Corporate Practice

Financial Incentive Arrangements among Contract Management Groups in Emergency Medicine

Over the past few years there has been increasing concern about fraud and abuse in health care. Consider this recent congressional testimony:

The importance of our ongoing work is not only to protect the taxpayers and ensure quality healthcare for Medicare beneficiaries, but to also make the Medicare environment one in which honest providers can operate on a level-playing field and do not find themselves in unfair competition with criminals.¹

The Office of the Inspector General (OIG) has also consistently taken the position that physicians are responsible for the accuracy and compliance of bills submitted in their name. There is no exception for emergency medicine. The OIG has also maintained the rather illogical position that physician employment arrangements are acceptable and that it is legal for a physician to reassign her billings to a contract management group (CMG).

No payment under this part for a service provided to any individual shall (except as provided in section 1870) be made to anyone other than such individual or (pursuant to an assignment described in subparagraph (B)(ii) of paragraph (3)) the physician or other person who provided the service, except that (A) payment may be made (i) to the employer of such physician or other person if such physician or other person is required as a condition of his employment to turn over his fee for such service to his employer. ²

"You may pay Part B benefits for covered physician services under an assignment or under §7201A2 . to the physician's employer, provided that under the terms of the physician's employment, only the employer and not the physician has the right to charge or collect charges for the physician's services.. ³

This would appear to be a perversion of an original provision to allow academic physicians to assign their clinical billings to their employer, the university. In the case of academic physicians this makes perfect sense because the physicians are paid more than they generate in fees from their clinical practice. The reassignment of their clinical income only serves to partially offset their salary. This is a far cry from the situation which has evolved in the practice of emergency medicine today whereby physicians are forced to work for CMGs and coerced into fee-splitting arrangements.

The CMG's require reassignment as a condition of employment. These groups then refuse to even allow physicians access to their own billing records. Under such an arrangement the OIG's compliance guidelines of June 12, 2000 makes absolutely no sense.

"Physicians should remember that they remain responsible to the Medicare program for bills sent in the physician's name or containing the physician's signature, even if the physician had no actual knowledge of a billing impropriety." ⁴

It is generally impossible for employee emergency physicians to comply with this regulation.

The Federal Government has also made innumerable claims that it is intent upon stopping fraud and abuse in health care.⁵  Fraud has been broadly defined as lying for profit⁶ and in a more limited sense, specifically defined to include any kickbacks paid for patient referrals. In spite of reports from individuals and groups and even in the face of congressional outcry,⁷  the reality is that the OIG seems to have little inclination to investigate some cases of overt fraud or kickbacks. It appears that the OIG is reluctant to become involved unless it can be proven that there is actual overutilization or overbilling. Unfortunately, in the field of emergency medicine, this is almost always impossible to prove because individual physicians are precluded from accessing their billing data by their employer, the CMG. This is the "lockbox" problem described by Mr. Lewis Morris in recent congressional testimony.⁸

This leaves the individual emergency physician stuck between the proverbial rock and a hard place. If he fails to monitor his billing he may be liable for fraud. If he seeks to monitor the bills sent in his name he is likely to be fired. What is the emergency physician to do? When this question is asked, the response is often, "If you don't like it, go work somewhere else". Unfortunately this is not really an option. When half the nation's emergency departments are run by these CMGs, such advice is tantamount to saying, "Quit practicing medicine!" Is this really the approach that the federal government wants to take? Such a hard-nosed approach may seem appropriate at first glance but the societal costs are staggering. This attitude produces the "crisis of inexperience", so eloquently described by Charles Krauthammer in the Washington Post.⁹  It is also penny wise and pound foolish in the sense that medical education is very expensive and it is funded largely by the government. Does the federal government really want to push doctors to retire in the middle of their careers after it has funded their education? This makes no sense and does not serve the American public.

Percentage-Based Billing
We search for a solution to these problems. We ask the federal government, the OIG, HCFA, DOJ and Congress to put a stop to practices which harm patients as well as physicians. The key to understanding the malignancy of CMGs is to begin with an understanding of percentage-based billing practices. The OIG has repeatedly stated that percentage-based billing arrangements are unacceptable and are likely to be found illegal.¹⁰

One of the most common risk areas involving billing services deals with physician practices contracting with billing services on a percentage basis. Although percentage based billing arrangements are not illegal per se, the Office of Inspector General has a longstanding concern that such arrangements may increase the risk of intentional upcoding and similar abusive billing practices.

A physician may contract with a billing service on a percentage basis. However, the billing service cannot directly receive Medicare payments made to the physician. Under 42 U.S.C. 1395u(b)(6), Medicare payments can only be made to either the beneficiary or a party (such as a physician) that furnished the services and accepted assignment of the beneficiary's claim. A billing service that contracts on a percentage basis does not qualify as a party that furnished services to a beneficiary, thus a billing service cannot directly receive Medicare payments. According to the Medicare Carriers Manual Sec. 3060(A), a payment is considered to be made directly to the billing service if the service can convert the payment to its own use and control without the payment first passing through the control of the physician. For example, the billing service cannot bill the claims under its own name or tax identification number. The billing service must bill claims under the physician's name and tax identification number. Nor can a billing service have the Medicare payments sent directly to its office or its bank account. The Medicare payments should instead be sent to the physician's office or bank account.

Physician practices should review the third-party medical billing guidance for additional information on third-party billing companies and the compliance risk areas associated with billing companies.¹¹

Their rational? Percentage-based billing gives the billing agent an incentive to overbill. This position leads to a truly mind-boggling inconsistency that it appears the OIG has not yet recognized. The CMGs which employ physicians on a salaried basis have far more incentive to overbill than any percentage-based billing company. If percentage-based billing problematic than surely the CMG employment arrangements should be illegal. Why is this so?

Fixed Costs and Marginal Profits
In order to understand the tremendous incentive to overbill in the CMG industry, one must undertake a basic review of accounting principles. Under the financial arrangements of many CMG's the physicians are paid a fixed salary and the billing is controlled by the CMG. Thus there are fixed costs (physician's salaries) and variable revenue and profit based on charges and collections.

Hypothetical Emergency Medicine Financial Figures
To help us understand the issues at stake, let us consider three different billing arrangements. We will first look at two types of billing arrangement for independent practicing physicians. We will then examine the billing relationship when the physicians are employed by a CMG.

(figure 1)

Figure 1. illustrates some fairly typical per patient financial and billing information for an emergency physician. In this case we assume that the business expenses represent fixed per-patient fees paid. This might include about $7 per patient, a fixed fee paid to a billing company on a per-patient basis. Malpractice insurance and other expenses account for another $13 dollars per patient.

(figure 2)

In the next case (figure 2) the numbers are identical for the sake of our example but the business arrangement between the physician and third party the billing company is different. In this case, we assume that the physician contracts with a third-party management company. For the sake of our example we assume that the management company covers all business expenses including malpractice and billing. For these services the management company is paid a percentage of the fee collected. So far these two scenarios appear very similar. What happens in these two scenarios if the charges are increased by 10%. What is the difference?

EM financial figures with 10% increase in charges

(figure 3)

The differences are illustrated in figure 3. Notice what happens if the charges are increased by 10%. In the first scenario where the physician owns his independent practice, the physician collects the entire fee increase. Assuming she is able to hold other costs down, her income will increase by 12.5%. This is more than 10% but not much more. In the second scenario, the physician is still self-employed in an independent practice. The difference is that because the management or billing company is paid on a percentage basis, they also profit from the fee increase. The physician's income increases, but not exhortantly. The physician's and the third party's increase in income is proportional to the fee increase. Most people would probably feel that this arrangement is inherently fair. It is important to realize that the federal government does not feel this way. The government frowns on such arrangements.¹²

Now consider the result under the scenario illustrated in figure 4. In this case the physician is no longer in independent practice. He is employed by a contract management group (CMG). The CMG controls the fees as well as the billing and coding. Notice also that when employed by a CMG, the physician's reimbursement is decreased from the start. If the charges are competitive then this must be the case to allow for the corporate profit.

EM financial figures for a physician employed by a Contract Management Group

(figure 4)

Let's see what happens in this case when the charges are increased by the same 10% as in our previous examples. Because the marginal billings represent variable profits, if the CMG can increase the charges billed by 10% this translates into a massive 100% increase in their revenue compared their revenue before increasing the charges. Such increases in charges fall straight to the bottom line as profits. What an incentive! When physicians are employed by a CMG there is a 10 fold increase in the incentive to overbill compared to percentage-based billings arrangements.

(figure 5)

Thus, under a percentage-based billing service there is indeed some incentive for the billing service to overbill. Notice, however, that under such an arrangement the profit to the billing company is simply passed through as their share (10% of the billing increase in this example). Many would consider this simply the billing company's "fair share"; a reasonable incentive. However, note that the OIG has steadfastly maintained that a percentage-based billing service is unacceptable because of the incentive to overbill. In this case the incentive is a small one. The third-party billing company would only see 10% of the increase. Even if the third party billing company does upcode, most of the increased revenue goes to the physician. The incentive does not seem strong. Its hard to imagine one would be motivated to break the law if 90% of the benefit went to someone else. If, as the OIG maintains, there is incentive to overbill under a percentage-based billing arrangement, this illegal incentive is increased ten-fold under a CMG employment arrangement! How can the OIG consider such an arrangement to be legal? This is a marked inconsistency in the interpretation and enforcement of the law. It must be rectified. There are voices calling for such change. E.g. Mr. Lewis Morris, Assistant Inspector General, has stated:

"Congress should consider measures to expressly prohibit the use of payment incentives in third-party billing contracts, no matter how the arrangement is structured." ¹³

(emphasis added)

In this context Mr. Morris was speaking of the lockbox arrangements described above. We agree with Mr. Morris regarding lockboxes and we ask Congress to be consistent and go further to "pass measures which prohibit" this greater abuse at its very root. We call upon Congress to outlaw forced fee-splitting arrangements whereby physicians are employed by for-profit management groups. This is the single greatest step which can be taken to restore integrity to the practice of emergency medicine.

N.B. The figures cited are not meant to represent absolute or definitive dollar amounts of various fees and expenses. The amounts and the ratios indicated are thought to be fair representations of the various principles discussed.

1. Testimony Before the House Committee on Government Reform, Subcommittee on Government Management, Information and Technology Medicare Fraud: Continuing Efforts, John E. Hartwig Deputy Inspector General for Investigations, OIG, July 25, 2000
2. http://www4.law.cornell.edu/ - 42 U.S.C. 1395u(b)(6)
3. Medicare Carriers Manual - Part 3 § 3060.1
4. Draft OIG Compliance Program for Individual and Small Group Physician Practice, June 12, 2000
5. e.g. www.hhs.gov/oig/, www.dhhs.gov, www.hcfa.gov
6. www.hcfa.gov/medicare/fraud/DEFINI2.htm
7. Subcommittee on Investigation and Oversight (subcommittee of Commerce), April 6,^, 2000 Health Task Force (Subcommittee of House Budget) July 12,^, 2000
8. Lewis Morris, Assistant Inspector General, Congressional Testimony, April 6, 2000
9. "Crisis on the Horizon as more-experienced doctors retire early", Charles Krauthammer, Washington Post, Jan 9, 1998.
10. e.g. OIG Advisory 98-04
11. Federal Register: June 12, 2000 (Volume 65, Number 113), Page 36830, via GPO Access wais.access.gpo.gov, DOCID:fr12jn00-34
12. Ibid.
13. Morris, op. cit.