OIG Rules that Hospitals Cannot Take Physician Fees


The following Office of the Inspector General (OIG) report is critical to AAEM’s fight for the working EP. Essentially, it prohibits hospitals from taking a portion of the physician’s fee beyond “fair market value” of what the hospital is giving to the physician (office space, etc). The immediate value to the EP who is a hospital employee is clear. You need access to what is collected in your name (another AAEM cause) to evaluate if you are being taken advantage of. Importantly, this OIG Opinion serves as a strong basis for AAEM’s fight against similar improper fee-splitting by contract groups and others. AAEM has petitioned the OIG in such matters and actively uses this tool to protect democratic groups. Contact our leadership if help is needed.

Department of Health and Human Services

Office of Inspector General

Financial Arrangements Between Hospitals and Hospital-Based Physicians

Richard P. Kusserow
Inspector General


This management advisory report (MAR) alerts you to potential violations of the anti-kickback statute (statute), ” 1128B(b) of the Social Security Act (42 U.S.C. ” 1320a-7b(b)). We have identified potential violations in the financial arrangements between some hospitals and hospital-based physicians because these agreements appear to require physicians to pay more than the fair market value for services provided by the hospitals. We are continuing to pursue illegal arrangements where referring physicians receive kickbacks from hospitals. This MAR focuses on arrangements in which hospitals receive suspect remuneration from physicians.


Hospital-based physicians include specialists such as anesthesiologists, pathologists, and radiologists. Each of these specialties is dependent on their position at the hospital to obtain referrals from other specialists practicing at their hospital. In addition, hospitals often perform a variety of services for these physicians. In turn, the hospitals are dependent on the hospital-based physicians because they provide essential services to the hospitals. Some hospitals have reduced payments to hospital-based physicians, and some are requiring payments from those physicians ostensibly to reimburse the hospital for the services it performs, or for other purpose, such as “contributions” to a capital fund.

Medicare pays for the services of hospital-based physicians in a variety of ways. Usually, Medicare pays physicians directly for the services delivered. However, when pathologists perform clinical laboratory services for hospital inpatients under Part A, some portion of Medicare’s prospective payment amounts to the hospital is for that pathology service. Medicare Part B payments for anatomic pathology services are more complicated. Technical and professional components are paid separately. The former go directly to hospitals and the latter to the pathologist.

Section 1128B(b) makes it illegal to offer, pay, solicit, or receive remuneration for referring patients or for arranging for or recommending the ordering of any service payable under Medicare or Medicaid. The statute is very broad, covering indirect or covert forms of remuneration, bribes, kickbacks, and rebates as well as direct or overt ones. Unlike most applications of the statute concerning Medicare compensation arrangements, the focus here is on remuneration made to hospitals from physicians.

The case law makes clear that the statute’s proscriptions apply to those who can materially influence the flow of Medicare and Medicaid business. Hospitals are in such a position with respect to hospital-based physicians, since they typically can name who will be the recipient of the flow of business generated at the hospital. The use of influence to steer health care business was the subject of a case decided in the First Circuit, U.S. Court of Appeals. In United States v. Bay State Ambulance and Hospital Rental Service, Inc. 874 F.2d. 20, 33 (1st Cir. 1989) a hospital employee, John Felci, was convicted of receiving illegal payments to influence the hospital’s decision as to which ambulance company should receive the hospital’s ambulance contract.

Three other significant cases have interpreted the statute. In United States v. Greber 760 F.2d 68, 69 (3rd Cir.), cert. denied, 474 U.S. 968 (1985) the Court held that, “if one purpose of the payment was to induce future referrals, the Medicare statute has been violated.” The reasoning in Greber was adopted by the Ninth Circuit Court of Appeals in the United States v. Kats 871 F.2d 105 (9th Cir. 1989.) In Kats the Court found that the statute is violated unless the payments are incidentally attributable to referrals.

In United States v. Lipkis 770 F.2d 1447 (1985), the Ninth Circuit Court of Appeals reviewed an arrangement between a medical management company which provided services to a physician’s group and a clinical laboratory. The laboratory returned 20 percent of its revenues obtained from the physician group’s referrals to the management company. The defendants alleged that these payments represented fair compensation for “specimen collection and handling services.” Ibid. at 1449. The court rejected this defense, noting “the fair market value of these services was substantially less than the [amount paid], and there is no question [the laboratory] was paying for referrals as well as the described services.” Ibid. Thus, applying the reasoning of the Ninth Circuit Court of Appeals in Lipkis, an inference can be drawn that illegal remuneration occurs when a contract between a hospital and hospital-based physicians calls for the rental of space or equipment or provision of professional services on terms other than fair market value.

If a provider’s conduct falls within the purview of the statute, it can be prosecuted unless the conduct meets a statutory exception or regulatory “safe harbor.” 56 Fed. Reg. 35952 (July 29, 1991).


Given the relationship between a hospital and its hospital-based physicians, contracts which require the hospital-based physicians to split portions of their income with hospitals are suspect, although not per se violations of the statute. In some cases that we have reviewed, there is little basis to require hospital-based physicians to turn over a percentage of their earnings to the hospital. In addition, under Lipkis, a court may draw the inference that a direct payment from a hospital-based physician to a hospital is made for an illegal purpose when the amount of the payment cannot be justified based on the amount of services the hospital renders under the contract with the physician.

We have reviewed agreements that provide payments or remuneration to hospitals far in excess of the fair market value of the services provided by them. Because these arrangements may violate the statute, disclosure of the terms of these agreements are rare. Therefore, it is very difficult to establish the prevalence of these agreements. Several medical societies and anonymous parties have shown us the following contract provisions without identifying names and locations:

A hospital provides no, or token, reimbursement to pathologists for Part A services in return for the opportunity to perform and bill for Part B services at that hospital.

Radiologists must pay 50 percent of their gross receipts to a facility’s endowment fund.

Thirty-three percent of all profits above a set amount must be paid by a radiology group to a hospital for its capital improvements, equipment, and other departmental expenditures.

A radiologist group was required to purchase radiology equipment and agreed to donate the equipment to the hospital at the termination of the contract. The hospital has an unrestricted right to terminate the contract at any time.

When net collections for a radiology group exceed $230,000, 50 percent is paid to the hospital, and the hospital reserves the right to unilaterally adjust the distributions if it determines that the physician group has not fulfilled the terms of the contract.

A radiologist group pays 25 percent of the profits exceeding $120,000 to the hospital for capital improvements. Fifty percent of the profits exceeding $180,000 go to this purpose.

A radiology group pays for facilities, services, supplies, personnel, utilities, maintenance, and billing services furnished by the hospital on a fee schedule that begins at $25,000 for 1989, and rises to $100,000 by 1993. Payments are due only if the radiologist’s gross revenue exceeds $1,000,000 in the previous year.

A determination of whether these agreements are illegal requires an entire review of the contract and the relationship between the parties. In addition, it is recognized that at some income levels, agreements which require physicians to turn over a percent of their income over a threshold amount, may approximate the fair market value of the services the hospital provides. This fact may diminish our enforcement concerns.

All of these examples appear to violate the statute because they provide compensation to the hospitals that exceeds the fair market value of the services the hospitals provide under the contracts. It also appears the remuneration is intended to provide the hospital-based physician with referrals from the other physicians on the hospital’s medical staff.

These potentially illegal financial arrangements may have several unfortunate results. Hospitals may award the exclusive contract based on improper financial considerations instead of on traditional considerations centering on the professional qualifications of the physician. In addition, the remuneration gives hospitals a financial incentive to develop policies and practices which encourage greater utilization of the services of hospital-based physicians payable under Medicare Part B. Hospital-based physicians faced with lowered incomes may also be encouraged to do more procedures in order to offset the payments to the hospitals. These problems are among the recognized purposes of having the anti-kickback statute on the books in the first place.

Illegal arrangements may also complicate the development and updating of physician fee schedules. Physician practice costs could be artificially inflated by hospitals and physicians that enter into arrangements not based on fair market values.


The HCFA should instruct its intermediaries to:

  • notify hospitals about potential legal liability when they enter into agreements not based on the fair market value of necessary goods and services exchanged, and
  • refer cases similar to the examples given above, or any other suspect arrangements to the OIG for possible prosecution or sanctions.

To avoid potential legal liability, all contracts between hospitals and hospital-based physicians should comply with all the safe harbor provisions that may apply under the contract between the parties. Of particular importance are the safe harbors that protect payments for personal services and management contracts and for services of bona fide employees. 42 CFR ”1001.952(d) and (i); 56 Fed. Reg. 35985, 35987. It is noted that in some of the safe harbor provisions, we require that payments must be consistent with “fair market value.” The regulation explicitly provides that safe harbor protection is not available where any part of the payment takes into account the volume or value of referrals or business otherwise generated by either party. This restriction is necessary because such payments directly violate the statute.

HCFA and Industry Comments on Earlier Version

In response to an earlier draft of this report, we received comments from HCFA, the American Hospital Association (AHA), and the College of American Pathologists (CAP). The HCFA comments are included in appendix A. The AHA comments are included in appendix B, along with our response to these comments, and AHA’s views on our response. The CAP comments are included in appendix C.

In response to these comments, we have (1) clarified the legal basis for our discussion and (2) deleted our recommendation that carriers identify suspect arrangements.