Legal Issues in a Medical Spa or Integrative Care Center: Anti-kickback and Fee-Splitting Concerns - The Laws

One of the most important legal concerns when setting up a medical spa or integrative medicine - or even a multidisciplinary health care center or group practice that involves multidisciplinary teams of allied health providers, such as psychologists and nurses, involves self-referral, anti-kickback and fee-splitting.


In a nutshell, legal rules, consisting of federal law (the federal Stark law, with its myriad of nested exceptions, and anti-kickback statutes) and, typically, state law statutes, prohibit conflicts of interest between financial remuneration and care, in the form of what are known as "self-referral," "kickbacks," and "fee-splitting."

Legal Prohibitions Under The 'Stark' Law

The Stark law, named after Congressman Pete (not Tony) Stark, prohibits physicians are prohibited from referring Medicare and Medicaid patients for certain clinical laboratory and other health services to entities in which they have a financial relationship. This is known as "self-referral."

Services subject to the Stark Law include inpatient and outpatient hospital services and the majority of ancillary services available to assist physicians in diagnosing and treating patients, such as clinical laboratory and radiology tests, radiation therapy and physical/occupational therapy. Home health services, durable medical equipment and prescription drugs are also covered under the self-referral prohibition.

The Centers for Medicare and Medicaid Services publishes a series of interpreting regulations which refine these rules over time.

The key to avoiding potential sanctions under the Stark Law is structuring health care transactions and arrangements with physicians in compliance with one of the many exceptions contained in the law, ranging from office and equipment leases or personal service arrangements to transactions such as ownership interests held in a hospital facility and group practices as defined in the statute.

One of the key exceptions involves the "group practice." To qualify for several exceptions, such as referrals for in-office ancillary services and referrals to other physicians in the group, a practice must meet all of the elements of the Stark statute's definition of a group practice. Some of the key elements include:

• A group practice must involve at least two or more physicians who are legally organized in a partnership, professional corporation, foundation, nonprofit corporation or other similar association.

• Each physician who is a member of the group (including shareholders, partners and employees but not independent contractors) must provide substantially his or her normal full range of DHS and other services in the group practice through the joint use of shared office space, facilities, equipment and personnel.

• The group must function as a "unified business." A unified business requires (1) centralized decision making by a body of the practice that maintains effective control over the group's assets and liabilities including budgets, compensation and salaries; (2) consolidated billing, accounting and financial reporting; and (3) centralized utilization review. In essence, a practice must operate out of one financial identity to meet the standards for a unified business.

• Substantially all of the services of the physicians who are members of the group must be provided through the group and billed under a billing number assigned to the group; and amounts received must be treated as receipts of the group. This requires using a single taxpayer identification number but also operating as a group under this number.

• The group's overhead expenses and income must be distributed in a manner that is established before payment is received for the services that create the overhead expense or income.

• When taken as a whole, the amount of time physician members of the group (excluding independent contractors) spend in work dedicated to the group must average 75 percent.

One of our clients was an integrative care center that wanted to provide incentives to a separate medical practice that it had incorporated into its overall wellness framework. The question arose as to whether we could design a compensation package with stock incentives that met the group practice exception.

The Federal Anti-kickback Act

Another client asked whether the integrative care center could give a discount to a patient that saw another physician in the practice after seeing the first MD. The answer should be clear from this description of the anti-kickback rules.

The federal Anti-kickback Act, 42 U.S.C. § 1320a-7b(b), is much broader, and prohibits anyone from knowingly or willfully paying or receiving remuneration in exchange for referrals or the purchase of any item or service that may be paid for by a federal health care program. Thus, while the Stark statute pertains only to physician referrals under Medicare and Medicaid ("physicians" includes chiropractors and dentists but not midlevel providers, such as nurse practitioners and physician assistants), the anti-kickback statute affects anyone engaging in business with a federal health care program.

The 1996 Health Insurance Portability and Accountability Act (HIPAA) mandated that the U.S. Office of the Attorney General (OIG) furnish advisory opinions to requesting providers that are either in an arrangement or contemplating an arrangement that may not fit within the law. The OIG maintains a searchable database of advisory opinions on various arrangements.

While the statute prohibits individuals or entities from knowingly and willfully offering, paying, soliciting or receiving remuneration to induce referrals of items or services covered by Medicare, Medicaid or any other federally funded program (except the Federal Employees Health Benefits Program), some courts have interpreted the law to cover any arrangement in which one purpose of the remuneration is to induce or compensate for program referrals. Further, the Office of Inspector General (OIG) at the U.S. Department of Health and Human Services and the U.S. Justice Department can interpret the law broadly to target perceived medical fraud and abuse by practitioners who are in hospitals as those who are practicing in groups or clinics when making financial arrangements with other physicians, hospitals and managed care organizations.

Health care providers are vulnerable to prosecution under the anti-kickback rules for defined conduct unless it falls into one of the statutory or regulatory "safe harbors." The 1991 safe harbors addressed the following types of business or payment practices: investments in large publicly held health care companies; investments in small health care joint ventures; space rental; equipment rental; personal services and management contracts; sales of retiring physicians' practices to other physicians; referral services; warranties; discounts; employee compensation; group purchasing organizations; and waivers of Medicare Part A inpatient cost-sharing amounts. The 1992 interim final safe harbors, which were finalized in 1996, addressed the following practices in managed care settings: increased coverage, reduced cost-sharing amounts, or reduced premium amounts offered by health plans to beneficiaries; and price reductions offered to health plans by providers. There have been additional safe harbors since.

State Law Prohibitions Against Self-Referral and Kickbacks

Many states have their own statutes which mirror the federal provisions. Typically, state laws at the very least will target fee-splitting, which usually consists of sharing a fee with another physician or health care provider for giving or receiving a patient referral. Violations of fee-splitting laws may subject a physician to disciplinary action by a state's licensing board, in addition to other sanctions.

For example, in New York the Rules of the Board of Regents ( prohibit:

1. directly or indirectly offering, giving, soliciting, or receiving or agreeing to receive, any fee or other consideration to or from a third party for the referral of a patient or client or in connection with the performance of professional services;

2. permitting any person to share in the fees for professional services, other than: a partner, employee, associate in a professional firm or corporation, professional subcontractor or consultant authorized to practice the same profession, or a legally authorized trainee practicing under the supervision of a licensed practitioner. This prohibition shall include any arrangement or agreement whereby the amount received in payment for furnishing space, facilities, equipment or personnel services used by a professional licensee constitutes a percentage of, or is otherwise dependent upon, the income or receipts of the licensee from such practice, except as otherwise provided by law with respect to a facility licensed pursuant to Article 28 of the Public Health Law or Article 13 of the Mental Hygiene Law....

(See Anti-kickback and fee-splitting issues for integrative medicine clinics and medical spas)

Similarly, California Business & Professions Code section 650 provides:

(a) Except as provided in Chapter 2.3 (commencing with Section 1400) of Division 2 of the Health and Safety Code, the offer, delivery, receipt, or acceptance by any person licensed under this division or the Chiropractic Initiative Act of any rebate, refund, commission, preference, patronage dividend, discount, or other consideration, whether in the form of money or otherwise, as compensation or inducement for referring patients, clients, or customers to any person, irrespective of any membership, proprietary interest or coownership in or with any person to whom these patients, clients, or customers are referred is unlawful.

b) The payment or receipt of consideration for services other
than the referral of patients which is based on a percentage of gross
revenue or similar type of contractual arrangement shall not be
unlawful if the consideration is commensurate with the value of the
services furnished or with the fair rental value of any premises or
equipment leased or provided by the recipient to the payer.

(c) The offer, delivery, receipt, or acceptance of any
consideration between a federally-qualified health center, as defined
in Section 1396d(l)(2)(B) of Title 42 of the United States Code, and
any individual or entity providing goods, items, services,
donations, loans, or a combination thereof, to the health center
entity pursuant to a contract, lease, grant, loan, or other
agreement, if that agreement contributes to the ability of the health
center entity to maintain or increase the availability, or enhance
the quality, of services provided to a medically underserved
population served by the health center, shall be permitted only to
the extent sanctioned or permitted by federal law.

(d) Except as provided in Chapter 2.3 (commencing with Section
1400) of Division 2 of the Health and Safety Code and in Sections
654.1 and 654.2, it shall not be unlawful for any person licensed
under this division to refer a person to any laboratory, pharmacy,
clinic (including entities exempt from licensure pursuant to Section
1206 of the Health and Safety Code), or health care facility solely
because the licensee has a proprietary interest or coownership in the
laboratory, pharmacy, clinic, or health care facility; provided,
however, that the licensee's return on investment for that
proprietary interest or coownership shall be based upon the amount of
the capital investment or proportional ownership of the licensee
which ownership interest is not based on the number or value of any
patients referred. Any referral excepted under this section shall be
unlawful if the prosecutor proves that there was no valid medical
need for the referral.

(Section 650 must be read in light of 650.01, 650.02 and some other provisions, but that is for another day.)

The Federal False Claims Act

Related to the Stark and anti-kickback laws as part of Congressional attempt to address medical fraud and abuse is the False Claims Act, which penalizes the knowing submission of inaccurate, inflated or fraudulent bills to federal health care programs.

In an integrative care practice, false claims concerns can be addressed by reviewing billing and coding. Our

Welcome to the real world, my friend. Congress has succeeded masterfully in creating job opportunities for lawyers.

But complex need not mean needlessly complicated. There is a way through maze, and we will offer a menu of options that can help clients navigate their way.

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