Referral and Compensation Compliance

In most industries, paying for referrals is called business development. In health care it can be a federal felony, a basis for treble damages, and grounds for exclusion from federal programs. Practitioners get into trouble here not because they set out to do something wrong, but because an arrangement that looks like ordinary commerce, a marketing agreement, a medical directorship, subleasing space to a referring physician, a discount from a laboratory, turns out to sit inside a regulatory scheme that does not care much about intent in some places and cares about nothing else in others.

The Law Offices of Albert Goodwin advises New York City practices on structuring referral and compensation arrangements, and on responding when one is questioned.

Three Overlapping Regimes

An arrangement in New York must satisfy all three of the following. Complying with one does not resolve the others.

The Physician Self-Referral Law

Commonly called Stark, this law prohibits a physician from referring a Medicare patient for certain designated health services to an entity with which the physician, or an immediate family member, has a financial relationship, unless an exception applies. It also bars the entity from billing for the referred service.

Two features make it dangerous. First, it is a strict liability statute. There is no intent element. An arrangement either fits an exception or it does not, and a technical failure, a lease that expired and was never renewed in writing, a signature never obtained, produces a violation even where nobody intended anything improper. Second, the consequence of a violation is that the claims were not payable, which means the money must be returned and the retained amounts can become False Claims Act exposure.

The exceptions are detailed and each has its own elements. Those most relevant to practices include the in-office ancillary services exception, which is what permits a group practice to provide imaging and laboratory services to its own patients but which imposes specific requirements about the group's structure, supervision, and location; the bona fide employment relationship exception; the personal service arrangements exception; and the rental of office space and equipment exceptions. Most exceptions require a written agreement, signed, for a term of at least one year, with compensation set in advance at fair market value and not varying with the volume or value of referrals.

The exceptions have been modified in recent years, including additions addressing value-based arrangements and limited remuneration, and the definitions of key terms have been clarified. Any arrangement being evaluated today should be assessed against the current regulations rather than older guidance.

The Federal Anti-Kickback Statute

The anti-kickback statute is broader in reach and narrower in application. It prohibits knowingly and willfully offering, paying, soliciting, or receiving any remuneration to induce or reward referrals of items or services payable by a federal health care program. Unlike Stark it is an intent-based criminal statute, and unlike Stark it is not limited to physicians or to designated health services. It reaches anyone and any item or service.

Remuneration is interpreted broadly and includes things of value that are not cash: free or discounted space, staff, equipment, meals, gifts, and below-market services. Courts have applied a standard under which an arrangement can violate the statute if one purpose of the payment is to induce referrals, even if there are other legitimate purposes, which is a demanding rule for arrangements with mixed motives.

Safe harbors exist, and unlike Stark exceptions, failing to fit within a safe harbor does not itself establish a violation. It means the arrangement is evaluated on its facts. Safe harbors relevant to practices include personal services and management contracts, space and equipment rental, employment, and investment interests, each with specific requirements including written agreements, fair market value compensation set in advance, and terms of at least one year.

Importantly, a claim submitted for items or services resulting from an anti-kickback violation is treated as a false claim, which links this statute directly to the damages regime described below.

New York Fee Splitting and Corporate Practice

New York's own restrictions apply regardless of the payor, including to entirely private-pay practices where the federal statutes do not reach. The Education Law and the Regents rules on unprofessional conduct make it misconduct for a licensee to share professional fees with an unlicensed person, or to pay for the referral of patients. New York also prohibits non-licensees from owning a professional practice.

The practical effect is that arrangements which would be evaluated federally by asking whether federal program dollars are involved are, in New York, a licensure question for the practitioner whatever the payor mix. A cash-pay aesthetics practice paying a marketing company a percentage of revenue is outside the federal statutes and squarely inside the New York analysis. See practice formation and the corporate practice of medicine.

The Arrangements That Cause Problems

• Medical directorships with compensation above fair market value, duties that are not documented, or hours that are never actually tracked. A directorship agreement with no time records is the single most common problem arrangement we see.
• Space and equipment subleases to or from referral sources, particularly per-click or percentage-based arrangements, and leases that lapsed and continued informally.
• Marketing and patient acquisition paid as a percentage of resulting revenue, or per patient.
• Ancillary service ventures, including imaging, laboratory, pathology, surgical facilities, and dispensing, where the referring physicians hold an ownership interest.
• Free or discounted items and services provided to referral sources: staffing, supplies, electronic health record subsidies, and continuing education.
• Waiver of patient cost-sharing, routinely waiving copayments and deductibles, which raises both anti-kickback and payor contract issues.
• Compensation formulas that credit physicians for ancillary revenue generated by their own referrals.
• Management fees tied to a percentage of practice collections.

What Enforcement Looks Like

The False Claims Act is the enforcement engine. It imposes liability for submitting false claims, with treble damages and substantial per-claim civil penalties, and it permits private whistleblowers to sue on the government's behalf and share in the recovery. In health care, the whistleblower is usually a former employee, a departing partner, or a billing company. New York has its own false claims statute as well, with parallel provisions.

Because penalties are assessed per claim, a practice submitting many small claims under a flawed arrangement can face exposure wildly disproportionate to the amounts actually received. Additional consequences include exclusion from federal health care programs, which for most practices is terminal, and corporate integrity agreements imposing years of monitoring.

The sixty-day rule matters here too: an identified overpayment must be reported and returned within sixty days, and a retained overpayment can itself become a false claim. See audits, overpayments, and appeals.

How to Structure an Arrangement Correctly

1. Put it in writing, signed, before it starts, with a term of at least one year, and calendar the renewal so it does not lapse.
2. Set compensation in advance at fair market value, without regard to the volume or value of referrals, and support the valuation with something objective rather than an assertion.
3. Document what is actually delivered. Time logs for directorships, deliverables for consulting, and evidence that the space is used as described.
4. Test the commercial reasonableness. Would you enter this arrangement, on these terms, with someone who referred you nothing.
5. Fit a safe harbor or exception where one exists, and where the arrangement cannot fit, understand why and document the analysis.
6. Review annually. Arrangements drift. Duties change, hours change, and space use changes, while the paperwork stays where it was.

Where an arrangement's status is genuinely uncertain, an advisory opinion process exists at the federal level, and self-disclosure protocols exist for arrangements that have already occurred. Both are considered decisions that should be made with counsel, since each involves telling the government something it did not know.

You can contact us by phone at 212-233-1233 or by email at [email protected].