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

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.

Copyright © 2018, Private Practice Section of the American Physical Therapy Association. All Rights Reserved.

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