other states favor a freedom of contract approach and are more likely to enforce a contractually negotiated noncompete. While each state analyzes the enforceability of a noncompete differently, in general the enforceability is based on whether the restraints in a particular situation are reasonable based on the specific facts.¹ Covenants deemed unreasonable by a court during litigation are typically either reduced in scope by the court to terms that it believes to be reasonable or are deemed to be null and void. By way of example, if Christine’s noncompete in her employment agreement was for a period of 5 years and 100 miles and lawsuit alleging a violation were filed, many courts would presumably question whether such a restraint is reasonable. A noncompete that is deemed enforceable by a court during the litigation process is subsequently enforced, often through a payment of damages by the violating party or by the court ordering the violating party to cease the conduct in violation, a process often referred to as an injunction.

When considering noncompetes in a purchase agreement and associated employment agreement, as noted above these noncompetes are not mutually exclusive and generally contain different terms. When examining these two types of noncompetes, it is important to understand why the differences exist. It has long been recognized that noncompetes executed in connection with a purchase and sale agreement are not subjected to as rigorous a reasonableness examination as noncompetition covenants ancillary to an employment contract.² As a result, the terms of a purchase agreement noncompete are often more restrictive. This underlying legal premise is consistent with the business reasons behind the noncompete. More specifically, a buyer who purchases a physical therapy practice generally expects a covenant not to compete to contain broader restrictions in consideration of the purchase price being paid to the seller. In today’s market, it would not be uncommon for a buyer to advocate for a five-year noncompete in a purchase agreement. This requirement is in consideration for the buyer paying a significant price for the practice and needing to preclude the seller from competing in the market for a sufficient period of time to allow the buyer to receive the benefit of the transaction. By way of example, if Christine received the purchase price payment for Superstar and one year later was able to reenter the market without restriction, the buyer would presumably not receive the full value of the practice as Christine’s goodwill in the community would likely be a significant benefit to her new practice.

In looking at the key terms of Christine’s noncompetes, the issues presumably negotiated relate to scope, term, and area. Scope addresses the breath of the restrictions in place. As to scope in Christine’s case, the purchase agreement noncompete broadly references physical therapy services as opposed to private practice physical therapy. Practice buyers often advocate that this broad restriction better incentivizes the selling physical therapist to remain fully committed to the buyer for a period of time following the closing. Additionally, a buyer frequently justifies a broader noncompete given the fact that this is a business sale rather than an employment relationship and a material payment has been made to the seller. The restriction in the employment context is often more narrow, as in Christine’s case, which limits the restriction to outpatient physical therapy services rather than physical therapy generally. This noncompete would presumably allow the individual to provide services in a skilled nursing facility following a termination of employment as this is a setting not typically deemed to be in competition with a private practice.

Term relates to the number of years or months for which the restriction applies. In this case, the restriction in the purchase agreement runs for a period of five years and the restriction in the employment agreement runs for a period of two years. Should the employment relationship be terminated within the initial five-year period, there is presumably a time in which the restrictions run concurrently. From the buyer’s perspective, the noncompete contained in the employment document is of significant value should the employee terminate employment after the purchase agreement noncompete has expired. When considering noncompete restrictions employment context, it may also be appropriate to consider whether there are certain circumstances in which the duration would be decreased or the restrictions otherwise limited. For example, an employment agreement noncompete may contain a provision stating that if the employee terminates employment for cause (such as due to the breach of the employment agreement by the employer), the employment agreement noncompete would no longer be in effect. However, such a set of circumstances generally would not void a purchase agreement noncompete where the supporting rationale for the restrictions, payment of the purchase price, remains. From a term perspective, the noncompete period in the purchase agreement typically runs from the date of closing, while the noncompete in the employment agreement typically runs during the employment period and for a fixed period of time from the date of the termination of employment.

Area relates to the geographic area in which the restriction applies. As to the geographic area restriction, the mileage restriction is generally more in the context of the purchase agreement, in consideration of the purchase price payment made to the seller. Another key distinction in the two noncompetes is the location from which the geographic restriction applies. In this example, the restriction in the purchase agreement is limited to the two locations in operation at the time of the transaction closing. When negotiating the noncompete in a transaction, consideration should be given to how additional locations may affect the restrictions in the noncompete. For example, it may or may not be appropriate to include a noncompetition restriction based on a mileage radius from newly opened clinics. In considering the employment agreement noncompete, note that while the geographic restriction is less on a mileage basis, the locations have the potential to be broader if, for example, Christine provides services at multiple newly opened Superstar locations other than those in Smalltown and Bigtown.

When considering covenants not to compete in purchase-and-sale transactions, it is important to consider the rationale behind the restrictions and the interests of the respective parties in negotiating the noncompete terms. As illustrated earlier, there are many elements in a noncompete that are generally subject to negotiation, and it is important to consider each of these, as well as others depending on the particular transaction, in negotiating these provisions.

References

1. Ruhl v. F.A. Barlett Tree Expert Co., 245 Md 118 (1967).

2. See Worldwide Auditing Services v. Richter, 587A.2d 772, 777 (Pa. Super Ct. 1991).

Fraud Alert

The Office of Inspector General fraud alert on medical directorships provides a reminder of the importance of compliance.

By Paul J. Welk, PT, JD

October 2015

On June 9, 2015, the Department of Health and Human Services Office of Inspector General (OIG) published a fraud alert related to physician compensation arrangements. Of relevance to physical therapy, the alert discusses medical directorships and compliance with the antikickback statute. The alert reminds the provider community and others that even if one purpose of a medical director arrangement is to compensate a physician for his or her past or future referrals of federal health care program business, the antikickback statute may be violated. Although the OIG and other governmental agencies have provided extensive guidance on physician compensation arrangements in the past, this alert serves as a reminder of the importance of compliance and provides a good opportunity to review certain federal regulatory issues associated with physician compensation arrangements. This article will provide a high-level overview of federal laws that must be considered in physician compensation arrangements and review some practical steps that can be taken to assist in achieving compliance in this area.

The primary federal statutes applicable to medical director agreements in this context are the antikickback statute and the Stark or Physician Self-Referral Law. In general, the antikickback statute prohibits offering, paying, soliciting, or receiving anything of value to induce or reward referrals or generate federal health care program business. The antikickback statute is intent based, which means that if even one purpose or intent of the arrangement is to compensate a physician for referrals, that may be sufficient for an antikickback violation. Violation of the antikickback statute can lead to substantial criminal, civil, and administrative penalties. The antikickback statute does include voluntary safe harbors, which describe a payment and business practice that is not deemed an offense under the statute. The antikickback safe harbor covering personal services and management contracts is implicated in the medical director context and is discussed in further detail here.

The Stark or Physician Self-Referral Law prohibits a physician from referring Medicare patients for designated health services, which are defined to include physical therapy, to an entity with which the physician has a financial relationship unless an exception applies. Additionally, the Stark Law prohibits the provider of a designated health service from submitting a claim to Medicare for those services resulting from a prohibited referral. Unlike the antikickback statute, which has an intent component, there is no intent standard when analyzing whether a Stark violation has occurred. A violation of the Stark Law subjects the relevant party or parties to civil penalties including a refund of the overpayment, false claims act liabilities, and civil money penalties. The Stark Law, similar to the antikickback statute, provides for exceptions that allow a legitimate business arrangement to move forward without violating Stark so long as the safe harbor requirements of the exception are satisfied. However, in contrast to the antikickback statute and its voluntary safe harbors, an arrangement that would otherwise violate Stark must fit an exception to the law.

Prior to expressing its concerns in the fraud alert, the OIG has taken action against numerous providers in recent years for violating the antikickback and Stark Laws relative to medical director arrangements. These actions are based on a variety of underlying violations including financial arrangements that take into account the value and volume of referrals made between the parties, paying other than fair market value for the services provided, paying for services not performed, paying for services performed pursuant to agreements that either had expired or were not in writing, payments made at rates different than those set forth in the contract, and payments for services that were not as described in the contract.

Providers can comply with the Stark and antikickback laws by assuring that the agreement between the medical director and the provider meets certain requirements. The Stark exception and the antikickback safe harbor covering medical director agreements each have similar elements that must be satisfied. By way of example, the antikickback safe harbor covering personal services provides that payment practices in connection with the provision of personal services shall not be treated as a criminal offense so long as:

The agreement is set out in writing, signed by the parties, and is for a term not less than one year;
The agreement covers all of the services provided for the term of the agreement and specifies the services to be provided;
If the agreement is intended to provide for services on a periodic or part-time basis rather than full-time, the agreement specifies the schedule of such intervals and the exact charge for such intervals;
The compensation to be paid is set in advance, consistent with fair market value in arms-length transactions and is not determined in a manner that takes into account the volume or value of any referrals or business generated between the parties;
The services performed do not involve the promotion of a business arrangement that violates any state or federal law; and
The aggregate services contracted for do not exceed those that are reasonably necessary to accomplish the business purpose of the services.

There are a number of practical considerations that physical therapy practices should consider to assist in complying with the above laws and regulations. These include the following:

Before retaining a medical director, the practice should assess the actual need for a medical director. In some instances, the practice may be required to have a medical director for regulatory or compliance purposes. While specific needs should be identified, by way of example a medical director may be retained to provide services such as consulting with the practice regarding treatment procedures and protocols, assisting with quality assurance issues, providing appropriate in-services for staff, and meeting regulatory requirements.
As discussed earlier, the payments under a medical director agreement must be fair market value. The parties should perform appropriate due diligence to determine fair market value and should maintain this supporting information. Supporting documentation may come through objective data such as published salary surveys and may consider the nature of the services provided, the geographic location, and other factors. The fees paid to a medical director cannot be based on the volume or value of referrals received from the medical director. In connection with the determination of compensation, the parties should also determine, and include in the written agreement, the amount of time the medical director will be performing services.
The specific duties and responsibilities of the medical director should be included in the written agreement.
Prior to compensating the medical director, the parties should establish a mechanism to support the specific services provided during the relevant time period. This is often done through submission of a timesheet describing the services performed. This document is generally then subject to approval by the provider and is retained by the parties for their records to support the payments made.
In addition to the antikickback and Stark Law requirements, any other applicable federal or state laws that may affect the medical director relationship should be considered.

In summary, many physical therapy practices choose to retain the services of a medical director for a variety of legitimate business purposes. In doing so, one issue to consider is assuring that the arrangement is compliant with the federal Stark and antikickback statutes. The OIG has made clear, by choosing to publish a fraud alert on the topic, that physician compensation arrangements and medical director contracts remain an area of concern.

Paul Welk, PT, JD, is a Private Practice Section member and an attorney with Tucker Arensberg, P.C. He can be reached at pwelk@tuckerlaw.com.

This article does not constitute the rendering of legal advice. You should consult with your practice’s legal counsel for advice on employment-related matters.