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Practice Management Agreements Draw Fire

The Office of the Inspector General of the Department of Health and Human Services (OIG) has recently issued an advisory opinion raising serious questions concerning the legality of many agreements between physicians and management companies. Specifically, Advisory Opinion 98-4 holds that many typical practice management agreements may violate the federal anti-kickback law.

A. The Facts

In the relationship evaluated in the Opinion, a management company agreed with a family practice to furnish initial capital for the establishment of a clinic, provide or arrange for all operating services of the clinic, and negotiate and oversee health care contracts for the practice. Additionally, the management company was to set up provider networks that the practice could join, and the practice would agree to refer its patients to the other network providers.

In return for the above services, the management company was to be paid in the following ways:

1.Six years of monthly payments for the capital assets provided the practice;

2.Fair market value payments for the operating services provided; and 3.A percentage of the practice's net revenues in return for the management services provided.

B. The Analysis

The OIG's analysis first determined that the anti-kickback law was triggered by the proposed arrangement because payments would be made to the management company, which was an entity referring Medicare or Medicaid business to the practice.

Second, it was determined that no "safe harbor" protected the arrangement. While there are safe harbors for "personal services" and "management services" contracts, these exemptions did not apply, because the exemptions require aggregate compensation to be set in advance, without taking into account the volume or value of referrals between the parties.

The OIG noted that it has the authority to protect specific arrangements not covered by specific safe harbors if those arrangements contain adequate controls against abuse. However, the OIG stated that it would not invoke this authority to protect these practice management arrangements, because the arrangements had no safeguards against potential overutilization of the Medicaid or Medicare programs.

C. The Implications

While not definitively concluding that the proposed arrangement is illegal, the OIG has clearly warned the parties that their plan carries grave risks. In so doing, the OIG has directly attacked "network" arrangements whereby, in exchange for a variable fee, a network or practice manager arranges to line up providers with Medicare or Medicaid patients. Additionally, the opinion generally attacks management fees based on a percentage of profit.

At the least, Advisory Opinion 98-4 will cause lawyers to modify the structure of practice management agreements, as well as to change the specific language found in these agreements. However, only time will tell if the Opinion will have a greater impact by seriously undermining the entire practice management industry.


September 21, 1998




Rosen, Barry F.


Health Care