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The OIG's focus on false claims, Stark and kickback issues with Medical Director agreements continues to increase, as most recently evidenced by recent settlements and court decisions. Many physicians have consulting, Medical Director and other service agreements with hospitals, long term care facilities, clinical laboratories, dialysis facilities and other entities to which they refer patients. These developments highlight the need for physicians and health care organizations to be careful when entering into Medical Director agreements, and to institute compliance procedures to review Medical Director agreements on an ongoing basis.

Recent OIG Enforcement Activity

In September, 2006, in United States v. Rogan, the United States District Court, Northern District of Illinois, issued a verdict of approximately $64 million in a false claims act lawsuit against the owner and CEO of Edgewater Medical Center, a Chicago teaching hospital. The court found that from 1995-2000, the CEO had conspired with certain physicians to engage in a payment for referrals scheme. The physicians' improper financial interests were created through a variety of contracts, such as Medical Director agreements, physician recruiting contracts and other arrangements which provided physicians with compensation that the court found was "grossly" above fair market value and for services never substantially performed. The court concluded that such payments violated the federal anti-kickback law, which makes it a crime for a physician to knowingly solicit or receive money or any other remuneration as an inducement or in return for referring patients for services paid for by Medicare or Medicaid.

In October, 2006 an Atlanta hospital (Northside Hospital) agreed to a $6.3 million false claims settlement in United States ex rel. Burnes v. Northside Hospital, based upon improper Medical Director arrangements with physicians. Two physicians who operated a transplant clinical program on behalf of the hospital had been paid $240,000 a year to serve as part-time medical directors of a small hospital lab when the appropriate amount of pay should have been around $50,000. The whistleblower lawsuit was filed by the former CEO and billing office manager of the transplant group. The former CEO and billing manager alleged that the transaction violated the Stark law, which prohibits a physician from making a referral to an entity for the furnishing of certain health services, if that physician has a financial relationship with the entity that does not met one of the law's exceptions.

How to Avoid Trouble

In each of the matters referenced above, the Medical Directors and/or hospital administrators were sentenced to more than five years in jail (in addition to substantial fines and penalties). To avoid risk, Medical Director agreements should be standardized in form to fit within the federal anti-kickback safe harbors and an exception to the Stark law, with final approval by competent legal counsel. Legal counsel should also approve any deviations from the standardized agreements. Because the written agreement is a statement of the understanding between the parties, it should be drafted in plain language so that both sides, as well as a third party, understand its provisions. There are a number of specific issues to be considered with establishing Medical Director agreements, including:

Written Agreement Signed by the Parties. All Medical Director arrangements should be reflected in a written agreement. Additionally, both parties should sign the agreement to evidence mutual understanding.

Description of Services to be Provided. It is critical that the written agreement reflects a clear understanding of the Medical Director's duties and responsibilities. All Medical Director services should be legitimate services that are important for the facility to carry out its clinical functions, and such services must be actually performed by the Medical Director. The services to be provided can not involve the counseling or promotion of an business arrangement or activity that violates any federal or state law.

If a form agreement format is used, an exhibit should be attached to identify the specific services that the physician is providing. If time is to be divided between organization duties and providing direct patient care, there should be some detail as to how the time is to be allocated. The following should be included in the scope and definition of duties and responsibilities:

• Nature and extent of duties to be performed
• requirements for consultation on matters within the scope of the agreement
• Participation on medical staff committees to which the physician is assigned
• Description of the supervision and oversight of organization employees to be provided
• Patient treatment obligations
• Teaching or training obligations
• Institutional planning responsibilities
• Documentation requirements

Specified Term and Grounds for Termination of the Agreement. Dates marking the beginning and ending of the agreement period as well as the date of execution should be specified. The agreement period should be for at least one year, and the agreement can be terminated before one year only for good cause. A provision should be included in the agreement to allow for termination in the event that the organization determines that the physician is not fulfilling his or her obligations under the contract.

Schedule When Services will be Provided. If the services are to be provided on less than a full-time basis, the Medical Director agreement must specify when the services will be provided, for how long and the rates charged for each service interval.

Aggregate Compensation May Not Exceed Fair Market Value. The amount of compensation paid to a medical director should be set in advance, consistent with fair market value in an arms-length transaction and not determined in a manner that takes into account the volume of value of any patient referrals or other business generated between the parties. Any compensation in excess of the fair market value could be labeled a kickback if referrals are involved. It is advisable to obtain a written analysis from an independent third party consultant with expertise in the health care field to confirm that the payments are fair market value for the services being provided, or otherwise to document in your file comparable data that you relied on to support the fair market value of the compensation.

Qualifications for the Medical Director Position. The agreement should include a summary of the physician's special expertise and/or qualifications for the Medical Director position and a provision that requires the physician to maintain appropriate licensure and credentials for the duration of the agreement. Furthermore, the agreement should also require that the physician not be under any federal or state sanction or exclusion (e.g., on the OIG's Cumulative Sanction Report).

Documentation of Services Provided. The agreement should require the physician to maintain appropriate time records demonstrating fulfillment of the duties outlined. It should specifically define the documentation required by the physician unless it is otherwise apparent in separate records (e.g., in a patient's chart that was reviewed by the medical director). This will provide the parties to the agreement tangible evidence that the services are being provided.

Compliance Program. The agreement should include an assurance that the physician will abide by all applicable policies and procedures as well as the health care organization's standards of conduct.

Ongoing Monitoring. Periodic monitoring of all Medical Director arrangements should be undertaken to ensure that in each case the Medical Director is actually providing the services required and is being paid the compensation set forth in his or her agreement. This type of review may be part of the ongoing auditing and monitoring effort related to the overall compliance program.

Conclusion

Given the increasing number of criminal and civil enforcement actions, health care organizations and physicians need to ensure that Medical Director agreements comply with applicable laws. All Medical Director agreements should undergo legal and compliance review. Recognize that contract language may be affected by numerous state and federal statutes and regulations. The statues and regulations are subject to periodic amendment and interpretation. In addition, fair market value is subject to periodic change. For these reasons, it is necessary for a Medical Director agreement to undergo thorough legal review upon its inception, its renewal and, for contracts with terms exceeding one year, annually. Failure to draft Medical Director agreements appropriately could result in administrative, civil and criminal liability, including possible exclusion from Medicare and Medicare.

Our firm has assisted numerous hospitals and physicians with regarding to Medical Director agreements and related issues. We can provide practical advice as you develop and implement policies and procedures related to Medical Director agreements. If you have any questions please contact Michael Dowell at mdowell@tocounsel.com or the lawyer in the firm who generally handles your health care law legal matters.