Sham medical director agreements violate Stark laws

Medical directors at medical spas should be concerned that, unless the arrangement is carefully structured with an eye to legal rules and anti-kickback risks, regulatory enforcement authorities might perceive their role as sham and fraudulent.

In U.S. v. Borrasi (7th Cir. 2011), a medical doctor,  was convicted of Medicare fraud after he accepted a salary from a hospital in exchange for continually referring patients to the facility, a violation of 42 U.S.C. § 1320a-7b.

The medical doctor owned Integrated Health Centers, a corporate group of healthcare providers in Illinois, and was found to have conspired with Rock Creek Center, a licensed inpatient psychiatric hospital, to send a "stream of Medicare patient referrals" in exchange for "bribes."

The Court found that he was "placed on ... payroll, given false titles and faux job descriptions, and asked to submit false time sheets."  Among other things, he was named Service Medical Director and required to be available at all times, yet was not expected to perform any duties listed in his job description.  Although he occasionally attended meetingsat Rock Creek, this was sporadic and he did not perform the administrative duties he had been assigned (and was not expected to).  Rock Creek paid his salary and lease payments for one of Integrated's offices, purportedly giving Rock Creek an outpatient clinic at the medical doctor's building.

In addition to jail time, each defendant in the case was ordered to pay almost half a million dollars in restitution.

Significantly, the Court declined to adopt the medical doctor's argument that if he could not be found guilty, if his "primary motivation" was to be compensated for bona fide services provided.  Instead, the Court adopted the rule from other Circuits that "if part of the payment compensated past referrals or induced future referrals, that portion of the payment violates" the federal anti-kickback statute.  Put another way, the jury only had to find, beyond a reasonable doubt, "that some amount was paid not pursuant to a bona fide employment relationship."

Note that if the medical doctor refers to an entity in which he or she has an ownership interest, this raises a Stark (self-referral) issue as well as an anti-kickback issue.

One significance of this case is that clients who want to establish a medical spa, integrative care center, or multidisciplinary wellness clinic sometimes regard the management services structure as somewhat pro forma.  They feel that a structure alone should convince regulators that they have dotted the t's and crossed the i's.  However, this is a legally risky view.  The Borrasi case is crystal clear that enforcement authorities will penetrate past sham agreements. 

Those structuring medical spas and integrative care centers should consult an attorney experienced in Stark, anti-kickback, and fee-splitting legal issues and drafting of management agreements.  If:

  • services are provided at fair market value (and justified as such with a detailed spreadsheet)
  • compensation is being rendered without bona fide services being provided in exchange, and/or
  • at least one purpose of the arrangement is to induce referrals

then the parties should understand that regulators could find a sham arrangement or disguised kickback scheme. 

To qualify this somewhat, note that in Borrasi there was testimony that the medical doctor "was not expected to perform any of the duties listed in his job description," and that he in fact did not perform such duties other than occasionally attend meetings.  So in this case the testimony established that the parties contemplated inducement of referrals as a key purpose behind the arrangement - in other words, they desired that the medical doctor receive "free money" in exchange for referrals, which is precisely what the anti-kickback laws forbid.

Legal counsel is necessary not only at the contract drafting stage, but during discussions and negotiations of proposed arrangements, so that a proper anti-kickback analysis can be performed and the parties can be adequately informed as to various options and the legal risks behind various structures and arrangements.


Michael H. Cohen is a thought leader in health care law, pioneering legal strategies and solutions for business law clients in traditional and emerging healthcare. wellness, and lifestyle markets.  As a corporate and regulatory attorney who has also handled litigation matters, Mr. Cohen represents conscious business leaders in a transformational era.

Clients seek Mr. Cohen’s specialized expertise on business structure and entity formation (corporations, partnerships, LLCs); health care licensing matters; employment contracts and independent contractor agreements; dispute resolution; e-commerce; intellectual property issues; informed consent and malpractice liability issues; HIPAA and confidentiality and privacy issues; Stark, self-referral, anti-kickback, patient brokering, and fee-splitting questions; dietary supplement labeling; medical device and FDA matters; insurance reimbursement and Medicare issues; website disclaimers; concierge medicine legal advice; telemedicine; and other business law and health care regulatory compliance arenas.  Whether advising start-ups or established companies, he brings his entrepreneurial spirit and caring insight to cutting-edge legal and regulatory challenges.

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