A series of recoupment letters from the New York State Medicaid Fraud Control Unit (MFCU) to healthcare providers who have management or billing company arrangements based on a percentage of collections has prompted the Medical Society of the State of New York (MSSNY) to warn its members that such arrangements are fraudulent under Medicaid law. The warning, posted on its blog on February 10, 2017, also urged members to review their billing arrangements to make sure the compensation is based either on time or a fixed, flat fee.

In a redacted MFCU recoupment letter linked to the post, MFCU states that as a result of an audit and investigation, it has determined that the percentage based contract violates state and federal Medicaid regulations, including Section 360.7.5(c), which permits Medicaid providers to contract with billing agents if the compensation paid to the agent is “reasonably related to the cost of the services” and “unrelated, directly or indirectly, to the dollar amounts billed and collected.” The audit period was five years, and MFCU sought to collect the overpayment amount plus an additional nine percent (9%) interest.

The warning from MSSNY comes at a critical time for healthcare providers, who have seen sweeping changes in their industry over the last decade from the transition away from fee-for-service to value-based payments, to the alignment of hospitals, physicians and other providers in accountable care organizations and other clinically integrated models. As healthcare delivery continues to evolve, providers continue to seek new economic arrangements that will help their businesses thrive, including management services arrangements. A management services arrangement allow providers to delegate the administrative side of the practice to professional billers, bookkeepers and back-office suppliers, which in turn allows the providers to focus on patient care.

The problem with many management services arrangements, however, is that the compensation is often based on a percentage of the practice’s revenue. This type of arrangement has long been prohibited in New York because it is deemed to constitute fee-splitting. The fee splitting prohibition – the sharing of fees for professional services between licensed and unlicensed individuals or entities – is intended to guard against improper interference or influence from lay persons who ostensibly have the financial bottom line, rather than the patient’s best interest, in mind. While the division of fees that are tied to patient referrals, as well as overbilling and overutilization, are genuine and reasonable concerns, many health care professionals and service providers have questioned whether a broad-based fee-splitting prohibition is the best solution for addressing these concerns. Indeed, other states with fee splitting prohibitions, such as California, expressly permit or safe harbor percentage-based compensation with management services organizations.

While the MSSNY post points out that the recent enforcement activity is the result of MFCU efforts and unrelated to any Department of Health (DOH), Office of Medicaid Inspector General (part of DOH but reports to the Governor), Office of Professional Medical Conduct (also part of DOH) or Education Department (which licenses physicians) endeavors, physicians and other healthcare providers should remain cognizant of the fact that fee-splitting does constitute professional misconduct and puts their license in jeopardy.

Despite the State’s long standing fee splitting prohibition and the recent MFCU enforcement activity, change in New York is not entirely inconceivable. As recently as 2015, a bill was introduced in the State Senate that would have expressly allowed hospitals and physicians to pay practice management and billing vendors based on a percentage of fees billed or collected as long as it constituted fair market value. But for now the prohibition is alive and well, which means physicians, group practices and management services organizations should continue to carefully examine their current and proposed arrangements to ensure compliance with the fee-splitting prohibition.