Editor’s note: One of the goals of the Affordable Care Act (ACA) is to align incentives among provider communities and their patients and partners. This effort to create communities of common interest with mutually beneficial incentives is now a key driver of many innovations in the healthcare environment. Some states, however, still have antiquated statutory prohibitions in place that hamper positive attempts to create legitimate business arrangements that promote efficiency and quality. A key example is the state prohibition against fee splitting, which is in approximately two-thirds of states.

In a new article for Bloomberg BNA’s Medicaid ReportTM, summarized below, Manatt Health examines the current status of fee splitting prohibitions in the states, highlighting different legislative approaches to facilitating and promoting desirable business arrangements, with an emphasis on billing arrangements. Click here to download a free PDF of the full article.

Fee splitting prohibitions are aimed primarily at situations where a healthcare professional, in order to generate patient referrals from other licensed or unlicensed persons, splits part of the professional fee earned from treating the referred patient with the source of the referral. In response to legitimate concerns, states adopted prohibitions against fee splitting. Some of these prohibitions, however, reach far broader than necessary to deter this behavior and instead prohibit appropriate business relationships with entities that are not healthcare providers, such as billing agencies or management companies.

Although there are understandable concerns regarding overbilling or overutilization of care, fee splitting prohibitions that broadly prohibit legitimate, nonfraudulent relationships are not the appropriate tool for addressing these issues.

States have taken a variety of legislative approaches to fee splitting. At one end of the spectrum, New York prohibits the compensation of any practice management and billing entities based on a percentage of reimbursement collection. At the opposite end, some states, including California, explicitly permit and sanction such arrangements. There are a range of fee splitting approaches in between, as well as states that have not addressed the issue at all.

Historical Context for Fee Splitting Prohibitions

The medical profession historically has recognized an ethical prohibition against physicians paying their professional peers for referrals. One form this takes is the prohibition against fee splitting. Fee splitting occurs when a physician, to generate referrals from other physicians, splits part of the professional fee earned from treating the referred patient with the referring physician. There are various harms that might arise from fee splitting, including:

  • Unnecessary operations and procedures,
  • Incompetent specialists, and
  • Dishonest orientation by the general practitioner and the specialist.1

Given the historical development of fee splitting, it is not surprising that the American Medical Association’s Opinion No. 6.02 on fee splitting provides that “payment by or to a physician solely for the referral of a patient is fee splitting and is unethical. A physician may not accept payment of any kind, in any form, from any source…for prescribing or referring a patient to said source. . . . All referrals and prescriptions must be based on the skill and quality of the physician to whom the patient has been referred or the quality and efficacy of the drug or product prescribed.”

Similarly the American Society for Clinical Pathology’s Statement on “Self-Referral Markups, Fee Splitting and Related Practices,” Policy No. 04-03, supports prohibitions designed to “prevent clinical providers from profiting on their patient referrals. . . . Abusive billing practices, such as markups, fee splitting and kickbacks, distort rational medical decisions as a result of economic incentive. . . . ”

The purpose of these prohibitions is to ensure that the patient’s referral to a specific specialist is not tainted by an improper remuneration incentive. Concerns are not prompted by the fact that fees are shared but rather by whom and for what intent and effect.

Survey of State Legislation Regarding Fee Splitting

Seventeen states have not adopted generally applicable fee splitting statutes per se.2 The remaining two-thirds have enacted fee splitting prohibitions in some form.3 Most of these statutes are fairly broad, rarely interpreted and could be used by a Board as the basis for a claim of professional misconduct against a physician utilizing a percentage-based management or billing arrangement.4

For example, Idaho’s statute, representative of many, defines the grounds on which a board may discipline physicians to include the “[d]ivison of fees or gifts or agreement to split or divide fees or gifts received for professional services with any person, institution or corporation in exchange for referral.”5 On the surface, this could be interpreted to prohibit a broad variety of arrangements, including percentage-based billing or management arrangements. Because virtually all billing companies and some management companies use percentage-based billing arrangements, physicians may inadvertently violate such prohibitions. This exposes them to legal risk and their partners to uncertainty, since the physician may try to exit a contractual arrangement by alleging the underlying contract is void, because it is contrary to law.

Four states (Florida, New York, North Carolina and Tennessee) have notably broad prohibitions against fee splitting. Of these, only New York explicitly states that percentage-based agreements with billing companies are impermissible. Courts in both Florida and Tennessee have expressed some concern over percentage-based arrangements with management companies but not with companies whose sole function is billing.

North Carolina is somewhat anomalous as well. Its Board of Medicine has publicly posted an online warning related to fee splitting6, but there are no posted records of disciplinary action taken against licensees for fee splitting that would provide more context as what the Board deems impermissible fee splitting.

Finally, two states (California and Illinois) have statutes prohibiting fee splitting but specifically authorizing percentage-based billing arrangements.

California has taken legislative action to protect arrangements that it recognizes as lawful, efficient and presenting a reasonably low likelihood of abuse. The California statute requires that fair market value compensation be paid for billing or management services, providing a reasonable check against abusive relationships.

The Illinois law is also of interest. It is even broader than the California statute, permitting a percentage-based fee calculated on service fees “billed,” while California only permits such arrangements to be based on fees “collected.” Like California, Illinois includes a fair market value requirement, which the state deems to be a sufficient check against abusive behaviors in billing, administrative preparation of claims or collection service arrangements.

Percentage-Based Billing and Management Company Arrangements

The likelihood of harm (such as upcoding or abusive billing practices) is only marginally greater using percentage-based billing arrangements than it is using per-claim billing arrangements. The preference for the latter type of arrangement is a relic of a system whose driving principle was volume rather than value.

Alignment of incentives and shared savings arrangements require that providers and their supporting organizations be able to share costs fairly and accurately among themselves. Legal prohibitions that prevent these organizations from using accurate, non-abusive means to reach that end are undesirable.

The performance of billing functions by a third party rather than by a provider itself offers key advantages. Billing companies:

  • Have greater expertise and resources to support employees in billing complex claims.
  • Provide cost efficiencies through economies of scale.
  • Increase accuracy due to greater billing experience than office staff.

Moreover, given the general consensus that healthcare costs should be driven by considerations of quality, value and payment for performance, it follows that payments to billing companies should track those principles. Guaranteed payments to billing companies (such as fixed fees or per-claim payments) that apply regardless of the biller’s success in achieving outcomes are contrary to these principles. They are also unfair to providers who are left to bear the brunt of two risks:

  • The risk of non-payment of their claims, and
  • The risk the billing company will not pursue payment of their claims.

In contrast, a percentage-based billing arrangement allows providers to share risk with their billing companies. This approach supports a more equitable outcome, considering billing companies have a greater degree of control over success. Overall, compensation of billing companies on a percentage basis provides a net savings to the healthcare system and creates efficiencies for providers.

The remaining issue is whether percentage-based billing arrangements increase the likelihood of fraud and abuse. One clear indication that a billing method is susceptible to abuse is when the compensation the provider paid to the biller is not commensurate with the fair market value of the services the biller provided. Measured on this scale, flat fee billing is far more susceptible to abuse than percentage-based billing.

When a provider pays a flat fee to a billing company, neither the provider nor the billing company can predict whether the fee will or will not accurately reflect the actual cost of the billing company’s efforts to obtain collections for the provider. In contrast, a percentage-based billing arrangement ensures that the billing company has an adequate incentive to pursue claims as long as efficiently possible. Further, it more fairly allocates costs to physicians, ensuring they only pay for claims that the billing company successfully recovered.

Conclusion

While some may argue that contracting with third-party billers on a percentage-based basis incentivizes upcoding, it also can be said that per-claim arrangements incentivize duplicate billing and submission of multiple claims. The dispositive factor determining whether abuse is likely to occur is whether the biller has an abusive motive, not whether the physician pays on a flat fee or percentage basis.

Given that percentage-based billings are fairer, more efficient and more equitable in apportioning risk, more and more states are recognizing that these billing practices are not only innocuous but superior. Therefore, states with outmoded fee splitting prohibitions should—and, at least in some cases, likely will—update these statutes to account for the realities of today’s modern healthcare system.