Healthcare & Physician Contracts
Contracts are an essential component in the operation of a successful medical practice, healthcare organization or business. Whether you are a medical professional seeking employment, currently own a practice, or are looking to establish a new medical practice or healthcare business in Georgia, your contractual agreements must be clear, enforceable, and in compliance with complex laws and regulations governing the healthcare industry.
Retaining a healthcare or physician contract lawyer is one of the best investments a physician, other healthcare provider or business can make. The benefit of that investment can be maximized and the cost minimized by retaining an attorney or firm experienced handling healthcare and physician contract reviews and negotiations.
Attorneys who work on healthcare contracts regularly understand the language, pay structures and terms that affect an an organization’s success and an individual provider’s professional and personal life. For over 30 years, physicians, physician groups, hospitals, healthcare businesses, and other attorneys have placed their trust and confidence in us for their most vital and sensitive contract issues.
Types of contracts we can assist you or your organization with include:
- Billing and Collection Agreements
- Business Associate Agreements
- Call and Coverage Agreements
- Compliance Plans and Agreements
- Consulting Agreements
- Employment Agreements
- Independent Contractor Agreements
- Managed Care Contracts
- Management Services Agreements
- Marketing Agreements
- Medical Director Agreements
- Network Provider Agreements
- Non-Compete Agreements
- Non-Disclosure and Confidentiality Agreements
- Non-Solicitation Agreements
- Partnership Agreements
- Operating Agreements
- Purchase Agreements
- Recruitment Agreements
- Relocation Agreements
- Sales Agreements
- Settlement Agreements
- Severance Agreements
- Shareholder Agreements
- Many other types of agreements
In any contract negotiation, each side or party deserves to be represented by separate, independent and competent counsel. Over the years, we have had the honor and privilege of representing both individual and institutional healthcare providers, organizations and businesses — ranging from small to very large — in a wide variety of contract matters.
With regard to employment contracts, we have extensive experience representing employers in numerous cases. And we have advised and represented individual employees and independent contractors in countless others. So we understand both sides of the equation.
For economic and other (often legitimate and understandable business) reasons, employers do not always put a physician’s or individual healthcare provider’s interests first when it comes to a contract’s details. Physician compensation is changing along with the reconfiguration of payment incentives within the healthcare industry. And lower-than-average compensation and ambiguous terms are common. Without the assistance of an experienced healthcare contract attorney, the terms can be detrimental to a physician’s or individual provider’s career.
For individual providers, hiring a healthcare contract attorney requires you to make an investment in your career. But that investment can save you thousands of dollars and multiple headaches down the road. Whether it is through increased compensation, better work schedules or termination provisions should you need to end your contract, your healthcare contract attorney can help tailor the agreement to your needs.
At the Law Office of Kevin O’Mahony, we will analyze your contract, interpret and explain complicated clauses, address missing needs or unfair terms, and compare your offer to other physicians or providers in your specialty, using both internal and external data and surveys. We also can negotiate the contract on your behalf.
During your consultations with us, we will discuss the issues found in your contract, how it compares with others we have seen, revisions we suggest, and concerns you may have. We will advise you on steps to take, and either negotiate on your behalf, or provide coaching on how to handle negotiations yourself.
We have years of experience representing and negotiating with health organizations and their legal teams; however, attorney negotiations are not mandatory. If you feel negotiations would be better received coming directly from you rather than an attorney, or you simply wish to avoid the added expense of paying a lawyer to negotiate on your behalf, we can provide tips to coach you through the process and help ensure things go smoothly.
The services we provide include reviewing and negotiating contracts, preparing contracts, helping employers and employees enforce contracts, advice on setting aside or voiding contracts, litigating contracts (in state or federal court), and litigating restrictive covenants (covenants not to compete, solicit patients or employees, etc.).
For interns, residents, fellows and those just entering the practice of medicine, it is particularly important to retain an experienced health and business law attorney to review and advise you on your physician employment agreement. Such an attorney can help you understand your contract, and explain any pitfalls and potentially problematic provisions, including clauses or paragraphs which might cause you unexpected liability in the future. This will arm you with the information you need to negotiate from a position of strength to obtain a more favorable agreement.
We can meet with you to review your contract face-to-face, or review it with you by phone. We also can arrange to confer with you after normal business hours or on weekends, should your schedule require.
Because contracts and individual providers’ needs vary greatly, we normally work and bill for our time based on competitive hourly rates. And if you need a written analysis, amendment or addendum to your contract, or you want us to seek revisions on your behalf, we can do so at those hourly rates.
Although not an exhaustive list, physicians and individual healthcare providers should keep the following points in mind when evaluating an offer or negotiating a contract:
- Health systems and institutional providers have experienced health and business law attorneys who advise and assist them with their contracts. You should as well.
- Health systems, institutional providers and their counsel have presumably seen and been involved in many more contracts than you have.
- There is no such thing as a “standard” healthcare contract or physician employment agreement.
- Contracts vary in numerous ways (as do individual providers and their needs), and many (if not all) terms are negotiable.
- Do not rely on your colleagues, non-healthcare lawyer acquaintances, or (especially) your future employer’s representatives, for “legal” advice. Misinformation about legal issues (especially in the highly-regulated healthcare arena) is readily available, but can cost you dearly. And just because a court may have decided a legal issue a certain way in one case does not mean a different court would not reach a different conclusion in another case. Every set of facts, circumstances, contract and case is different.
- Be sure the wording of your contract represents exactly the agreement you made. If something is not specified in the written contract, or an oral agreement differs from the written contract, the language in the written contract will almost certainly govern in any future dispute.
- A promise to make you a “partner” or “shareholder” in a practice or group after a certain period of time will not be enforceable unless all key terms are specified sufficiently for a court to enforce it. (Price, timing, percentage of ownership, method of payment of buy-in, etc., are generally required.) Similar to the purchase of a home or real estate, unless all terms required for a binding contract are set forth in writing and agreed to by the parties, it will not be enforceable.
- Obtain and review copies of every document referenced in the contract. Such documents usually are considered part of the agreement. They may include the practice or entity’s policies and procedures, the employee handbook, a code of conduct, sexual harassment policy, compliance agreements, etc. Keep these documents in a file with a copy of your contract.
- Ensure the contract is clear throughout that you are an employee and not an independent contractor, or be sure you understand all the ramifications of working as an independent contractor. Employees generally receive more benefits and have more protections under the law than do independent contractors. If you sign as an independent contractor, you may have more autonomy, but you will be assuming many expenses and liabilities that the employer ordinarily would be required to assume.
- Carefully consider clauses that allow the employer to terminate the contract without cause on a 30, 60, 90 or even 180-day notice. With such a clause in your agreement, you cannot assume you have a one or two-year agreement, even if the anticipated “term” of the agreement is stated to be one or two years. Instead, you potentially have only a 30, 60, 90 or 180-day contract. So think about whether you can find another job and relocate in 30, 60, 90 or 180 days, and what you might need to protect for that contingency and cushion the financial ramifications.
- If there is a “for cause” termination provision in the contract, be sure to seek a right to “cure” provision. This is a provision which requires the employer to provide you written notice of any alleged breach and allows you a certain period of time (usually anywhere from 10 to 30 days) to cure it.
- Try to avoid assuming an obligation to pay the premium for tail coverage for professional liability or medical malpractice insurance, especially if the employer terminates the employment. If you are unable to negotiate this away completely, try to: (1) reduce the percentage you agree to pay to 50%, or 25% for each year you are in the practice; and (2) insert a provision that if you maintain the same insurance company or obtain retroactive coverage, this will be substituted for tail coverage.
- Do your “due diligence” before signing. Ask to see billing and collections figures and income statements. Talk to other employees or associates. If your compensation will be based on productivity, speak with another physician who is similarly compensated about how his or her compensation is calculated.
- Visit any hospital or other facility where you will have privileges or see patients. Contact any physicians or other providers you know or have met who live in the area or surrounding areas. Discuss the quality of the equipment and staff with other physicians and providers in the area. They may be able to provide you information regarding your potential employer, hospital or city that may affect your decision.
- Be sure every blank in the contract is completed and filled in before you sign.
- Be sure every exhibit, schedule or addendum referenced in the contract is attached, and you have read and understand them, before you sign.
- Do not sign any document you do not understand and agree with. Contracts have consequences. Oral “explanations” do not change written terms. Read anything you are contemplating signing carefully and fully (even if it is long and boring).
- Do not sign any contract until you are satisfied (or at least prepared to live and comply) with all its terms. If you sign the agreement, be prepared to honor it. Do not sign an agreement thinking that there may be certain provisions that won’t be enforceable or that you won’t be required to follow in the event you do not fully comply with them. Assume that every part of the contract is enforceable.
- Provided they are drafted correctly, restrictive covenants (covenants not to compete, solicit patients or employees) are generally enforceable in Georgia. Although there sometimes are exceptions and defenses that may be used to potentially prevent, defeat or minimize enforcement of a restrictive covenant, unless you have sufficient money set aside to finance a lawsuit, expect to honor it if it is in the agreement. As an employee or independent contractor, your negotiating strategy should be to: (1) try to get the covenant removed completely; or (2) reduce the period of time, geographic area, and scope of services or activities covered to the extent possible.
- Do not start working until you have a copy of the fully-executed contract. A draft is not sufficient. A copy signed by you but not the employer is insufficient. One of the most common problems we see when there is a dispute over a physician employment agreement is the employee does not have a copy of the contract that is signed and dated by the employer.
Partnership & Shareholder Agreements
For physicians who wish to own their practice, but do not want to “go it alone,” there are many benefits associated with partnering with one or more other doctors. The physicians can share administrative costs associated with operating the practice, have in-house coverage when one is away, and better plan for the future, to name just a few. Although there are multiple benefits associated with entering into a partnership with other physicians, prior to entering into such relationships, physicians should carefully evaluate the arrangement to ensure the arrangement is indeed appropriate based upon the doctor’s individual circumstances and goals.
This is true even for physicians who first have been employed by a practice, and are considering, or being considered, for partnership, shareholder or other equity ownership interest. In general, except for vague provisions outlining the parties’ intentions, partnership or equity ownership usually is not thoroughly addressed in an initial employment agreement. So a physician should use the time he or she serves as an employee to learn more about the practice and its partners. A partnership has been likened to a marriage. And it behooves physicians to learn as much as they can about their future partners (either while serving as employed physicians first, or through research, background-checking and other due diligence) before making a long-term commitment to become a partner in the practice.
If you do enter into a partnership arrangement with other physicians — either through ownership in a general partnership, limited liability partnership (“LLP”), limited liability company (“LLC”), professional corporation (“PC”) or professional limited liability company (“PLLC”) — it is imperative that you enter into an agreement specifying the terms of the relationship with the other physician(s). This agreement is generally referred to as a Partnership Agreement, Shareholders’ Agreement, Members’ Agreement or Operating Agreement, depending on the type of entity through which the physicians render services. Regardless of the type of entity involved or nomenclature used, all the parties need to be on the same page before entering into such a relationship, or it will not go well. Some key issues that need to be addressed prior to physicians entering into partnership arrangements with other physicians include the following:
When a physician partners with other doctors, decisions regarding the practice will no longer be made solely by that physician. Since decisions will now be made by all of the physicians, it is important to specify exactly how such decisions will be made. For instance, will decisions regarding the practice be made by a majority vote or by a unanimous vote of the physicians? If there are more than two physicians in the practice and decisions are made by a majority vote, there is always a chance that a majority of physicians can align against the minority physicians. Even if most routine decisions are to be made by a majority vote, the parties can agree that certain important decisions are to be made by unanimous vote. Such decisions may include, for example, admitting new physicians, changing physicians’ compensation, making purchases exceeding a certain amount, terminating physicians, authorizing the practice to file suit, selling or dissolving the practice, or other crucial actions.
In the event a physician is offered the opportunity to buy in to an existing practice and become a partner, the physician must review the terms of the buy-in, including how much the physician is required to pay to become an owner in order to ensure that the buy-in is financially worthwhile. Furthermore, before buying into a practice, the physician must do his/her homework so the physician knows exactly what he/she is buying into and that the practice is financially sound. In many cases, it is recommended that the physician obtain a valuation of the practice by a certified healthcare appraiser or accountant.
The physicians must also all be on the same page regarding compensation and expense reimbursement. With respect to compensation, the physicians need to determine how they will be compensated and how net profits will be distributed. Prior to setting the compensation structure, it is advisable to speak with your accountant regarding the practice’s cash flow. It is important that the physicians examine the practice’s cash flow to ensure that the practice is able to make such payments and pay administrative costs involving the operation of the practice in a timely manner. The physicians also need to determine what expenses and benefits will be paid for by the practice (e.g., license and registration fees, CMEs, cell phone, conferences, books, car allowance, disability, health and life insurance, etc.). In the event the physicians’ expenses are likely to vary greatly, it may be advisable for each physician to have a predetermined expense account.
Physicians must also fully understand the termination provisions in the agreement. Physicians should be especially concerned if the agreement allows for the physician owners of the practice to be terminated without cause by a majority vote of the other physician owners. In order to protect the physician, the agreement should allow for involuntary termination only in limited circumstances, including, for instance, if the physician loses his/her license to practice medicine. Additionally, the agreement should state the specific terms for termination or withdrawal, including the amount of notice that must be provided in the event a physician voluntarily withdraws from the practice, as well as the practice’s and withdrawing physician’s responsibilities upon withdrawal.
Physicians also must consider whether there will be a buy-out in the event of termination (including for voluntary or involuntary withdrawal, retirement, death or disability), as well as whether the buy-out amount will be small or substantial. The buy-out can differ depending on the reason for the withdrawal. For instance, the buy-out for a voluntary withdrawal might be the withdrawing physician’s share of the accounts receivable of the practice, while a buy-out for death or disability might be the value of the physician’s life insurance or disability policy. The parties should also agree on when buy-out payments will commence, as well as how such payments will be made and over what duration. For the practice, it is also important to include a provision in the agreement to protect the practice from having to make multiple buy-out payments simultaneously, which could place a significant financial strain on the practice. Such a provision is usually in the form of a cap, with payments exceeding the cap deferred.
Physicians also need to consider what happens when one or more of the physicians leave the practice, particularly if the departing physician(s) may continue practicing within the relevant service area. Specifically, the remaining physicians may need to ensure that the practice is protected and can continue to operate, despite the departure(s). It therefore is often recommended that there be restrictive covenant(s), which restrict the departing physician(s) from competing with the practice within a specified geographic radius for a certain period of time. However, restrictive covenant provisions which are overly broad risk being deemed unreasonable and unenforceable by the courts, if challenged. So it is important for both the practice and the individual physicians involved to consult competent legal counsel before any such covenants are agreed upon. (See the Restrictive Covenants & Non-Compete Agreements page of this website for additional information.)
Malpractice Insurance/Tail Coverage
Whenever a physician terminates a medical malpractice insurance policy, for any reason, the issue of tail malpractice coverage should be addressed. This is especially important in the event a physician has a “claims-made” policy (the most common type of malpractice insurance policy), which only offers protection to a physician while the policy is in effect. In other words, there is no coverage for a claim brought after a claims-made policy is cancelled or not renewed, even though there may have been insurance coverage when the incident or alleged malpractice occurred. Tail malpractice coverage solves this problem, by providing insurance coverage for claims brought after a claims-made insurance policy is terminated.
Hospitals, for example, typically provide medical malpractice insurance for the physicians they employ. However, if a physician was insured under a claims-made policy prior to hospital employment, hospitals often require the physician to purchase tail malpractice coverage to cover any claims that might arise from the physician’s prior practice. So if a claims-made policy is discontinued, the physician would have to obtain the tail coverage, which can be expensive, unless the practice agrees to do so (or a subsequent employer is willing to provide “prior acts” coverage). Consequently, if possible, a physician should try to ensure that the agreement indicates that upon his/her withdrawal from the practice, the practice will be responsible for paying for tail coverage, should that situation arise.
Medical Director Agreements
The professional role of a physician can be divided into two main components: the clinical role (which generally involves direct clinical care of patients), and the administrative or managerial role (which usually requires some use of a physician’s clinical knowledge, but may not involve or require actual examination, diagnosis or treatment of individual patients). There are a wide variety of areas where a physician’s clinical specialty knowledge is needed in a non-direct care context.
Hospitals are just one example where healthcare organizations need and, in many cases, must engage Medical Directors. Medical Director roles range from specialty-specific service line program leaders (where the physician assists in the establishment and management of a particular portion of the hospital’s business) to Medical Director positions required by law or regulation (where, for example, Medical Directors perform oversight services designed to ensure compliance with applicable government program requirements).
Serving as a Medical Director gives a physician opportunities to increase his/her earnings and use managerial skills to advance an organization’s goals. But compensation to Medical Directors has become a significant compliance issue for many healthcare providers and businesses. If not properly structured and monitored, a Medical Director arrangement can become a major compliance problem.
Unlike most other types of employment arrangements involving physicians, physicians acting as Medical Directors are compensated for the performance of administrative and managerial services which are not directly related to patient care services. And because Medical Directors are not necessarily performing medical services, many physicians feel comfortable entering into a medical directorship with little or no written documentation. However, physicians should proceed with caution when undertaking a Medical Director role.
Medical Director Agreements are often scrutinized by the Office of the Inspector General (“OIG”) of the U.S. Department of Health & Human Services (“HHS”) to determine whether the arrangement is, in reality, being used as a vehicle to provide remuneration to physicians for patient referrals. Because these agreements are subject to increased scrutiny by government regulators and payors, they must be structured carefully to reduce risks of investigations for potential fraud or abuse, including violations of the Stark Law, the Anti-Kickback Statute (“AKS”) and other laws.
To meet state and federal standards, numerous legal requirements must be met, such as the services listed in the Medical Director Agreement must be necessary, properly documented, and compensated at fair market value set in advance. At the Law Office of Kevin O’Mahony, we can help you or your organization meet those legal requirements.
Questions to ask concerning any Medical Director Agreement include:
- Does the Medical Director Agreement help establish or implement protocols and systems for verifying quality of care and patient satisfaction?
- Is the Medical Director Agreement designed to ensure staff members are properly trained and supervised?
- Or are Medical Director Agreements being given only to top referring physicians to a facility, with little or no other value to show for compensation paid?
Medical Director Agreements can be structured as independent contractor relationships where, for example, a hospital contracts with an independent member of its medical staff (often on a less than full-time basis) to perform certain specialty/service line administrative leadership functions. Or, the role of a Medical Director can be structured as a full- or part-time employment arrangement. For instance, the Medical Director role can be included in a full-time employment agreement which calls for the provision of clinical care, but also provides that the physician spend a certain percentage of her/his time performing in the Medical Director role.
The distinction between an independent contractor arrangement and an employment agreement is very important. Whether a physician is performing in an independent contractor vs. employment role is determined by the degree of control the hospital or other healthcare entity exercises over the physician under the arrangement. The Internal Revenue Service’s regulations set forth the factors and criteria applicable to each category. And those regulations must be taken into account to ensure that the Medical Director Agreement is properly structured. But regardless of whether the physician is an independent contractor or an employee, a third party not licensed as a physician should not be permitted to interfere with the physician’s independent clinical judgment. This issue arises more frequently in a physician’s clinical role. But it also can occur in a physician’s role as a Medical Director.
Well-crafted Medical Director Agreements address the various issues involved clearly, to assure not only a meeting of the minds between the parties, but also compliance with applicable state and federal laws. As with any properly structured agreement, Medical Director Agreements should be documented in writing and signed by both parties. Indeed, a written agreement is generally required by law and regulation. And there are numerous other legal requirements as well.
One of the key provisions contained in a Medical Director Agreement is the section (usually appearing early in the agreement or attached as an exhibit incorporated into the agreement) that specifies the Medical Director’s job duties in detail. For instance, a hospital’s Medical Director Agreement might list the physician’s responsibilities in his/her role for a particular service line with job functions such as:
- Overall program design and development
- Participation in strategic planning
- Assistance with developing the program’s operating and capital budgets
- Participation in program-related meetings
- Design and implementation of physician and staff education and training
- Development and implementation of systems, practices and procedures to monitor and improve program clinical quality, efficiency and patient satisfaction
- Program-specific clinical practice protocol development and implementation
- Program-related chart review
- Oversight and assistance with program-related legal and regulatory compliance initiatives
- Satisfaction of the various standards of the Joint Commission on Accreditation of Healthcare Organizations and other regulatory bodies
- Initiatives aimed at assuring that value-based purchasing standards are satisfied (whether they relate to government program payors or commercial health insurance plans)
The physician’s compensation for his/her performance as Medical Director is extremely important for both financial and regulatory compliance reasons. The structure of the compensation portion of a physician’s Medical Director Agreement varies depending on the type and structure of the underlying agreement. If, for example, the agreement is a part-time independent contractor arrangement, the physician is typically paid an hourly rate for his/her services. The agreement specifies the hourly rate and typically sets forth the maximum number of hours per month the physician may be paid for performing his/her Medical Director duties. The agreement also will usually require that a time sheet setting forth the specific functions performed by the Medical Director be prepared, signed by the physician and submitted as a condition of payment. The form or template of the time sheet may even be attached to the agreement as an exhibit.
This same approach is often also used in situations where the physician’s Medical Director role is included as an element of a physician’s full-time Clinical Services Employment Agreement and the Medical Director services are “over and above” the compensation relating to the physician’s performance in a full-time clinical role. In full-time Medical Director Agreements (such as those for a hospital’s Chief Medical Officer), an annual salary approach is generally used.
If the Medical Director refers patients to the hospital or facility for inpatient or outpatient hospital services, the services are included in the Stark Law’s definition of “designated health services.” If these referrals involve federal program patients, the Stark Law and AKS must be carefully examined and addressed. And even if only private-pay patients are involved, state laws and private health insurance requirements must be considered. Specific conditions must be satisfied in order for the Medical Director Agreement to be legally-compliant. Full descriptions and analyses of the Stark Law, AKS, and other potentially applicable laws are beyond the scope of this summary, but some aspects of these laws governing Medical Directors’ compensation are discussed below.
The Stark Law generally prohibits referrals by a physician of a Medicare or Medicaid patient to an entity providing designated health services if the physician (or an immediate family member) has a financial relationship with that entity. The Stark Law is a strict liability statute. It does not require a showing of intent to violate its terms, and ignorance is not a defense. It is implicated based on referrals unless there is an applicable exception or safe harbor that applies to the referral arrangement.
Similar to Stark but broader, the AKS prohibits anyone from offering, paying, soliciting or receiving remuneration (monetary or otherwise) to induce or reward referrals or generate business for anyone participating in any federal healthcare program. Although neither knowledge of the AKS nor intent to commit a violation is required, the proof required under the AKS (unlike Stark) is knowing and willful misconduct. As a result, those found in violation of the AKS also face criminal penalties in the form of a prison term or fine for each violation. Moreover, recent amendments to the AKS now establish that a violation of the AKS constitutes a false or fraudulent claim under the False Claims Act (for which crippling financial penalties and treble damages can be imposed), even if the service was medically necessary and properly provided.
In all cases that could implicate the Stark Law and the AKS, the provisions of a Stark Law “exception” must be satisfied and the requirements of an AKS “safe harbor” should be satisfied. The exceptions and safe harbors relied upon depend on whether the Medical Director Agreement is structured as an independent contractor arrangement or an employment arrangement.
Under the Stark Law, virtually any Medical Director Agreement is deemed a “financial relationship” between the hospital or other entity and the physician that constitutes a “direct compensation arrangement.” The applicable Stark exception in an independent contractor situation is the personal services exception, and the applicable exception in the case of a Medical Director Agreement structured as an employment agreement is the bona fide employment exception. These two exceptions require (among other key elements) that the compensation paid in return for the physician’s services be “fair market value.”
Under the AKS, the safe harbor that is usually applicable to an independent contractor Medical Director Agreement is the personal services and management contract safe harbor. In cases of Medical Director Agreements structured as employment agreements, the applicable safe harbor is the employment safe harbor. These safe harbor provisions also require (among other elements) that the compensation paid in return for the physician’s services be “fair market value.”
The exception most often relied upon for Medical Director Agreements under both the Stark and Anti-Kickback laws is the “personal services” safe harbor. Although slightly different under each statute, some key elements in complying with the “personal services” safe harbor include:
- Written Agreement: The agreement between the provider entity and the physician should be in writing, with a term of not less than one year.
- Duties: The agreement should specify all of the services the physician is expected to perform.
- Commercially Reasonable: The services provided by the Medical Director should be necessary for legitimate business purposes and not exceed the amount of services required by the provider. This analysis is focused not only on whether the contracting physician’s services in and of themselves are necessary, but also whether there are other Medical Directors, and whether multiple Medical Directors are performing the same services.
- Compensation: The physician should be paid fair market value for the services provided, and the compensation should be commercially reasonable under the circumstances. Specifically, the aggregate compensation paid over the term of the agreement must be “set in advance,” “consistent with” and “not exceed” “fair market value in arms-length transactions,” and “not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties.” To demonstrate that this is the case, it is wise to obtain an independent fair market value analysis by a respected valuation expert, taking into account the geographic location, credentials and experience of the physician, and type of facility. While having such an analysis is not an absolute defense in an investigation, it will be useful in demonstrating that fair market value was analyzed and that the remuneration falls within what was believed to be an acceptable range.
- Hourly Rates/Caps on Compensation: Because it is difficult to predict (or even estimate with reasonable certainty) how much time will be involved performing Medical Director services, entities often prefer to pay Medical Directors on an hourly basis. In such cases, however, the hourly rate paid must be the fair market value rate. It is also recommended that the aggregate compensation a physician can earn for his documented hours be capped, to further ensure reasonableness.
- Documentation: The physician should keep daily time logs of services performed and the time spent on each service. This shows that the physician is performing real work, for which he or she is being paid fair market value, and also can be used to demonstrate that the services being performed are necessary for the facility.
To qualify as a bona fide employment relationship, an arrangement must meet all of the following requirements:
- The employment must be for “identifiable services”;
- The amount of remuneration must be consistent with “fair market value”;
- The amount of the remuneration cannot be determined in a manner that takes into account the volume or value of referrals by the referring physician;
- The compensation must be “commercially reasonable” even if no referrals are made between the physician and the organization.
The specific facts and circumstances involved in each situation are important in determining the legality of any compensation arrangement. For example, in a 2001 Advisory Opinion, the OIG said that even though total aggregate compensation over a contract was not set in advance, the totality of the facts and circumstances in that case indicated that there was no significant increase in risk of fraud or abuse, due in part to the presence of a monthly payment cap. But in a 2003 Advisory Opinion, the OIG found that a proposed arrangement did not qualify for protection under the safe harbor because the aggregate compensation paid under the agreement was not set in advance. So all relevant facts and circumstances must be evaluated and weighed.
Recent cases have focused on the concepts of “fair market value” and “commercial reasonableness” of compensation paid from a hospital or health system to an employed physician. These cases provide some guidance and parameters to consider when negotiating physician compensation. However, the facts in each case are unique, and the extent to which they will be of guidance to any specific compensation issue is uncertain.
For example, some cases have demonstrated that even though there might be a detailed listing of a physician’s obligations under a Medical Director Agreement, there must be evidence showing that those services were actually provided. If the services were not provided, any compensation in excess of fair market value will be deemed to be for another purpose, such as inducement for referrals.
Thus, from a compliance standpoint, healthcare organizations need to monitor their contracts to assure that specific services being compensated are actually being performed. And an employed physician and his or her employer organization have an equal interest in assuring that this is the case, since both can potentially be in violation of the Stark Law if the services were not actually performed or provided.
Other cases under the AKS illustrate the risks associated with Medical Director Agreements that are not properly monitored or, in extreme cases, are entered into for improper purposes. Indeed, so-called “sham” Medical Director payments can lead to criminal liability under the AKS.
For instance, in one recent case, a physician was convicted criminally under the AKS for conspiring to receive bribes from a nursing home for referring patients to the facility. The jury found that the physician and others were placed on the organization’s payroll as “service medical directors.” They were provided compensation for a list of services that, according to trial testimony, they were never really expected to perform. There also was testimony from employees that the “Medical Directors” were rarely seen around the facility, and that time reports were falsified in order to make it appear that they performed services at the facility that they did not.
In addition to compensation for what were found to be “sham” Medical Director services, the nursing home also paid for a secretary for the physician’s company and paid lease payments for the building owned by the physician. And there was testimony that the physician had told others that he was receiving “free money” from the facility.
Although the facts in that case were egregious, it demonstrates the risks involved with Medical Director Agreements in general. And when the government can show that at least one intended purpose for compensation to, or a payment arrangement with, a Medical Director is to induce otherwise proscribed referrals, or that the Medical Director Agreement is actually a “sham,” criminal consequences (in addition to civil monetary damages) may follow.
Even in cases where intent cannot be proved, there still may be potential liability under the Stark Law. And even in cases where no criminal exposure exists, the financial consequences can be devastating, given the civil monetary penalties involved for Stark Law violations.
It therefore is essential to keep these legal requirements in mind when structuring Medical Director Agreements, to ensure not only that the physician is compensated fairly, but also that there is full compliance with the applicable laws. Adhering to the criteria set forth above can help provide legal protection for both the Medical Director physician and the facility. And it is wise for both parties to consult with experienced healthcare counsel before entering into any Medical Director arrangement.
Management Services Agreements
In recent years, the healthcare industry has experienced revolutionary changes. These changes have prompted creation of new financial arrangements between healthcare providers, payers and businesses to survive and prosper in an ever-changing and highly competitive environment. These new economic arrangements often raise questions under federal and state fraud and abuse laws, and prohibitions against self-referrals and fee splitting.
One relatively new economic arrangement involves physician practices entering into management services arrangements where management or administrative responsibilities of the practices are delegated to management companies. Practice management has become popular in recent years among healthcare entities due to pressures within the industry to reduce costs, implement new technologies, and comply with increasingly complex regulations. Management services arrangements offer several benefits, including enhanced efficiencies which may occur when a practice is professionally managed, allowing the physicians to focus on practicing medicine and providing medical services to patients.
It now is also fairly common for non-licensed businesspeople, venture capital firms, and those looking to profit from rising demand for healthcare services to open and play at least some role in running medical or healthcare businesses. This is easily done in some states where laypeople can hire physicians, own medical practices, and profit from the practice of medicine. In other states, however (including Georgia), the process is more complicated, because of laws limiting the involvement of non-physicians in the practice of medicine, including the Corporate Practice of Medicine (“CPOM”) doctrine, as well as limitations on fee sharing and similar restrictions.
Although CPOM prohibitions vary from state to state, they generally do not allow unlicensed individuals or entities to engage in the practice of medicine, or even employ a licensed physician to provide professional medical services. CPOM restrictions were established with the intent of ensuring that licensed physicians could practice medicine without pressure from laypersons, and without being “subject to commercialization or exploitation.”
CPOM prohibitions may be found in state statutes or regulations, or they may derive from court decisions or state Attorney General Opinions. CPOM laws dictate what type of relationship healthcare entities may have with physicians (i.e., employment versus independent contractor, etc.).
CPOM laws generally include at least two exceptions. One typical and crucial exception allows hospitals to employ physicians because hospitals are formed for the specific purpose of treating patients and providing healthcare services, and are themselves licensed entities. Additionally, most states allow physicians to provide medical services through some form of a professional or service corporation. But generally each shareholder of such a corporation must be a licensed physician.
In those states where it is more difficult for businesses to engage in the practice of medicine (such as Georgia), a popular approach is to use a management service organization (“MSO”) model. Under this model, a management company is formed to “operate” the medical/professional entity. The MSO may provide the office space, medical equipment, supplies, nonprofessional staff, and other needs of the practice.
For the practice itself, however, a separate professional entity must exist or be formed; and, most importantly, a physician (or physicians) must own the professional entity. This approach is especially popular for medical spas and urgent care centers, for example.
Physicians who are invited to own a professional entity under the MSO model are often referred to as “friendly physicians.” They usually are paid relatively small monthly fees for medical director services, though they may render clinical services as well. These types of arrangements can be risky for physicians, who may not consider the legal complexities and professional and financial risks when they accept such positions.
On the plus side, though, MSOs can carry out a number of essential duties physicians might prefer not to have to handle, including those related to:
- Financial management
- Business operations
- Organizational governance
- Human resources management
- Information management
- Patient care systems
- Quality management
- Risk management
Typically, a Management Services Agreement delegates to the management company the responsibility of employing and providing all non-medical personnel, such as a practice administrator, to manage and administer the practice’s business functions and clerical, secretarial, bookkeeping and collection personnel. The management company may also lease or sublease the practice’s medical offices and, in conjunction with the lease, manage and maintain the offices in good condition and repair, including providing janitorial services, etc.
Under the typical Management Services Agreement, the management company also provides and is responsible for repairing and maintaining all office furniture, fixtures and equipment, including medical equipment. The management company orders and purchases the medical and office supplies required for the operation of the practice, provides management information systems services, bookkeeping, accounting services, billing and collection services, and marketing and other non-clinical services.
Payment for Management Services
There are a number of payment arrangements an MSO can have with physicians or healthcare entities to provide compensation for its services. Payment arrangements for an MSO include, but are not limited to: (1) fixed fee arrangements; (2) a percentage of an entity’s revenues or profits; (3) a portion of cost savings that the MSO helped the entity realize; and (4) a combination of the models listed above. However, both the MSO and the physician(s) or healthcare entity must be extremely cautious regarding what compensation arrangements are made, since such arrangements may violate state or federal laws that govern how an MSO and healthcare providers may structure such agreements. For example, regulators have already challenged or questioned several MSO payment arrangements, including “per visit” fees, actual cost plus mark-up fees, and percentage of collection fees, as being unlawful.
Healthcare entities face a range of federal and state legal and regulatory constraints, which affect their formation, operation, procedural coding and billing, and transactions. Federal fraud and abuse laws, specifically those related to the anti-kickback and physician self-referral laws, may have the greatest impact on the operations of healthcare organizations. For example, MSOs must be particularly careful not to violate the AKS through its fee structure. In a 1998 advisory opinion, HHS’s OIG expressed concern regarding MSOs receiving payment as a percentage of collections or revenue while performing marketing services.
Specifically, the OIG issued an advisory opinion, which concluded that certain types of management services agreements between physician groups and management companies may violate the AKS. The AKS provides that it is a felony to knowingly and willingly solicit or receive any remuneration directly or indirectly, overtly or covertly, in cash or in kind, in return for referring an individual to a provider for the furnishing of any item or service for which payment may be made by any federal or state health program.
In its advisory opinion, the OIG examined a proposed Management Services Agreement between a management company and a physician group. The physician group was to provide all medical services at a clinic. The management company was to provide or arrange for all operating services with respect to the clinic, including accounting, billing, purchasing, and hiring of non-medical personnel and outside vendors.
The management company was also supposed to provide the physician group with management and marketing services for the clinic, including the negotiation and oversight of contracts with various payers. In return for its services, the management company was to receive a management fee that included a percentage of the medical group’s monthly net revenues.
The OIG analyzed the proposed Management Services Agreement in light of the safe harbor for personal services and management contracts. As noted above, in order to qualify for the safe harbor protection, a personal services or management services agreement must satisfy all of the following criteria:
- the agreement must be in writing and signed by the parties;
- the agreement must be for at least one year;
- the agreement must specify the services to be performed;
- if the services are to be performed on a part-time basis, the schedule for performance must be specified in the contract;
- the aggregate amount of compensation must be fixed in advance based on fair market value, and not determined in a manner that takes into account the volume or value of referrals between the parties; and
- the services performed under the agreement must not involve the promotion of business that violates any federal or state law.
The OIG concluded the safe harbor was not satisfied, since the management fee that the management company would receive would not have been an aggregate amount fixed in advance, but instead would vary based upon the physician group’s monthly net revenue. Additionally, the OIG found the proposed arrangement would violate the AKS because the management company was to receive a percentage of the physician group’s net revenue derived from its marketing efforts, the arrangement did not contain any safeguards against overutilization, and it included financial incentives that would have increased the risk of abusive billing practices, since the management company would have had the financial incentive to maximize the physician group’s revenues.
In short, any and all payment methods between MSOs and healthcare providers must be carefully and properly structured to avoid violating either state or federal laws. Fees charged by an MSO to a physician group must be at fair market value and be commercially reasonable, so as to not violate federal or state anti-kickback, Stark or other laws. And the Management Services Agreement must clearly set forth the MSO’s obligations for specific managerial and administrative duties, such as:
- Meeting the non-medical staffing needs of a practice
- Handling all accounting, bookkeeping, billing and collection functions
- Providing medical equipment, such as MRI and X-ray equipment
- Acquiring and leasing office space
- Implementing a compliance program
- Implementing a health information technology program
HIT, EMR, EHR & Software Vendor Agreements
With regard to health information technology (“HIT”) in particular, studies have shown that implementing such a program can lead to improved quality of care and efficiencies. HIT includes a variety of computer applications, such as billing software, staffing models, and electronic medical records (“EMR”), also known as electronic health records (“EHR”). In recent years, there has been a rapid adoption of technological innovations, due largely to regulatory and reimbursement changes in the industry.
For instance, as of 2014, all public and private healthcare providers were required to adopt and demonstrate “meaningful use” of EHR to maintain their existing Medicare reimbursement levels. And financial incentives to utilize EHR as part of the “meaningful use” program were merged into the Merit-based Incentive Payment System (“MIPS”), a value-based reimbursement program implemented under the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”).
The use of EHR has fundamentally changed the way healthcare is delivered. With the current shift in reimbursement from volume-based (fee-for-service) to value-based payment, providers now need to track and submit both cost and quality data, and accurately administer compensation based on performance of certain metrics. A well-run EHR system is essential to collect the data needed to comply with the growing number of initiatives related to value-based care reporting and clinical outcomes analysis.
So physician practices and other healthcare providers face an uncertain reimbursement environment, as both public and private payers switch from volume-based to value-based models of reimbursement. In order to cope with changing reimbursement policies, as well as potential increases in demand, healthcare entities have to become more efficient, which may be achieved in part through the adoption of HIT. And as long as management services arrangements are structured properly, with well-crafted Management Services Agreements, MSOs can assist in that effort.
But caution and due diligence are required in structuring these agreements. Recent enforcement actions against EHR vendors, including several high-profile False Claims Act (“FCA”) settlements involving software companies, highlight some of the potential pitfalls. Investigations have arisen from alleged violations related to the “meaningful use” EHR incentive program, in which HHS offers incentives to hospitals and physicians for the adoption and meaningful use of certified EHR technology.
The theory underlying the recent FCA cases against EHR software vendors is that those companies sold EHR technology to providers that did not meet the stated criteria for the meaningful use program, and therefore the providers were paid incentives that they had not earned. Under this theory, the EHR vendors did not themselves submit false claims, but caused providers to file false claims for meaningful use incentives.
Although much of the enforcement focus has been on EHR vendors, healthcare providers are also at risk if the EHR technology they use does not meet the requirements of the meaningful use incentive program. In fact, whistleblowers have recently filed several FCA cases which specifically aim at providers’ receipt of EHR incentive payments. Although those cases have had mixed results to date, at least one case unsealed in 2019 shows that providers are also prime targets for such claims.
In an effort to inform physicians about newly developed medical devices, medications and other products, it has become increasingly common for medical device, pharmaceutical and other health-related companies to engage the services of physician leaders who serve as advisors and consultants to other physicians practicing medicine in their targeted markets. Research has shown that physicians are more willing to listen to and change their ordering or prescribing patterns after obtaining information regarding the therapeutic effectiveness of new devices and medications from other well-credentialed physicians. As experts in their field, physician consultants possess knowledge about particular subjects companies need to improve their business.
As a result, medical device, pharmaceutical and other healthcare companies have been engaging more and more physician consultants and advisors to conduct promotional meetings and advocate on behalf of their devices, medications and health-related products. And payments to physician advisors and consultants have become routine marketing expenses for medical device, pharmaceutical and other healthcare companies.
Medical device, pharmaceutical and other healthcare companies often enter into consulting agreements with physicians who use or recommend their products or services to others. These agreements may involve substantial payments, sometimes amounting to hundreds of thousands of dollars per year per physician. Yet such arrangements frequently have only vaguely defined duties, for which there may be little follow-up or tangible results. Such arrangements are vulnerable under anti-fraud and abuse laws because they have not been designed to satisfy the provisions of those laws and their attendant regulations. Substantially more thought and analysis needs to go into structuring these arrangements and following up on their provisions. Otherwise, both the companies and the consultants can easily find themselves subjects of OIG and other civil or criminal investigations, which can result in enormous short- and long-term professional and financial consequences.
This section reviews application of the AKS and Stark Law to medical consulting agreements. Some of the common pitfalls of consulting agreements are discussed, along with the potential civil and criminal consequences that can arise from poorly drafted, insufficiently documented, or inadequately monitored agreements. Recommendations are also offered on how to craft consulting agreements to minimize the risks of exposure under these laws.
Common Clauses in Consulting Agreements
Before a consultant commences work for a company, the two parties should sign a consulting agreement to protect both sides in case of nonpayment, failure to deliver services, or problems or disagreements that arise between the consultant and the company. The agreement should also define the duration of the consulting arrangement and the consultant’s compensation. Consulting agreements can be simple or complex. But a typical consulting agreement usually contains at least most of the following standard clauses and language:
- The date the parties enter into the agreement, stated at the beginning of the contract.
- The names of both parties and their business addresses.
- The type of consulting service(s) to be provided (stated with as much detail as possible), and that the company desires to hire the consultant to perform such consulting services pursuant to the terms of the contract.
- The duration of the agreement, with the start (effective) and end dates noted. Alternatively, the agreement could state that the relationship ends when the consultant has completed the project or services involved. But it is usually preferable to state a specific end date, because both sides might not agree when the consulting service has ended. Moreover, to be compliant with healthcare laws, the agreement must be for at least one year (for reasons discussed below.)
- Compensation for the consultant, including how much, payment schedule, and (if necessary) how the consultant must provide invoices, descriptions of services provided, and time spent.
- A statement that the relationship between the parties is that the consultant is an independent contractor and not the company’s employee or partner.
- Terms of termination of the consulting agreement, which usually includes one party providing written notice to the other party and stating how many days’ notice the party must give the other party. Termination may also result from certain specified events or breaches of the contract.
- A statement that each party is not liable to the other and is not in default for any delay due to acts of God (such as tornadoes, hurricanes, floods, earthquakes, etc.) or other unforeseen catastrophes.
- A statement describing who owns the general and intellectual property rights to any product created by the consultant, including patents, copyrights, trademarks and trade names.
- A statement that the consultant is to keep the company’s product and company information, such as trade secrets, designs, ideas, how the company is performing, and anything that a competitor might use to its advantage against the company, confidential.
- Restrictive covenants, including, for example, a non-compete clause, requiring the consultant not to compete with the company’s business at a similar type of company during the contract term and for a specified period after the agreement ends or the consultant leaves the company or completes his or her work. The clause can also state that the consultant agrees not to work for the company’s competitors or customers and not to solicit the company’s customers or employees.
- The state whose law will govern the agreement and any disputes between the parties, and the jurisdiction(s), venue(s) or courts in which the agreement can be enforced. Alternatively or additionally, the contract can include alternative dispute resolution (“ADR”) requirements, such mediation and/or arbitration, and specify exactly how, where and by whom ADR must occur.
- A statement that the agreement is the entire agreement between the parties, and no oral promises are part of the contract unless specifically included in the written agreement itself, or an amendment or addendum signed by both parties.
- Signatures and titles of each party or a duly authorized officer for each party.
- A wide variety of other provisions may also be included.
Whether you’re a consultant or a healthcare company looking to retain one, a simple agreement based on the above information can be drafted relatively quickly and easily. But consulting agreements also usually contain legal terminology about warranties, liabilities and indemnification, so that each party isn’t liable to the other under certain conditions. And if you want to ensure that your consulting agreement is thorough and compliant with the myriad laws and regulations governing the healthcare industry in particular, it is wise (if not essential) to have an experienced healthcare attorney prepare an agreement for you, or at least have such an attorney review and advise you regarding any agreement you are considering signing.
Fraud & Abuse Implications of Medical Consulting Agreements
To avoid violating government anti-fraud and abuse laws and regulations, medical device, pharmaceutical and other healthcare companies need to be very careful planning, drafting and monitoring consulting agreements with physicians who use or recommend their products or services. Most medical device and pharmaceutical companies are familiar with governmental enforcement actions through the FDA’s Office of General Counsel and its Office of Criminal Investigations, which enforce the provisions of the Federal Food, Drug, and Cosmetic Act. Fewer companies have experience with HHS’s OIG, which, in conjunction with the Department of Justice, enforces the Medicare and Medicaid fraud and abuse laws.
Among these laws is the Anti-Kickback Statute (“AKS”), which criminalizes any payment by a supplier to a customer made in whole or in part to induce sales, absent some legal exception. Similarly, the federal physician self-referral ban (commonly referred to as the “Stark” Law) prohibits financial relationships between entities and physicians who also refer patients to the entity for “designated health services” billed to federal healthcare programs. The Stark law may, for instance, be triggered when (i) a physician, who has a financial relationship with a pharmaceutical company, (ii) prescribes an outpatient prescription drug (which is considered a “designated health service” under Stark) that (iii) is paid for by a federally funded program (e.g., Medicare) and filled at a retail pharmacy affiliated with the pharmaceutical company.
Fraud and abuse enforcement activities tend to focus on areas the government believes offer the potential for abusive arrangements, including arrangements between physicians and those entities that derive substantial revenue from federal healthcare programs. As a result, relationships between medical device, pharmaceutical and other healthcare companies and physicians are becoming the focus of increased scrutiny from regulators. Questions are being raised with regard to the amount of money physician advisers and consultants are being paid, as well as possible conflicts of interest that may be inherent in the arrangement. In particular, a series of recent settlements between the government and medical device manufacturers, regarding payments to physician consultants, has triggered intensified efforts to ensure that physician relationships are fully compliant with the applicable laws.
The question thus becomes: what is the best way to mitigate the legal and regulatory risks in relationships between physicians and medical device, pharmaceutical and other health-related companies? The AKS and Stark Law are extremely broad, and they can apply to virtually all physician-related marketing activities, as well as to other non-promotional activities. Given the broad scope of these federal laws, certain safe harbors, exceptions and regulatory guidance have been provided in the statutes and further clarified and defined by the OIG and the Centers for Medicare & Medicaid Services (“CMS”).
Stark Law Analysis
With respect to the Stark Law, all of the elements of at least one exception must be satisfied for an arrangement to withstand scrutiny. There are a number of potentially applicable exceptions; however, each of the most available exceptions for ensuring the compliance of advisory and consulting arrangements contains the same requirement of mandatory compliance with fair market value.
While Stark provides an exception for “bona fide employment arrangements,” for consulting arrangements, the “personal service arrangements” exception is the most relevant because it is focused on protecting legitimate service arrangements (e.g., advisory and consulting arrangements) with healthcare providers. Under Stark, employment arrangements present the easiest way to comply with an exception as long as physicians are bona fide employees as defined by the Internal Revenue Code. However, since the appearance of independent advisers and consultants endorsing a new medical device, product or medication is more compelling than an employed spokesperson, medical device and pharmaceutical companies (as well as most physician-consultants) have understandably decided that most advisory or consulting arrangements should be structured as independent contractor relationships. Consequently, most medical consultants are usually freelancers or independent contractors, meaning that they aren’t the medical device, pharmaceutical or healthcare company employees, so the company does not have to add them to the payroll or provide employee benefits, such as health insurance, etc.
However, while these types of arrangements are more appealing to the companies and the external physician community, many medical device, pharmaceutical and healthcare companies overlook the fact that these independent contractor relationships require compliance across multiple elements to fully satisfy the applicable requirements of the Stark exception. Specifically, the personal services arrangements exception requires all of the following elements:
- Each arrangement is set out in writing, is signed by the parties, and specifies the services covered by the arrangement;
- The aggregate services contracted for do not exceed those that are reasonable and necessary for the legitimate business purposes of the arrangement;
- The term of each arrangement is for at least one year;
- The compensation to be paid over the term of each arrangement is set in advance, does not exceed fair market value, and is not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties.
Anti-Kickback Statute Analysis
Similar to Stark, the AKS is extremely broad, and in some ways even more widely applicable to consulting arrangements. The AKS can be used to punish anyone who “knowingly and willfully offers or pays any remuneration (including any kickback, bribe or rebate) directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person . . . to purchase, lease, order, or arrange for or recommend purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part under a Federal health care program.” To prove a violation of the AKS, the government must show that the defendant knowingly and willfully offered or paid remuneration to a healthcare professional or patient; that the defendant made the offer or payment with the purpose of inducing the healthcare professional or patient to recommend or order its product; and that the cost of the product was reimbursed in whole or in part by a federal healthcare program. But for a violation to occur, only one purpose of the payment needs to be the inducing of a recommendation or order.
Because the statute covers virtually any relationship with a customer, OIG promulgated “safe harbor” regulations that set out certain types of arrangements for which the government will not seek enforcement action despite what otherwise would be a violation of the law. One of the most widely used safe harbors governs personal services contracts. For an agreement to fall within this safe harbor, seven requirements must be satisfied:
- The agreement must be in writing and signed by both parties.
- The agreement must detail the consultant’s duties.
- The agreement must specify the amount of time that the consultant will spend on his or her duties on a periodic basis, such as monthly or quarterly, with the precise charge for each periodic interval of work.
- The agreement must be for at least one year in term.
- The compensation paid to the consultant for services must be based entirely on the fair market value of those services and cannot be determined on any basis that takes into account referrals or sales generated by the consultant.
- The services performed must not violate any state or federal laws.
- The aggregate services contracted for under the agreement do not exceed those which are reasonably necessary to accomplish the commercially reasonable business purpose of the services.
But the personal services contract safe harbor can be a trap for the unwary. If any one of the seven requirements is not satisfied, the safe harbor will not apply, and the company and its consultant may face criminal, civil and administrative enforcement actions for potential violations of the AKS.
Consulting Arrangement Pitfalls
Common pitfalls which medical device, pharmaceutical and other healthcare companies may face when entering into consulting agreements with physicians who may be in a position to use or recommend their products or services include:
Consultant Selection. The first problem with many consulting agreements starts with the selection of the physician who is going to do the consulting work. A typical and understandable goal from the company’s perspective is to sign up the most influential member of the medical community possible, by, for example, engaging the services of a national or local leader in a surgical or diagnostic field. However, this goal may unfortunately be overly influenced by a desire to obtain commitments from users of the company’s products, or to sign up an influential physician as an unofficial endorser of the company’s product line, rather than for a substantive contribution that the physician can make as a consultant.
Part of the problem may stem from the organizational unit within the company that selects the consultant, especially when such decisions are made by sales or marketing departments, rather than by engineering, research, development, or regulatory affairs departments. Even when the sales or marketing department does not have control over the decision-making process, such departments or personnel may weigh in with their opinions. And, as a result, a perhaps understandable desire for actual or potential sales may unduly influence (either as an implicit or explicit or factor), if not drive, the consultant recommendation or selection.
As in any other business environment, the analysis of how an action will impact sales is a rational consideration. However, given the government’s view of healthcare companies as an enforcement priority and the litigious healthcare environment which has existed for some time now, the existence of a document or email assessing the impact of a consultant’s payments on sales, revenues or profits is akin to handing a government enforcer or litigation opponent a smoking gun. As discussed above, under the AKS, the government need only prove that one purpose – not even necessarily an important purpose – of a consulting agreement was to increase sales. Often, the company’s internal documents provide the necessary evidence of purpose, typically in memorandums from the sales department making a case for a consulting agreement based on current or future sales to that consultant or his or her contacts. Further, these same documents can disqualify a company from the protection of the personal services contract safe harbor.
Duties. Another pitfall common to medical consulting agreements is the manner in which the duties to be performed by the consultant are defined. Frequently, the agreements deal only in vague generalities regarding the type of work the consultant is asked to undertake. For example, there often are broad references to providing “such consulting services as are required” by the company, or to providing “clinical advice and assistance” regarding a particular medical device or product.
The problem with such broad language is that it makes a consultant’s performance of the services a company is actually getting for the compensation it is paying difficult to measure. Indeed, when the duties are not carefully defined in the agreement, the value of the consulting services for which the company is paying is not apparent, which may lend credence to a prosecutor’s or litigation opponent’s argument that the agreement is a “sham” designed to cover up a “kickback” or “bribe” to a customer. Moreover, the safe harbor itself requires that the agreement specify “the services to be provided” by the consultant. So there generally is no good or satisfactory explanation for not doing so.
Even when the consultant’s duties are more fully described and properly defined, the particular language in an agreement can make a consultant’s performance difficult to monitor and evaluate. For instance, “collecting and maintaining efficacy data” does not specify the form or accessibility of a database, while “reviewing clinical outcomes data” does not indicate the level of analysis or provide a format for the review.
Similarly, many consulting agreements do not adequately define the consultant’s time commitment. There is no clause in the contract specifying that the consultant will devote a certain number of hours or days for a set time period to the company’s projects. This lack of specificity may make the government suspicious by creating the impression that little is being required of the consultant. In addition, it will remove the agreement from the safe harbor provisions, which require such specificity. Consequently, the OIG or other government regulators or payers may contend the consulting agreement is really a “sham” arrangement designed to buy physician loyalty to the company’s products.
Compensation. Although perhaps reasonable by industry standards, the numbers involved in medical consulting agreements can be staggering to laypeople, as well as government regulators and payers. Payments of $50,000, $100,000, or even $250,000 per year may be common for what can be viewed as, at most, a “side job” requiring a few hours of work per week. Such sums can be difficult to defend not only to government enforcers, but also to judges and juries, who generally are less informed about industry norms and the value of physicians’ services. This is especially true if the duties are not well defined and a careful analysis of the compensation to be paid has not been undertaken and documented.
In fact, many consulting agreements demonstrate a problematic lack of due diligence regarding how much the consultant should be paid. Often, no fair market value analysis is undertaken to determine what the price of the services should be, as is required under safe harbor provisions. Consequently, when confronted with a government investigation into such a consulting agreement, the company often must scramble to justify the amount of money paid to the consultant. And when that justification is unconvincing, the government assumes and contends that it is a belated attempt to defend an unlawful arrangement.
Even when there has been some fair market value analysis of the consultant’s services done beforehand, it may be an insufficient or incorrect analysis. Medical device, pharmaceutical and other healthcare companies frequently use the amount of money foregone by the consultant as a measure of what his or her services are worth. Thus, if a surgeon generates $10,000 from procedures each day, the company uses that figure as a basis for computing his or her daily or hourly fee for consulting services.
The potential problem with using such a foregone-income analysis is that it compensates the consultant for the income given up, rather than for the value of services rendered to the company. To the government, this may look too much like simply paying the consultant to focus on, use or recommend the company’s products. Such a payment scheme may violate the safe harbor for personal services contracts in the anti-kickback regulations, leaving the company vulnerable to government enforcement action. Even if the company ultimately persuades the government of the validity of its analysis, such an effort will almost certainly be costly and time-consuming.
Negotiation. In some medical device, pharmaceutical or healthcare companies, the negotiation of consulting agreements with physician/customers may be handled by a sales or marketing department, or even by independent distributors. These circumstances can cloud the objective analysis and assessment of the consultant’s expertise and potential to contribute to the proper development of the company’s products, or lead to the retention of a consultant on the company’s payroll when his or her performance no longer merits it.
As important as the identity and qualifications of the negotiator is the manner in which consultant expenses are allocated. When the consulting agreement is negotiated by the sales or marketing department, it often appears as a line item in that department’s budget on the general ledger. No matter how innocent the intentions, and regardless of the actual value provided by the consultant, a $50,000 payment to a consultant that is recorded as an expense under “sales” or “marketing” may give exactly the wrong impression to government investigators and judges or juries as fact-finders in court.
Drafting an Agreement. A surprising number of consulting agreements with physicians/customers are not drafted or approved by counsel familiar with the Stark Law, the AKS and the safe harbor provisions. Rather than being routed through the company’s legal department or outside counsel for substantive review, consulting agreements are sometimes written by a senior businessperson responsible for sales or research and development. At best, this process may produce documents that lack standard contractual language protecting the company’s interests. At worst, the agreements may contain contingencies that can be viewed as direct evidence of Stark or anti-kickback violations, such as requirements that the consultant use or recommend to others the company’s products.
The failure to run documents through counsel also reduces the standardization of the agreements. Additionally, without a centralized location where agreements are maintained, the company can lose track of what agreements it has outstanding and what provisions the various contracts and drafts contain.
Documentation. Document control becomes vital when the government launches an investigation. Through its subpoena power, the government will have access to documents from many sources in addition to the company’s files. If there is an agreement that exists in a customer’s or a distributor’s file, but cannot be located in the company’s files, the company may essentially be flying blind during the investigation. And its credibility will be harmed, if not destroyed. In this arena, what you don’t know or can’t find can seriously harm you.
Another area where medical device, pharmaceutical and other healthcare companies often fall short is in documenting a consultant’s services, neglecting, for example, to keep a contemporaneous written record of work done. Thus, a surgeon may provide critical advice to the company’s engineering department regarding the instrumentation necessary to implant a device, but his or her input is not preserved in any written record.
Similarly, the consultant frequently has no accountability to the company for the performance of the duties described in the consulting agreement. There may not be a provision permitting the company to rescind the agreement if the consultant fails to provide the agreed-upon services or devote the agreed-upon time, or the company may simply fail to follow up with the consultant to monitor performance. In other instances, the company may have an agreement in place with a willing consultant, but it never actually calls upon the consultant to provide any services.
Once a government or payer inquiry begins, proper documentation becomes critical. In order to successfully defend an agreement, the company must be able to assemble documents proving that the consultant lived up to his or her end of the bargain by providing legitimate and valuable services, which were monitored and evaluated by the company. When an agreement has been in place for several years with a major customer without documentation of effort, monitoring, evaluation of performance, and tangible results, the government’s investigation can turn into not only suspicions, but also allegations and serious enforcement action.
Consequences of Noncompliance
The costs of defending an investigation brought by the government under the AKS can be extraordinarily high. The combination of attorneys’ fees, disabling effect on employee productivity, and distraction from the company’s business operations can quickly make a poorly structured consulting agreement an unwise investment. But when civil, criminal and administrative sanctions are added, the costs increase dramatically and the consequences can be catastrophic.
Civil Monetary Penalties. Civil monetary penalties under Stark include recovery of all payments made in violation, imposition of a $23,863 per service civil monetary penalty for violations, and a monetary fine of $100,000 for each arrangement found to have willfully circumvented the statutory scheme. Under the AKS, violators can face penalties of up to $50,000 per kickback plus three times the amount of the remuneration. And because many services or claims may be billed and payments made before a potential problem is detected or an issue is raised, potential liability can easily become astronomical.
Criminal Sanctions. Criminal sanctions against a company and consultants can also be severe. Under the principles of corporate liability, a company is liable for the acts of its agents, including officers, employees, and independent contractors. Both the company and individual employees and officers can be prosecuted, resulting in criminal convictions, fines, and imprisonment.
Under federal law, all organizations convicted of criminal offenses are subject to the federal sentencing guidelines, which are likely to be the starting point for any negotiated settlement and will establish the fine if the company is convicted after a trial. The sentencing guidelines direct that in lieu of calculating the base fine under the organizational sentencing guidelines the court is to use the greatest of “the value of the unlawful payment; the value of the benefit received; or the consequential damages resulting from the unlawful payment.”
The value of the unlawful payment is relatively straightforward. The government may contend that the consulting agreement was a “scheme” to bribe physicians for sales, thereby making the aggregate of all of the consulting payments the relevant loss for calculation of the organizational fine. Because this calculation usually does not yield the greatest dollar amount, the fine is likely to turn on a calculation of the benefit conferred or the consequential damages resulting from the unlawful payment.
The “value of the benefit received” refers to the value of the action to be taken or effected in return for the bribe. In a commercial bribery case, for both parties, the value of an additional contract obtained by the bribe is the net benefit conferred, which is determined by taking gross revenues minus direct costs. Indirect costs such as overhead are not deducted from gross value because they have no impact on the harm caused by the illegal conduct. Direct costs are defined as “all variable costs that can be specifically identified as costs of performing a contract, that is, expenses which would not have been incurred, but for the corruptly obtained orders. . . .” The amount of the bribe itself is not deductible as a direct expense. Moreover, the significant costs of research and development of the device or product may not be deductible as direct expenses. The costs of goods sold and the costs of delivery would, however, be deductible as direct expenses.
The government will likely take the position that the value of the benefit conferred would be the total sales of the relevant product or products to physicians with consulting agreements or their respective institutions. From this total sales figure, direct costs would have to be deducted to determine the net benefit conferred. Thus, the government’s settlement offer, or its position at sentencing, will cost the company all of the sales generated by the consultant’s practice.
The third method of establishing a fine under the sentencing guidelines is according to the consequential damages resulting from the unlawful payment. The government would likely assert that this measure includes at least two components: the loss to payers resulting from the unlawful payments, and the value of the business taken from other competitors as a result of the unlawful payments.
The government often argues that the loss to payers resulting from the unlawful conduct is the cost of treating those patients who were treated by physicians receiving consulting payments. As under the previous measure, the company could lose its total sales to physicians with consulting agreements.
The other aspect of consequential damages, loss to competitors, is more difficult to measure. According to one court of appeals, in a commercial bribery case, “the harm caused by a bribe is the value lost to a competing party had the bribe not been paid.” Under the sentencing guidelines, the government frequently contends that it does not have to prove the loss to competitors with any precision. As a result, the company could also be penalized for its competitors’ lost sales.
Collateral Consequences. A company can face serious collateral consequences from a criminal conviction under the AKS. Regulations recently issued by the government mandate that indirect suppliers, such as medical device companies, must be excluded on conviction of a healthcare offense from receiving direct or indirect reimbursement from the government for a period up to five years, which almost certainly is a death knell for any such company. The company and individuals will also likely be debarred from entering into any new direct supplier contracts with the government. These debarment and exclusion provisions give the government almost irresistible settlement leverage.
If a publicly held company is convicted, shareholder litigation is almost a certainty. Defense of such actions is made difficult by the preclusive effect of the criminal conviction. As a result, the company faces the likelihood of significant litigation expenses, both in terms of attorneys’ fees and settlement costs. Finally, even more than these short-term costs, the damage to the company’s reputation and share value can be incalculable.
Creating Better Consulting Agreements
It is important to keep in mind, though, that there is nothing inherently wrong with consulting agreements, if they are the product of careful thought and consistent follow-through. In fact, there are important reasons for medical device, pharmaceutical and other healthcare companies to have consulting agreements with physicians who use their products. The OIG itself has said that “physician-industry collaboration can produce important medical advances.”
Many devices have unique features that require the services of knowledgeable medical practitioners for proper development and evaluation. For example, device performance cannot always be adequately measured in short-term clinical trials. Companies often need outcomes data over long periods of time to measure the performance of their products. Clinicians are positioned to collect and maintain this type of information as they follow their own patients through follow-up visits over the patients’ lifetimes.
Physicians who use devices in procedures often have invaluable insights about the design and use of such products. Because surgical and diagnostic conditions are not possible to replicate in an engineering laboratory, such experiential knowledge can be irreplaceable.
These and other valid rationales for consulting agreements can be effectuated by some relatively straightforward considerations that will enable medical device, pharmaceutical and other healthcare companies to avoid potential problems. And serving as consultants can offer physicians excellent opportunities to apply their expertise to real-world challenges, positively impact human health to an even greater extent, learn how business works, and improve their financial situations.
Consultant Selection. Although perhaps obvious, consultants should be selected based solely on their expertise and the need for their substantive services, and not on their sales figures or ability to generate referrals.
Duties. Under the safe-harbor provisions, the consultant’s duties and obligations need to be clearly defined in the agreement. Whether it’s collecting data on implanted devices; testing devices; reviewing safety and effectiveness data required to support a premarket approval application, a premarket notification submission, or other regulatory submissions; or performing other consulting services, the agreement should expressly delineate the consultant’s duties. Additionally, the agreement should specify the time commitment required from the consultant on a monthly, quarterly, or some other periodic basis. And it is advisable to pay the consultant for services rendered, rather than in advance.
Merely defining the duties and time commitment, however, is not enough. The company must also monitor the consultant’s performance. In the hopefully rare cases in which the consultant does not meet agreed-upon expectations, the company must reduce or eliminate compensation.
Compensation. Under the safe harbor for personal services contracts, the consultant’s compensation must be set at fair market value, not by foregone income, and specified for each interval of work to be performed. Thus, the cost of hiring a like expert for like services often determines the range within which the consultant can be paid. But making this determination can be difficult when there is no easily determinable market for the consultant’s services. In such instances, the company must make its best approximation, based on some rational, defensible method that will withstand governmental scrutiny. Sometimes, the consultant will set the hourly or daily fee required for compensation; in other cases, the company must analyze the services to be provided and assign them a reasonable value.
It is generally accepted that the term “fair market value” is defined as the value in arm’s-length transactions, consistent with the general market value. In the context of consulting or advisory arrangements between medical device or pharmaceutical companies and physicians, “general market value” means the compensation that would be determined as the result of bona fide bargaining between well informed parties to the agreement who are not otherwise in a position to generate business for the other party.
In any case, the volume or value of referrals cannot be evaluated in the determination, and market data cannot be considered if the data represents other transactions between parties who are in a position to refer patients to one another. Therefore, compensation arrangements based on similar relationships should not be used as the sole determinant of FMV, as these arrangements may represent “tainted” values.
Although federal regulators have provided limited guidance with respect to establishing FMV, government settlements with medical device manufacturers concerning payments to physician consultants provide some insight into how the government views this issue. While the settlements are not applicable to other companies and their physician consultant arrangements, they do provide some helpful direction with respect to determining risky transactions. The settlement agreements reiterated that compensation for such arrangements must be at FMV. And they also indicated that any time physician consultant compensation exceeds $500 per hour, companies would be well-advised to seek independent third party opinions by a qualified valuation expert to establish FMV and commercial reasonableness.
Otherwise, regulatory guidance encourages healthcare organizations to use numerous salary survey sources when determining FMV compensation. Specifically, the Stark Law’s Phase III rule states that reference to multiple, objective, independently published salary surveys remains a prudent practice for evaluating fair market value. If an organization’s physician compensation is challenged, documentation of multiple, objective, independently published salary surveys should prove beneficial in defending the compensation.
Negotiation. The negotiation of the consulting agreements should be taken out of the hands of the sales and marketing departments and should not represent a line item in those departments’ budgets. Once a standardized agreement has been developed, the engineering or research and development department may be the most appropriate one to negotiate and pay for consulting services.
Drafting an Agreement. Consulting agreements should be standardized agreements that have been reviewed and approved by in-house counsel as well as by counsel familiar with the provisions of the AKS. These agreements should be maintained in a centralized location for ease of review and access. Among other things, the agreements should contain standard contractual terms regarding consideration, severability, choice of law, and arbitrability of disputes, as well as provisions that give the company the right to rescind the agreement for nonperformance or reduce the compensation for unsatisfactory work. Under the safe harbor, the agreement must be for a term of at least one year. Because these agreements are contracts, they should be drafted with the same care accorded any binding agreement to which the medical device company is a party.
Documentation. Once the consultant’s duties are defined and compensation agreed upon, the company must be careful to document the effort expended by the consultant. This documentation can often be generated simply by requesting invoices or statements of work performed from the consultant, which can then be centrally maintained for future reference.
Equally important is the documentation of the result produced by the consultant’s efforts. Whether in the form of notes in an engineering laboratory notebook or a memorandum of conversation in the file, some energy needs to be devoted to producing and maintaining a record of the consultant’s advice. Because the consultant’s input may come, for example, in the form of a telephone conversation suggesting a modification in a device or its instrumentation, there may not be any document reflecting the value added by the consultant thus justifying payment without the company taking steps to ensure that it is recorded.
The importance of collecting and maintaining this documentation of the consulting services cannot be overstated. These documents will constitute evidence that the company or consultant can show to the government to defend the legitimacy of the agreement. Moreover, if these documents are produced and maintained in the regular course of business, as is suggested here, they generally should be admissible in court in the event the government pursues litigation.
Although nothing can completely insulate healthcare companies and their consultants from regulatory scrutiny or liability, the steps outlined above can help considerably in defending against (if not completely avoiding) government investigations into a company’s consulting agreements with its physicians/customers. And a relatively small investment of time, effort and resources up front can save companies and consultants far bigger heartaches and expenses down the road. For additional information regarding this topic, see, e.g., OIG’s Compliance Guidance regarding “Physician Relationships With Vendors” at https://oig.hhs.gov/compliance/physician-education/04vendors.asp.
Compliance Plans & Agreements
A compliance plan is a formal statement of a healthcare practice or company’s intention to conduct itself ethically in regard to business operations, government regulations, and patient care and services. The purposes of a formal compliance plan are to: (1) provide a blueprint for the practice or company’s compliance program and accomplish the aforementioned goals, and (2) encourage employees and staff to report unethical conduct.
Federal law now requires healthcare practices and companies to develop and implement formal compliance programs. HHS’s OIG has published voluntary compliance program guidance for individual and small group healthcare practices for many years.
In the 1990s, the OIG began providing voluntary compliance tools and resources to help healthcare providers avoid submitting erroneous claims and engaging in unlawful conduct involving federal healthcare programs. However, because the OIG’s guidance was voluntary, not all healthcare providers and organizations felt compelled to develop compliance programs.
With the implementation of the Patient Protection and Affordable Care Act (the “ACA”) in 2010, compliance programs became mandatory. Section 6401 of the ACA stipulates that healthcare providers must establish compliance programs as a condition of enrollment in Medicare, Medicaid or the Children’s Health Insurance Program (“CHIP”).
Having a compliance plan is important for many reasons beyond the fact that it is required by law. An effective compliance plan is vital for preventing erroneous billing and fraudulent claims, preparing for and responding to audits, and avoiding ethical conflicts in business operations and patient care services.
Furthermore, if noncompliance with the law results in a complaint, investigation, lawsuit or enforcement action, the consequences can be significant. Merely not understanding the law or failing to provide compliance training for staff is almost never a sufficient excuse for violations or a defense to liability.
The range of possible penalties the government can impose for submitting erroneous or fraudulent claims or violating federal or state fraud and abuse laws include completion of a corporate integrity agreement; exclusion from Medicare, Medicaid and CHIP programs; civil and criminal penalties; and/or a referral to the provider’s state medical board or other licensing authorities.
By implementing and adhering to the requisite compliance plan, healthcare practices and companies will generally meet their legal obligations and send a clear message to employees, staff and the public that the practice or company is committed to conducting itself in an ethical manner, promoting good employee conduct, and providing quality patient care.
The OIG has declared that the elements described in Chapter 8 of the 2015 United States Sentencing Commission Guidelines Manual are the seven fundamental elements of an effective compliance program. These elements are intended to guide healthcare providers and organizations in the process of developing well-defined plans and strategies for their compliance programs. The seven fundamental elements are:
- Implementing written policies, procedures, and standards of conduct.
- Designating a compliance officer (“CO”) and a compliance committee (“CC”) to provide program oversight.
- Using due diligence in the delegation of authority.
- Educating employees and developing effective lines of communication.
- Conducting internal monitoring and auditing.
- Enforcing standards through well-publicized disciplinary guidelines.
- Responding promptly to detected offenses and undertaking corrective action.
OIG also encourages providers to seek help and support as needed from outside experts in billing and coding, legal counsel knowledgeable in fraud and abuse laws, and the comprehensive resources available at OIG’s website.
Implementing Written Policies, Procedures & Standards of Conduct
An effective compliance program is dependent on written policies, procedures, and standards of conduct. These documents explain the healthcare practice or company’s commitment to legal standards, ethical conduct, and quality care. And they set forth the practice or company’s expectations regarding compliance.
Each healthcare practice or company’s compliance policies should include a code of conduct that defines the organizational mission, values, expectations, and guiding principles for workplace behavior. A code of conduct identifies model behavior for employees and explains how to report suspected instances of compliance violations or unethical activity.
The designated CO and CC should be involved in developing the policies, which should specifically delineate their respective duties. Once developed, compliance policies and procedures should be reviewed with, and distributed to, all employees of the practice. The review should occur within 90 days of hire and at least annually, and employees should be asked to acknowledge their review and understanding of the policies. Additionally, each practice should have guidelines for periodic review and updating of the compliance policies.
Designating a Compliance Officer & Compliance Committee to Provide Program Oversight
As part of the second element, each healthcare practice or company should designate two key roles — CO and CC — and assign duties to the respective roles. The CO should report directly to the CEO or senior management and should have primary responsibility for the compliance program structure and administration. The CO should be thoroughly familiar with the practice or company’s operational and compliance activities. This is crucial because a CO without explicitly delegated authority will likely be ineffective. The CO’s daily duties may include:
- Understanding and administering the compliance program
- Being informed about the outcomes of audits and monitoring
- Reporting on compliance enforcement activities
- Assessing/reviewing the compliance program
For smaller healthcare practices, the CO might have other clinical and administrative duties in addition to compliance duties. The practice may also choose to outsource the CO role to an outside vendor.
The CC is a multidisciplinary committee that reports directly to the CEO or other high-ranking person or people in the organization. The CO and CC are jointly responsible for certain duties related to administering the compliance program. These responsibilities include:
- Developing, reviewing, and updating compliance policies and procedures
- Developing and auditing the work plan and risk assessment plan
- Attending meetings for operations staff
- Monitoring and auditing compliance performance
- Enforcing compliance program requirements at all levels of the organization
- Recommending policy, procedure, and process improvements
- Enforcing disciplinary standards
Using Due Diligence in the Delegation of Authority
The third element of an effective compliance plan requires that each healthcare practice’s management team takes responsibility for, and engages in, proper due diligence in the hiring and periodic assessment of management employees. This element implies that practice leaders should conduct thorough background checks on all new management employees and periodic background checks on existing management employees.
The practice should undertake reasonable efforts to ensure that employees have not engaged in illegal activities or other conduct inconsistent with the practice’s compliance and ethics program. The practice’s management team should also ensure due diligence when hiring or contracting with vendors and other agents.
Educating Employees & Developing Effective Lines of Communication
The fourth element of an effective compliance program is training and education to ensure adequate understanding of the expectations set forth in the compliance plan and code of conduct. Compliance training should be mandatory for all employees. The initial training should be a comprehensive review of the compliance plan and code of conduct. Thereafter, review training should occur each year, highlighting any compliance program changes or new developments, as well as re-emphasizing the practice’s code of conduct.
To assist in information retention, training programs should be interactive and include actual compliance scenarios that employees and managers might encounter. Additionally, the CO should communicate compliance messages via other informal training methods, such as posters, newsletters, and intranet communications.
The fourth element also includes developing effective lines of communication, which involves making communication about compliance issues an integral part of the practice and having an “open-door” policy throughout the organization.
Recommendations for developing an open communication culture include the following:
- Ensure communication channels foster dialogue rather than one-way communication.
- Educate employees about the importance of reporting issues in a timely manner.
- Develop a formal process for managers to communicate compliance issues and results to staff.
- Create an anonymous reporting process to prevent real or perceived retaliation (e.g., an anonymous hotline, an email drop box, or a well-promoted open-door policy).
Employees should have several ways to report compliance and ethical concerns. The CO and/or CC should evaluate the reporting process for effectiveness. Questions to consider include:
- Are employees familiar with what compliance/ethical issues they should report?
- Are employees aware of the reporting process and to whom they should report concerns?
- Are employees aware of the specified timeframe for reporting compliance/ethical issues?
Moreover, employees should feel comfortable reporting issues to multiple individuals within the practice (e.g., any manager, the CO, or CC). The CO should be available and accessible for routine questions about compliance or ethics.
Conducting Internal Monitoring & Auditing
The fifth element of an effective compliance program is creating a system for monitoring and auditing the effectiveness of the program. This system will help providers comply with CMS requirements and identify compliance risks.
Monitoring may include reviewing procedures to gauge whether they are working as intended and following up on recommendations and corrective action plans to ensure they have been implemented. Monitoring should occur on a regular basis, such as weekly or monthly.
Auditing is a comprehensive review and requires more effort than monitoring. Auditing ensures compliance with statutory and CMS requirements and includes routine evaluations of the compliance program to determine the program’s overall effectiveness.
Internal staff or an external contractor should conduct an audit at least annually. The audit should result in a written report of findings and recommendations that the CO and/or CC should follow up on as part of their responsibilities.
Conducting a formal baseline risk assessment is a critical component of developing monitoring and auditing work plans. The risk assessment should include areas of concern identified by CMS and other authoritative organizations as well as classification of risk levels. Areas identified as high risk, such as coding/billing and working with excluded providers, should be audited more frequently.
The monitoring work plan should cover frequency of monitoring, person(s) responsible, and issues of concern for the organization. The auditing work plan should cover methods the practice will use to conduct internal investigations, a time limit for closing investigations, corrective action guidelines, and criteria for external independent contractor review and/or referral to CMS or OIG.
Enforcing Standards Through Well-Publicized Disciplinary Guidelines
The sixth element of an effective compliance program is to ensure consistent and timely discipline when an investigation confirms a violation. Disciplinary guidelines must be clearly written and describe expectations and consequences for noncompliance.
Guidelines should include sanctions for failure to comply with the code of conduct, failure to detect noncompliance when routine observation or due diligence would have provided notice, and failure to report actual or suspected noncompliance.
The practice or company should review disciplinary guidelines at least annually with all employees, and the information should be readily available for review so that employees are well aware of their obligations.
Responding Promptly to Detected Offenses & Undertaking Corrective Action
The final element of an effective compliance program is the use of corrective actions when vulnerabilities, noncompliance, or potential violations are identified. Examples of corrective action include staff education, repayment of overpayments, disciplinary action against responsible employees, and termination of vendors who violate contract terms relating to compliance.
Corporate Integrity Agreements
OIG negotiates corporate integrity agreements (“CIAs”) with healthcare providers and other entities as part of the settlement of federal healthcare program investigations arising under a variety of civil false claims statutes. Providers or entities agree to the obligations, and in exchange, OIG agrees not to seek their exclusion from participation in Medicare, Medicaid, or other federal healthcare programs.
CIAs have many common elements, but each one addresses the specific facts at issue and often attempts to accommodate and recognize many of the elements of preexisting voluntary compliance programs. A comprehensive CIA typically lasts 5 years and (similar to the seven elements listed above) includes requirements to:
- hire a compliance officer/appoint a compliance committee;
- develop written standards and policies;
- implement a comprehensive employee training program;
- retain an independent review organization to conduct annual reviews;
- establish a confidential disclosure program;
- restrict employment of ineligible persons;
- report overpayments, reportable events, and ongoing investigations/legal proceedings; and
- provide an implementation report and annual reports to OIG on the status of the entity’s compliance activities.
CIAs include breach and default provisions that allow OIG to impose certain monetary penalties (referred to as Stipulated Penalties) for the failure to comply with certain obligations set forth in the CIA. In addition, a material breach of the CIA constitutes an independent basis for the provider’s exclusion from participation in the federal healthcare programs. Information regarding OIG’s enforcement actions under CIAs is available here and at https://oig.hhs.gov/compliance/corporate-integrity-agreements/index.asp.
Healthcare compliance can be complex. But at its core, it is intended to promote ethical conduct and business practices. By developing and adhering to an effective compliance plan and educating employees and staff, healthcare practices and companies can prevent fraudulent activity, promote ethical behavior and business practices, and support quality care.
The summary above provides a brief overview of the role of compliance in healthcare, and discusses how practices and companies can take steps to ensure they are meeting their compliance obligations. But it is important to remember that compliance involves numerous federal and state laws, rules, regulations, and regulators conducting oversight and enforcement activities.
New developments in audit focuses and government enforcement actions occur continually. Healthcare practices and companies should consult legal counsel for specific advice and guidance on particular compliance program development, documentation and implementation.
Medical Office Leases
Virtually all leases require or can benefit from negotiations, revisions and sound legal advice. But leases for physicians and other healthcare providers need even more. Medical offices and clinics require special lease provisions. Consequently, a medical office or clinic lease agreement should be a much different type of lease than one used for other businesses or commercial lessees. Medical office or clinic leases should contain provisions specifically designed to address the unique issues that pertain to medical practices and the healthcare industry.
While negotiations of lease agreements for most healthcare providers involve many of the same issues, this section focuses particularly on leases for ambulatory surgery centers (“ASCs”), which present additional issues that must be identified and negotiated by attorneys representing landlords and ASC tenants.* ASCs are healthcare facilities that provide single or multi-specialty outpatient surgical care in the same day, which may include diagnostic and preventative procedures. Along with discussing key medical practice and ASC lease provisions, this section offers practical tips for negotiating and drafting such leases from both the landlord’s and the tenant’s perspectives. This guidance can be used to draft an ASC or other medical practice lease for an entire building or a portion thereof, and focuses on the following considerations:
- Pre-drafting structural considerations (e.g., regulatory environment);
- Rights and obligations with immediate impact (e.g., tenant improvements, utilities, signage, other physical space issues, landlord access to the leased premises, and regulatory compliance issues); and
- Those provisions that may not concern the parties until later in the term (e.g., assignment and subletting, permitted and exclusive uses, landlord waivers, and subordination, non-disturbance, and attornment agreements (“SNDAs”)).
Though the main federal and state laws and regulations impacting medical practices and ASCs in particular are discussed below, the potential impact of state and local laws and specific ASC accreditation standards is beyond the scope of this website discussion. Before entering into a lease involving a healthcare provider, every landlord, tenant or prospective investor should consult with a healthcare attorney about potential regulatory risks.
Regulatory Environment & Lease Structure
The healthcare industry is heavily regulated and even minor shifts in laws and regulations can impact lease structure. Landlords and tenants must grapple with restrictive federal and state laws and regulations proscribing kickbacks, rebates or division of fees between and among physicians and non-physicians, prohibiting the corporate practice of medicine by non-physicians, and prohibiting the offering or receipt of remuneration as an inducement to refer patients. The principal regulatory focal points for landlords and tenants related to medical practice and ASC leases involve:
- Understanding the regulatory risks for each party
- Allocating such risks appropriately
- Structuring key provisions of the lease in compliance with applicable regulatory requirements
- Ensuring the lease reflects fair market value based on regulatory guidelines
Lease Referral & Anti-Kickback Considerations
When entering into a lease or sublease involving a healthcare provider who makes or receives patient referrals from another healthcare provider (particularly for items or services that may be reimbursed by Medicare, Medicaid, or other government healthcare programs), there are a number of federal and state regulations which, if not complied with, present significant risks for civil and criminal liabilities. Due to the nature of these risks, landlords and tenants frequently attempt to obligate the other party to incur some or all regulatory compliance obligations pertaining to the lease. Counsel for both parties should understand the regulatory risks and carefully structure covenants to mitigate such risks. In addition, the lease should contain specific termination provisions triggered by violations of federal or state regulations relating to the provision of healthcare services, loss of requisite licensure, permits, and certifications of the tenant, and breaches of specific covenants (as well as remedies and damages related to violations thereof).
In recent years, federal and state government agencies have substantially increased their scrutiny of healthcare providers and have also dedicated more resources to investigating and prosecuting violators of fraud and abuse laws, specifically the federal Anti-Kickback Statute (the “AKS”), the federal self-referral prohibition (“Stark”), and various state law prohibitions on kickbacks, rebates, division of fees, and self-referrals. Explanations of each of these laws and tips for managing related liability risks follow.
The AKS prohibits the knowing and willful solicitation, receipt, offer, or payment of any direct or indirect, monetary or nonmonetary remuneration (including kickbacks, bribes, or rebates) in return for or to induce or reward the referral, arrangement, recommendation purchase, or lease of items or services that may be reimbursed, whether in whole or in part by Medicare, Medicaid, or other government healthcare programs. The AKS is an intent-based statute but does not require actual knowledge or specific intent to violate.
An ownership interest, discount, or opportunity to invest in the underlying property governed by a lease may constitute remuneration to the landlord and/or the AKS tenant and may implicate the AKS. Federal courts have repeatedly held that the AKS may be violated if even one purpose of an arrangement is intended to induce or reward referrals, purchases, leasing, or orders of such items or services, even if there are other legitimate purposes. Violations of the AKS may result in criminal liability and civil and administrative penalties, including mandatory exclusion from participation in Medicare, Medicaid, and other government healthcare programs. Violation of the AKS is a felony, punishable by imprisonment of up to five years, fines of up to $50,000, or both, plus three times the amount of the remuneration.
The Stark Law
Stark prohibits, with exceptions, a physician who has (or whose “immediate family member” has) a financial relationship with an entity from referring patients to that entity for the provision of designated health services (“DHS”) if payment for those services may be made by Medicare or Medicaid. A financial relationship for purposes of Stark includes both compensation arrangements with, and ownership or investment interests in, the entity to or from which referrals are made.
A lease may constitute a compensation arrangement under Stark because it involves ownership or investment remuneration between a physician and an entity for which referrals of DHS may be made. However, as bundled ASC surgical and ancillary services are specifically exempted from the definition of DHS, a threshold consideration in determining application of Stark to an ASC lease is whether referrals are being made for any DHS not included in the ASC bundle.
State Law Kickback & Referral Restrictions
Leases may also implicate state kickback, rebate, and/or self-referral prohibitions, which may similarly restrict ASC and other medical practice lease activity, and which may also apply to commercial and other payer sources. In addition, state law may restrict (as Georgia’s does) ownership in health facilities by non-physicians through its corporate practice of medicine restrictions. States may even go so far as to restrict leasing to certain providers or for certain express purposes. The scope and enforcement of state laws can vary significantly, and the state’s regulatory environment should be carefully considered before entering into a lease transaction.
Managing Liability Risks
There are a number of ways for a landlord and tenant to reduce risks associated with implicating fraud and abuse regulations, including:
- Divestiture. The landlord or tenant may take steps to divest an ownership or investor interest in the property attendant to certain self-referral risks or to prohibit referrals by certain owners or investors in the property to the tenant. However, such steps may not altogether eliminate Stark and state self-referral regulatory risk and will not likely eliminate most risk under the AKS and stricter state kickback laws.
- Use of statutory exceptions and safe harbors. As discussed further below, the lease can be structured to fit within the Stark space rental exception and the safe harbor provided by the AKS (and applicable state) regulations. Recent Stark guidance has added a new exception relative to timeshares; however, this exception does not apply to ASC entities.
- Setting rent at fair market value. If the lease does not fit within the AKS (and applicable state) safe harbor and does not violate Stark, the parties should ensure that the base rent is at fair market value and take additional prophylactic measures recommended by the OIG, albeit with significantly higher risk under the AKS.
Space Rental Exception & Safe Harbor
The general requirements under the AKS safe harbor and the Stark exception share many of the same features. To satisfy both, the arrangement must:
- Be set forth in writing
- Be signed by both parties
- Describe the specific space to be leased
- Establish a term of at least one year
- Be for an aggregate rent amount set over the term of the lease
- Be consistent with fair market value
- Satisfy a commercially reasonable business purpose
- Not be determined in a manner that takes into account the volume or value of referrals
- Be commercially reasonable in the absence of any referrals
- Be for the lease of only such space as is reasonably necessary to accomplish the commercially reasonable business purpose of the rental
- Any holdover month-to-month rental following the initial one-plus year term must meet the same conditions as above
Fair Market Value in Lease Arrangements
The critical issue for tenants and landlords is whether the base rent and any build-out costs are consistent with fair market value (“FMV”). The Centers for Medicare & Medicaid Services (“CMS”) defines FMV in a lease as “the value of a rental property for its general commercial purposes.” CMS has provided guidance indicating several key restrictions on this general value, including:
- The amount may not take into account the property’s intended use.
- The amount may not be upwardly adjusted to reflect the value that either the prospective tenant or landlord places on the property as a result of its proximity to sources of referrals or other business. In other words, a landlord may not seek or charge a commercially unreasonable rent for an ASC or other medical practice located near a medical office park or hospital because such proximity may generate additional referrals.
- While the landlord may take into account additional costs for leasehold improvements for development or upgrading of the leased premises, the landlord may not provide capital improvements and build-outs that are more valuable than those that would be provided to any other tenant unless such costs are properly allocated to the tenant. Any build-out costs for imaging services or operating rooms under the lease should be borne by the tenant. CMS has opined that the determination of whether any costs of capital improvements should be allocated over the useful life of the improvements or be passed on in their entirety to the tenant will depend on the facts and circumstances of the case.
- The base rent should be fixed in advance and should not vary with volume or value of referrals or be based on a percentage of revenue raised, earned, billed, collected, or otherwise attributable to the services performed on any business generated through the use of the space. The OIG does not view per-unit compensation relationships to be set in advance under the AKS. In essence, the annual aggregate rent must be determined and reflected in the lease to be considered set in advance for purposes of meeting the space rental safe harbor.
In determining FMV, CMS provides that documentation of comparable public transactions may be a commercially reasonable method for establishing reasonable base rent per square foot (subject to additional adjustments for capital improvements by the landlord). However, due to the substantial investment often involved in building out an ASC or other medical office space, which may subject the lease to additional scrutiny, the best practice is to obtain an independent third-party appraisal. Although an appraisal is not expressly required by Stark or the AKS, the parties should consider engaging a qualified and independent third-party valuation firm with experience appraising ASC or similar medical practice space rentals to ensure FMV is paid. CMS has indicated that it believes internally generated appraisals to be particularly susceptible to manipulation and may subject such internal surveys to additional scrutiny that might not otherwise apply to an independent third-party valuator.
Licensure & Certificate of Need (“CON”)
Attorneys for both parties should ensure that their clients also thoroughly understand applicable state regulatory requirements prior to entering into the lease, with particular attention paid to any contingencies in the lease related to CON requirements. Many states (including Georgia) require that an ASC and other medical facilities obtain a CON through a market-restrictive process demonstrating that the proposed ASC or other facility fulfills public need for and requirements of state health planning boards. If the state requires CON approval for establishment of an ASC (as Georgia does), a tenant and landlord may seek to make the effective date of the lease contingent on approval of a CON (or other requisite licensure), with delivery of possession of the leased premises to the tenant subject to this condition. Any such contingencies must be carefully drafted to provide limits on how long a landlord may be subject to hold the premises prior to delivery. Certain states may also impose notice and other requirements in the event of a proposed closure of an ASC. And the attorney for the tenant should try to ensure that the lease is drafted to reflect and comply with any such requirements.
Most states also license ASCs and promulgate extensive practice restrictions and physical facility requirements in addition to those provided in Medicare or accreditation standards. The Accreditation Association for Ambulatory Health Care and The Joint Commission on Accreditation of Healthcare Organizations, whether acting as deemed status surveyors or accrediting an ASC or other healthcare organization, often have further physical layout requirements that may exceed state requirements. Some states do not place ASCs in the licensure category and instead regulate them as hospitals or office-based surgery practices or clinics. A state may also restrict entry to an ASC market by and through a legislative or administrative moratorium.
Space Sharing Arrangements
Subleases by tenants and block leases permitting the sublease of a portion of a facility are common among healthcare providers where space sharing is permitted. But, in an ASC context, landlord’s counsel must be careful to ensure that space sharing is, in fact, permitted and, if so, the times and scope meet all ASC space sharing requirements. As discussed below, tenants are reluctant to limit their assignment and subleasing rights because they may wish to enter into a space sharing arrangement that reduces fixed-cost buildout and investments, reduces personnel, administrative, and equipment overhead, and endeavors an additional medical tenant to cover a portion of the rent.
Federal Space Sharing Requirements
Under Conditions for Coverage that went into effect in 2009, in order to be certified as a Medicare and/or Medicaid ASC supplier,
- An ASC must be certified and approved to enter into a written agreement with CMS. Participation as an ASC is limited to any distinct entity that operates exclusively for the purpose of providing surgical services to patients not requiring hospitalization and in which the expected duration of services would not exceed 24 hours following an admission. An unanticipated medical circumstance may arise that would require an ASC patient to stay in the ASC longer than 24 hours, but such situations should be rare.
- The regulatory definition of an ASC does not allow the ASC and another entity, such as an adjacent physician’s office, to mix functions and operations in a common space during concurrent or overlapping hours of operations. CMS does permit two different Medicare-participating ASCs to use the same physical space, so long as they are temporally separated. That is, the two facilities must have entirely separate operations, records, etc., and may not be open at the same time.
- ASCs are not permitted to share space, even when temporally separated, with a hospital or Critical Access Hospital outpatient surgery department, or with a Medicare-participating Independent Diagnostic Testing Facility (IDTF). Certain radiology services that are reasonable and necessary and integral to covered surgical procedures may be provided by an ASC; however, it is not necessary for the ASC to also participate in Medicare as an IDTF for these services to be covered.
The federal Conditions for Coverage do not generally or specifically require that an ASC be housed in a separate building from other healthcare facilities or practices. However, an ASC is defined by federal law as a separate and distinct entity that operates exclusively to provide surgical services, and it must be separate and distinguishable from any other healthcare facility or practice, either physically or temporally. Thus, under federal law (subject to some restrictions), a physically or temporally separated ASC may share space with another entity.
The Medicare State Operations Manual notes that (1) a physically separate, “distinct entity” must be separated from other facilities by a wall meeting certain fire proofing requirements, and (2) a temporal distinction permits an ASC to share the same physical space insofar as the ASC and other entity “are separated in their usage by time.” In other words, an ASC operating four days a week as a single specialty nephrology ASC, and one day per week as a vascular access center or extension of the same, or as other interventional nephrologists’ practice(s), would satisfy these requirements. But the same ASC could not lease, during its hours of operation, clinical space to the physician or practice to operate concurrently, as such entities would not be “separated in their usage of time.”
Additional Space Sharing Considerations
When assessing the propriety of an ASC or other medical practice space sharing sublease arrangement, there are a number of additional considerations. State law may substantially restrict or proscribe outright an ASC or other medical practice space sharing arrangement under its licensure or other applicable regulations. Where not proscribed outright, states often do so by limiting operation of more than one license in a particular location. In Georgia, an ambulatory surgical treatment center is defined under Georgia Department of Community Health Rules as “any institution, building, or facility, or part thereof, devoted primarily to the provision of surgical treatment to patients not requiring hospitalization, as provided under provisions of [O.C.G.A. § 31-7-1]. Such facilities do not admit patients for treatment which normally requires overnight stay, nor provide accommodations for treatment of patients for period of twenty-four (24) hours or longer.” Some state regulators in other states have interpreted similar provisions to proscribe ASC space sharing in the state.
Even where state regulators permit space sharing arrangements, tenants and landlords should notify state and accreditation surveyors of the hours of operation for each supplier. If a holder of interest in the space sharing entity or practice also has an investment interest in the tenant or the landlord and is in a position to make referrals to the ASC, this will likely implicate fraud and abuse regulations and potentially render the lease in violation of applicable federal and/or state law. Direct and indirect ownership, investment, and/or referral arrangements may subject a tenant to higher scrutiny under any sublease arrangement unless the arrangement is carefully structured in accordance with an exception or AKS (and applicable state) safe harbor.
Subject to state law, federal regulations also permit temporally distinct entities to share waiting rooms, reception areas, restrooms, staff break rooms, and other common areas. A space sharing tenant may allocate some shared common area costs (including build-out costs therewith) to the other entity insomuch as the allocation does not exceed the person or entity’s proportional use of the premises. However, not all space may be shared. The lease or sublease should include additional prophylactic measures to ensure compliance with all applicable laws and regulations. For example, the lease should require that signage be changed out on the days the tenant is not operating as an ASC so as to meet applicable state licensure and marketing requirements. The lease should also provide that medical/administrative records and electronic health records must remain physically separate from and inaccessible to the sharing entity so as not to run afoul of the Health Insurance Portability and Accountability Act (“HIPAA”) or the Health Information Technology for Economic and Clinical Health (“HITECH”) Act or applicable state medical records requirements regulating the disclosure and security of medical records.
Prior to or during lease negotiations, the landlord and the tenant must also narrowly define both common and restricted space because a facility’s physical space layout can significantly alter the attendant regulatory analysis.
Negotiating Key Provisions in ASC & Other Medical Practice Leases
Permitted & Exclusive Uses
The permitted use provisions of an ASC or other medical practice lease are often the subject of heavy negotiations by the parties. Landlords generally try to limit the permitted uses to be very specific, particularly where the ASC or practice will be leasing space in a multi-tenanted building. The permitted use provision must accurately capture the tenant’s intended use of the leased premises, without being overly narrow, so as to prohibit the tenant from using the space for purposes incidental to the operation of an ASC or other medical practice on the leased premises. Moreover, the tenant needs to consider the likelihood of later assigning or subletting all or some of the leased premises, as a permitted use provision that is drafted too narrowly may ultimately prevent the tenant’s ability to assign or sublet space to a third party.
Whether or not the tenant has an exclusive use right is a business point that is also typically heavily negotiated by the parties. Landlords are typically reluctant to give an exclusive use right, while tenants will want assurances that no other ambulatory surgery or similar treatment centers will be operated on the property. Accordingly, if the landlord agrees to give a tenant an exclusive use right, the language must be narrowly and precisely drafted to provide the tenant with adequate protection without unduly restricting the landlord’s ability to operate and lease space to other tenants in the same and adjacent property, and must also avoid infringing on any exclusive use rights of any existing tenants.
If the landlord and/or its affiliates own or control other properties in close proximity to the leased premises, the tenant may also desire a radius restriction, which prohibits the landlord and its affiliates from permitting any other tenant or occupant of such properties to operate an ambulatory surgery or similar treatment center. The tenant’s motivation is both to (1) minimize regulatory risks, as discussed above; and (2) avoid losing patients and business for the ASC or practice due to other, competing providers operating near the leased premises. Before agreeing to such a restriction, the landlord must consider not just the current tenants of its and its affiliates at nearby properties, but also the ability to lease available space to suitable tenants in the future.
Hours of Operation
Unlike general commercial tenants and most other medical practices, an ASC’s hours of operation need to be more flexible to allow for (1) performance of surgical and pre-operative procedures before ordinary business hours and (2) extended recovery time and other post-surgical care that may need to be furnished after ordinary business hours (potentially including weekends). Therefore, when representing a tenant, it is critical that the attorney understands the required hours of operation for the ASC or other practice to conduct its business. Moreover, the attorney representing the landlord must verify whether it is feasible for the landlord to provide required services during extended hours of operation and that the other tenant’s rights of use will not be unreasonably interfered with or disturbed prior to agreeing to accommodate the tenant’s requested operational schedule.
Tenant’s Right to Make Alterations, Additions & Improvements
The alterations provision of the lease sets forth the tenant’s ability to make changes to the leased premises during the lease term. In general commercial leases, the typical alterations provision requires the landlord’s consent to make alterations other than purely decorative and cosmetic changes that are nonstructural or cost less than a certain amount (e.g., $5,000) in any one instance. However, in the context of medical practice leases, the alterations provision is often the subject of heavy negotiations between the parties, as the installation of medical or surgical equipment and the other specific improvements and alterations, many of which involve structural alterations, are necessary for the operation of a medical practice, particularly if the leased space has been designed or previously used for another purpose. Accordingly, it is generally best for the parties to agree on a specific plan for the initial build-out, improvements, and installation of equipment in the leased premises before executing the lease.
Because tenants will likely need to (1) replace existing equipment, (2) install new equipment during the lease term, and (3) make other alterations to the space during the lease term to account for business needs or comply with legal or accreditation requirements, the parties need to negotiate an alterations provision that takes this into account and provides sufficient protection for both parties. The tenant will want reasonable assurances that the landlord will timely accommodate these needs without unreasonably withholding necessary approvals, while the landlord will want the right to review and approve the tenant’s proposed alterations, particularly those with structural implications or that will require costly alterations to re-let the property to non-ASC or medical tenants at the end of the lease term.
A crucial aspect of the alterations provision is what alterations and improvements, if any, the tenant will be required to remove at the termination or expiration of the lease. This concern is particularly acute in the ASC lease context, as the improvements and alterations required to operate an ASC are often not conducive to general commercial use of the space, can be very costly to undo, and result from the ASCs’ installation of expensive surgical equipment in the leased premises that may be subject to third-party financing. Therefore, it is critical that the parties agree up front as to:
- What alterations and improvements the tenant will be required to remove, if any
- Whether the tenant is required to restore the space to a condition more suitable for general uses at the end of the lease term
- If the tenant is required to restore the space, who will bear the associated costs and expenses
Tenant’s Signage Rights
The lease should set forth the tenant’s signage rights. To comply with applicable laws and regulatory and accreditation requirements, as well as for general business purposes, tenants will typically want the right to (1) install and maintain signage on the exterior of the building and the property, any monument or pylon sign for the building, and on the doors and interior of the building; and (2) have the practice or ASC and its associated physicians listed in any directory for the building or property. Depending on what the parties negotiate, the tenant will typically pay for some, if not all, of the expenses of the signage and its installation. Such signage (including its design and placement) is almost always subject to the landlord’s prior approval. However, the tenant will typically want the landlord to agree in the lease to the tenant’s proposed signage package, which is often attached as an exhibit to the lease. The tenant will usually also want the ability to change or install additional signage during the lease term (with the landlord’s consent), and thus may want to restrict the amount of time the landlord has to review and approve proposed signage, which approval should not be unreasonably withheld, conditioned, or delayed.
Additionally, due to the importance of having visible signage for an ASC or other medical practice, the tenant should consider negotiating (1) a prohibition or restriction in the lease on the landlord’s ability to install structures that block the visibility of the tenant’s signage, and (2) a provision that requires the landlord to install temporary signage and take other mitigating actions to limit disruption for the limited and temporary periods (such as construction and repairs) where it is unavoidable. Furthermore, the lease should clearly delineate which party is responsible for removing signage installed by the tenant at the end of the lease term and for paying the associated costs and expenses.
Landlord’s Access to the Premises & Landlord’s Repairs & Improvements
By nature of the sensitive medical procedures performed at an ASC or other medical facility, the lease should clearly spell out who, when, and under what circumstances the landlord has the right to access the leased premises, whether to conduct repairs, maintenance, inspections, or improvements. Unexpected interruptions or interference by the landlord or its agents could have serious, and even potentially deadly, consequences. Accordingly, the tenant will want to make sure that the landlord’s right to enter onto the premises and to conduct repairs, maintenance, or improvements within the premises is conditioned on at least 24 hours prior notice (except in cases of emergency), in a manner that will minimize any disruption or interference with the tenant’s use and operation of the premises for medical or surgical procedures. To do so, the parties should build some flexibility into the lease to allow the landlord access to the premises both during and outside of the tenant’s normal business hours, depending on the reason the landlord needs access and the potential disruption or interference with the tenant’s operation. Similarly, a tenant will also want to negotiate reasonable rights to restrict (or at least, to have to consent to) the landlord’s performance of certain types of improvements, inspections, maintenance, and repairs in other areas of the building or property near the leased premises, as byproducts such as noise and dust can adversely affect the performance of medical or surgical procedures and furnishing of patient care on the premises.
Additionally, the tenant’s attorney must be cognizant of the requirements imposed under HIPAA, HITECH, and related state medical records privacy and security laws when negotiating what rights the landlord will have to enter onto the leased premises. The tenant will need sufficient prior notice from the landlord in order to provide the practice or ASC with adequate time to take precautionary measures to protect, safeguard, and restrict access to patient records and other confidential materials on the premises from unauthorized access or removal from the premises. Moreover, the tenant may want reasonable assurances from the landlord that any personnel and agents with access to the premises understand and have received instruction on the privacy and security requirements to which the healthcare provider is subject. The tenant should also seek the right to indemnification from the landlord in the event that the tenant incurs any liability for noncompliance with those legal requirements due to the acts or omission of the landlord, or its personnel or agents, as a result of their access to or presence on the premises.
Assignment & Subletting
Assignment and subletting provisions are some of the most heavily negotiated provisions in any commercial lease and are often even more critical for a medical office or ASC lease. Due to the inherent nature of healthcare and ASC business, the physicians who own or are affiliated with the practice or ASC may change frequently during the lease term and fundamental transactions (such as mergers, consolidations, and sales of the practice or ASC, or substantially all of its assets) are commonplace. Moreover, healthcare providers and ASCs often like to sublet or share space with both affiliated and third-party physicians and practices. For example, an ASC may want to sublet one of its operating rooms to another practice on a full- or part-time basis, or may wish to sublet a dedicated portion of the leased premises to an affiliated physician, practice, or management company for their exclusive use as office space. Therefore, the tenant will want to make sure the lease provides sufficient flexibility, while the landlord will want to ensure that any occupants of the space are high quality and have sufficient financial means to pay rent and perform all other obligations required under the lease.
Typically, the tenant should be permitted to, without the landlord’s consent, assign the lease or sublet the premises to an affiliate, subsidiary, or successor in connection with a merger, acquisition, or consolidation of the tenant or a sale of all or substantially all of the tenant’s assets, so long as:
- The tenant is not in default under the lease.
- The tenant remains liable under the lease.
- The successor tenant’s or subtenant’s financial position is at least substantially comparable to that of the tenant prior to such event.
The parties should also consider negotiating a threshold percentage change in the ownership or voting interests in the tenant, such that the landlord’s consent is not required for any changes thereto over a continuous period (e.g., 12 months) that does not exceed the agreed-upon threshold. Additionally, the tenant may want the lease to specify certain parties (or types of entities and individuals) to which the tenant may assign the lease or sublet space, particularly when the tenant reasonably anticipates a likely need to do so during the lease term.
Generally, the tenant’s attorney should seek to ensure that any right of the landlord to consent to an assignment or sublease should not be unreasonably withheld, conditioned, or delayed, while the landlord’s attorney should try to include terms in the lease that specify the information that the tenant will need to provide in connection with a proposed assignment or sublease and the applicable time frame. The tenant may want to negotiate inclusion in the lease of a specific, limited list of reasons for which the landlord may permissibly withhold consent (where the landlord’s withholding of consent would be reasonable), while the landlord will often try to insist that any such list not be exclusive. The tenant’s attorney should also consider negotiating a provision to the effect that if the landlord fails to respond to a subleasing or assignment request within a specified time frame, the landlord’s consent will be deemed given. The landlord’s attorney should also consider negotiating a lease provision that requires the tenant to pay the landlord’s reasonable costs and expenses (or, alternatively, a specific, negotiated fee) in connection with the landlord’s evaluation of a proposed assignee or subtenant.
Landlord Waivers, SNDAs & Estoppel Certificates
Due to the high costs of procuring and installing the necessary surgical equipment and operating an ASC, ASCs are typically highly reliant on third-party financing arrangements, especially when the ASC will be required to bear the considerable expenses of converting general commercial use space for the specific needs of operating an ASC. Whenever possible, a tenant should ideally negotiate the terms of any necessary financing prior to (or at least, contemporaneous with) negotiation of the lease and, to the extent possible, arrange for the lender to be actively involved with and participate in the lease negotiation. Although specific requirements may vary by lender, lenders often require execution of the following:
- A landlord waiver, whereby the landlord agrees to waive (or agrees to subordinate in favor of the lender) any lien on or security interest in the tenant-borrower’s leasehold improvements, equipment, and other assets located on the leased premises, and which grants the lender the right, on reasonable prior notice to landlord, the right to enter onto the lease premises and repossess the tenant/ borrower’s assets
- A collateral assignment of the lease, whereby the tenant/ borrower pledges its rights in, to, and under the lease as collateral security to the lender for repayment and the lender has the right to assume the tenant/borrower’s rights in, to, and under the lease as of (but, generally, not prior to) the date of the tenant/borrower’s default in its obligations to the lender
- A short form memorandum of lease between the landlord and the tenant, which is recorded in the local land records of the leased premises’ jurisdiction and puts subsequent parties on notice of the existence of the lease and the landlord’s and tenant’s respective rights and interests thereunder
Because landlords often dislike these types of agreements and because their negotiation can be both time consuming and expensive, it is best to negotiate these agreements and any other requirements of the lender simultaneous with, or prior to, the execution of the lease. If the lease must be executed before the ASC or practice obtains necessary financing, the tenant’s attorney should consider, at a minimum, negotiating adequate provisions in the lease that require the landlord to execute documents reasonably required for the tenant to obtain required financing. Better yet, the tenant’s attorney should include mutually agreed-upon form documents as exhibits to the lease, which the landlord is required to execute on request. What the tenant’s attorney wants to avoid, if possible, is a situation where a lease is executed without adequately providing for lender requirements, as the landlord will likely insist on costly concessions from the tenant in exchange for what amounts to a giveaway of the landlord’s rights with little to no value to the landlord.
Meanwhile, the landlord’s attorney also needs to be mindful of preserving the landlord’s rights regarding current and future financing arrangements and future sales of the property when negotiating a medical practice or ASC lease. The landlord’s lender will (and a prudent tenant also would) require execution of an SNDA by and among the lender, the landlord, and the tenant, whereby, generally:
- The lender agrees that, even if the landlord defaults on its mortgage and the lender forecloses, the lender will respect the tenant’s lease on its terms (Non-Disturbance)
- The tenant agrees and acknowledges that, subject to Non-Disturbance, the tenant’s lease rights are subordinate to the landlord’s mortgage in favor of the lender (Subordination)
- The tenant agrees to, subject to Non-Disturbance, pay rent, and otherwise honor the terms of the lease notwithstanding foreclosure by the lender (Attornment)
To avoid potentially lengthy and costly negotiations, it is in the best interest of both the landlord and the tenant to include (1) sufficient language in the lease that requires the parties to execute an SNDA on the landlord’s or its lender’s request with agreed-upon terms, and (2) a mutually agreed-upon form SNDA as an exhibit to the lease. Better yet, if the landlord has existing financing in place to which the premises is subject, the landlord’s attorney should seek to attach the lender’s approved form of SNDA as an exhibit to the lease.
Similarly, any potential buyer of the property (and, likely, the potential buyer’s lender), will insist that the landlord-seller obtain from its tenants (or, at least, its major tenants, of which the tenant will likely be one) estoppel certificates. Although the required provisions of estoppel certificates may vary, they often include a statement and acknowledgment from the tenant of all of the following:
- The lease term, base rent, leased premises, the date through which rent has been paid, and the security deposit
- That the lease is in full force and effect, and has not been modified or amended except as otherwise specifically stated in the estoppel certificate
- That there are no current defaults, conditions, events, or circumstances that would lead to a default, by either landlord or tenant
- That the landlord and tenant have performed all of their respective obligations under the lease to date
- That the tenant has not paid rent or any other charges more than one month in advance
- That the tenant has no right to deduct or offset any amount from the rent or otherwise due to landlord
- That the tenant has no defenses to enforcement of the lease
- That the tenant has neither received from the landlord nor given to the landlord any notices of default
- That the tenant has neither made nor currently has any claims against the landlord
To minimize the cost and time of negotiations, it is in the best interest of both the landlord and the tenant to include sufficient language in the lease that requires the parties to execute an estoppel certificate with certain matters to which the tenant must certify on the landlord’s request. Alternatively, the landlord’s attorney should seek to attach an approved form of estoppel agreement as an exhibit to the lease.
Physical Facility Issues
There are myriad certification, state, and accreditation standards related to the physical facility and environment that must be discussed by the negotiating parties to ensure that the tenant’s right to make alterations, additions, or improvements is drafted with sufficient breadth to permit the tenant to meet the regulatory requirements to which it is subject. The landlord will want to require transparency regarding the nature and purpose of the intended use of the property, as the tenant may or will be exposing the property to environmental liability for medical and biological waste, hazardous chemicals, pressurized gases, and controlled pharmaceutical substances, among other items. As part of the physical facility issues, the landlord’s and tenant’s counsel will want to consider and discuss handling some of the following issues:
Tenant’s counsel should attempt to ensure that the tenant can undertake additional usage of certain utilities and other amenities without disproportionate cost to tenant. The tenant should seek to refine the applicable usage formula to normalize excess allocations. The following is a list of some items that may require additional usage allocations:
- Utilities. Counsel should anticipate the need of tenants for uninterrupted utility services, excess electrical, water, HVAC, emergency generators for power failure, and other uses of the practice or ASC. ASCs in particular typically require a much more significant use than standard office tenants of electrical, HVAC, and water facilities, due to the higher utilization needs of the ASC’s equipment and hygienic systems. Furthermore, unlike some types of commercial tenants that could temporarily relocate to another office or have their people work from home on a limited basis, the tenant cannot operate (literally) if the utilities and other important building services are not fully and adequately available at all times. Accordingly, the tenant will want to negotiate a provision in the lease that allows the tenant to (1) abate rent if the utilities or other important building services are interrupted or otherwise unavailable for a specified period of time, (2) exercise self-help if the landlord cannot or will not address/repair the problem in a timely manner, and (3) terminate the lease if the problem is repetitive or anticipated to continue.
- Security. When security for the property is provided by the landlord, additional security related to the tenant’s use of the property may be required for the tenant, particularly in the context where a medical practice or ASC houses expensive medical or surgical equipment, controlled pharmaceutical substances, patient records, hazardous chemicals, and the like. Additional security costs may include the cost of personnel, fixtures for cameras, and monitoring services.
Additional Build-Out Costs
To ensure that the tenant can meet the requirements of additional build-out costs and financing requirements, the tenant should seek to refine the standard capital improvements provisions in a general commercial lease. The following is a list of some items that may require additional build-out costs:
- Fire standards. Reinforced floors, walls, and doors that meet local, state, and accreditation standards may require additional build-out, fixtures, and structural improvements for medical or ASC tenants. For example, if an ASC is co-located with another provider, the National Fire Protection Association Life Safety Code requires that ASCs must be separated from other facilities with one-hour fire walls.
- Emergency generator. Medical and ASC tenants require uninterrupted power to certain core systems, such as life support, certain equipment, fire, and utility systems. These requirements necessitate the additional expense of building out emergency backup systems, such as an emergency generator. Elevators may also require additional emergency operation and power failure needs.
- Americans with Disabilities Act (“ADA”) requirements. Tenants may require special accessibility needs in and around the premises to comply with ADA requirements to which they are subject. Assuming compliance with the requirements is not “structurally impracticable”, most landlords should be familiar with basic accessibility features sought by tenants, such as excess door width, handicapped parking, ramps, lift equipment, water fountains, security systems, and many others.
- Parking. Many medical practices and most ASCs are subject to requirements related to reserved spaces for handicapped access and minimum parking availability requirements related to the size of the facility. In some states, local fire, zoning, curbing, public access, or even canopy requirements can necessitate additional space needed to comply with the tenant’s needs.
- Entrances and exits. Entrances and exits in a medical practice or ASC typically must comply with various accreditation, licensure, and local requirements related to fire and ADA safety standards. In addition, access restrictions and security cameras must often be provided at entrances and exits to the premises, which may require additional fixture build-out.
- Equipment. Specialized equipment, such as imaging equipment used for surgical procedures, may require a special build-out and fixturing allocation. Whether the tenant has purchased the equipment at its own cost or through additional financing, the tenant may need a waiver of any rights, lien, or security interest that the landlord may possess with regards to the equipment if the tenant hopes to retain the equipment or return it to the financer following termination of the lease. The landlord may seek to retain some interest in the equipment or other financial assurances in the event that the tenant abandons the property and may attempt to allocate to the tenant the cost of the landlord’s removal of the equipment (including any incidental costs for hazardous materials).
Medical Waste & Disposal
Due to the liability risks related to biological and medical waste, the landlord may wish to require, at the tenant’s expense, periodic inspections of the premises by an environmental specialist to ensure compliance with applicable environmental regulations. Often the landlord will allocate the disposal of medical and biological waste to the tenant, with certain prohibitions on the disposal of materials during certain hours or through certain methods (e.g., the sewer systems). The landlord will often also seek to allocate as much risk as possible to the tenant related to the generation and disposal of such waste and may even seek specific requirements related to storage, permitting, and handling of waste that exceed the medical provider’s obligations under law.
In addition, the landlord’s attorney may seek to negotiate significant liability disclaimers and indemnifications related to the occurrence of a hazardous spill. In the event of such a spill, the landlord may also wish to be notified and to receive certain assurances that spills will be handled by an agreed upon chemical or biological cleanup company in accordance with requirements applicable to one or both parties. The landlord should require that the tenant surrender the property free of all medical and biological waste and also ensure that the obligations related to cleanup survive the termination of the lease.
While addressing and balancing all of these issues is a complex process, the stakes are high and warrant the time and careful attention necessary to satisfy all legal requirements. With the assistance of experienced counsel on each side, landlords and healthcare tenants can reach lease agreements that protect both parties’ interests, advance their mutual goals, and improve patient health and public safety.
* This section is adapted in large part from an article by Alan B. Gordon, Paul A. Kiehl and Timothy R. Loveland, posted in the Lexis Practice Advisor Journal on April 17, 2019.
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