OIG ruling puts common fee arrangement in question

PPMCs: Not dead yet, but facing major changes

The first blow came in early spring, when the Florida Board of Medicine found that a practice that paid a practice management company (PPMC) a percentage of its revenues for referrals was engaging in illegal fee-splitting. The second blow came on April 15, when the Office of the Inspector General (OIG) of the Department of Health and Human Services found that a similar agreement may violate Medicare/Medicaid anti-kickback laws.

According to Chris Rolle, an attorney with the Orlando, FL, law firm Broad and Cassel, the OIG's opinion will "change the way PPMCs do business." Rolle explains that the case involved a proposed arrangement in which a primary care practice would hire physicians and deliver medical care, and the PPMC would provide the facilities and management and marketing services - including billing and collection, negotiation and oversight of payer contracts, and establishment of provider networks to which the practice might be required to refer its patients.

In return for its services, the PPMC would get payments for capital expenditures it made to set up the clinic, fair market value payments for the operating services provided, and 20% of the practice's monthly net revenues.

But the OIG felt that anti-kickback laws against paying or receiving payment, directly or indirectly, in exchange for referring patients were violated by the agreement. The main problem, says Rolle, was that there was no compensation fixed in advance - it was a percentage of revenue.

But there were other problems with the arrangement, including:

· Financial incentives to increase patient referrals. The PPMC would get a percentage of practice income, including revenue from managed care contracts arranged by the PPMC. This suggests a kickback.

· No safeguards against over-utilization. The OIG found the proposed establishment of provider networks and the required referral arrangements created a risk of over-utilization. There was no incentive - or none presented to the OIG - to provide only the care needed.

· No safeguards against abusive billing practices. The PPMC would provide billing services and would receive a percentage of revenues. This incentive to increase revenues, the OIG found, could increase the risk of up-coding and other abusive billing practices, something the OIG said was a "long-standing concern."

Not a death knell

Although the news was bad, Rolle says there is some hope. The OIG appears to provide some flexibility in percentage-based contracts, provided they have adequate protection against fraud and abuse. A carefully crafted arrangement with appropriate safeguards might be acceptable to the OIG, he says. The OIG opinion is related only to the practice that requested it, says Rolle, but no smart practice can ignore the ruling. "The PPMCs are aware of this too, and they are looking for ways to work around the problems," he says. "But this is a fairly standard kind of arrangement, so this is very important to practices that are thinking of entering into a PPMC agreement."

In the future, Rolle says fixed fees may take over as the most common kind of payment to PPMCs. But he and his firm are already working with companies and practices to see if there is an appropriate way to structure a percentage deal.