Legal Update


Are Your Medical Directorships Legitimate?

As the federal government increases its scrutiny of facilities that bestow medical directorships on physicians as a means of compensating them for their oversight of clinical or administrative services, let's review the keys to structuring compliant arrangements.

Beware Sham Deals With Docs

Three healthcare providers that allegedly offered physicians sham medical directorships ended up striking multimillion-dollar settlements with the OIG this year alone:

  • A Missouri health system agreed to pay the federal government $60 million to settle claims that the system allegedly entered into medical directorships that were not in writing, paid the physician directors based on their referrals and paid them amounts in excess of fair market value.
  • A New Orleans hospital agreed to pay $1.75 million to settle allegations that the hospital made unlawful payments to a psychiatrist pursuant to a series of sham consultant and medical directorship contracts intended to disguise kickbacks for the psychiatrist's referrals. (The government also pursued criminal charges against the psychiatrists, netting 13 guilty verdicts.)
  • A whistleblower suit brought by a former employee led a Florida radiologist to a $7 million settlement over claims that he'd established illegal medical directorships for physicians as a means of paying for patient referrals.

— Anjana D. Patel, JD

Most medical directorship arrangements are bona fide efforts to incentivize physicians who take on additional responsibilities. In some cases, however, facilities are establishing multiple directorships that border on being excessive. For example, a surgery center may create one directorship for anesthesia, another for pain management, yet another for OB surgery and a fourth for ophthalmic surgery. Multiple directorships may be a red flag to enforcement authorities, who'll want to examine the legitimacy of these directorships in order to ensure they're not sham arrangements designed to provide kickbacks to multiple physicians in exchange for their referrals.

As you know, the federal Stark Law prohibits a physician from making referrals to an entity in which the physician has a financial interest if the referred services are paid for by Medicare or Medicaid. In a similar vein, the federal Anti-kickback Statute makes it a criminal offense to offer or pay anything of value in exchange for referrals of federal healthcare program items or services, or for the purchasing, leasing, ordering or arranging for such items or services.

The Department of Health and Human Services' Office of Inspector General, which enforces the Anti-kickback Statute, recently issued a draft of its "Supplemental Compliance Program Guidance for Nursing Facilities," which, among other things, identifies medical directorships as a key area of concern. "Prudent facilities will also take steps to ensure that they have not engaged more medical directors or other physicians than necessary for legitimate business purposes," the OIG notes.

The OIG's guidance reaffirms principles expressed in a 2005 transmittal from the Centers for Medicare and Medicaid Services, which provides a detailed list of responsibilities that CMS expects medical directors to fulfill (

While the CMS's transmittal and the OIG's guidance are directed toward nursing homes, they're helpful to all providers in demonstrating how the government differentiates between bona fide medical directorships — evidenced by documentation that real duties and services are actually being performed — and sham arrangements with physicians that exist simply to reward referrals and disguise kickbacks.

Guidance to stay within the lines
Here are some practical recommendations to maintain compliant directorship agreements:

  • Written documentation. All medical directorship arrangements should be in writing and should satisfy the requirements of the Stark Law and the Anti-kickback Statute.
  • Legitimate business needs. Medical directorships should be necessitated by actual business concerns. Ask yourself: Are the directorship's duties legitimate and necessary for the facility to conduct its operations?
  • Avoid multiple directorships. Multiple directorships are a red flag to enforcement authorities. Examine whether multiple physician-level skills are needed for legitimate business purposes or for compliance with the law. Can one physician, or even a non-physician employee, perform the same duties?
  • Bona fide physician services. The medical director must actually provide the services. One way to ensure this is to contemporaneously document the physician's activities — such as with daily time logs — to set forth in detail the duties performed and the amount of time spent performing them.
  • Fair market value compensation. All payments under medical directorship agreements must be fair market value for services the physician actually performs. It's a good idea to have a written analysis by an independent third-party consultant to support the fair market value of the payments.
  • Ongoing monitoring. Your facility should have a reliable tracking system, such as a database, to assist in monitoring each medical directorship arrangement created. Perform annual reviews to ensure that each medical director is paid the compensation established in his agreement and is actually performing the services required under the agreement. Otherwise, be sure to adjust payments to the physician in order for them to be fair market value for the services actually provided.

Blowing the whistle
Much of the federal government's recent enforcement has originated from whistleblower actions brought by former employees (see "Beware Sham Deals With Docs"). Since it seems likely that this trend will continue, you must aggressively monitor your directorships to ensure continued compliance with the law. OSM

Reader Survey: Compensating Your Medical Director

1. How much do you pay your medical director(s) per month?

a. nothing


b. $500


c. $1,000


d. $1,500


e. more than $1,500


2. How many medical directors do you have at your facility?

a. one


b. two


c. three


d. more than three


3. Is your medical director ______________ ?

a. an anesthesiologist


b. a surgeon


c. we use both


4. How many hours per month does your medical director spend serving in this capacity?

a. less than 2 hours


b. between 2 and 10 hours


c. between 10 and 20 hours


d. more than 20 hours


SOURCE: Outpatient Surgery Magazine reader survey, September 2008, n=100 (hospital and ASC readers).