Moving the HME Industry Forward


Entering Into a Properly Structured Medical Director Agreement

April 7, 2014

AMARILLO, TX – Under the Medicare anti-kickback statute, it is a felony for DME suppliers to knowingly or willfully offer or pay any remuneration to induce a person to refer a person for the furnishing, or arranging for the furnishing, of any item for which payment may be made under a federal health care program—or the purchase or lease or the recommendation of the purchase or lease of any item for which payment may be made under a federal health care program.

Under the Stark physician self-referral statute, if a physician has a financial relationship with a DME supplier, then the physician may not refer patients to the supplier who are covered by a government health care program. The anti-kickback statute is a criminal statute; if a person violates it, then he can end up vacationing in Club Fed. Stark is a civil statute; if a person violates it, then he can end up paying a lot of money.

There are a number of “safe harbors” to the anti-kickback statute. If an arrangement falls within a safe harbor then, as a matter of law, it does not violate the anti-kickback statute. Likewise, there are a number of exceptions to Stark. If an arrangement falls within an exception, then as a matter of law, it does not violate Stark.

When entering into a Medical Director Agreement with a referring physician, the arrangement needs to comply with the (i) Personal Services and Management Contracts safe harbor to the anti-kickback statute and (ii) Personal Services exception to Stark. The safe harbor and exception essentially say the same thing.

Among other requirements, (i) the Medical Director Agreement (“MDA”) must be in writing and signed by the physician and DME supplier; (ii) the MDA must specify the services to be provided by the physician; (iii) if the MDA provides for services on a sporadic or part-time basis, then it must specify exactly the scheduled intervals, their precise length and exact charge for each interval; (iv) the term of the MDA must be for not less than one year; (v) the compensation must be set in advance, be consistent with fair market value, and must not take into account any business generated between the parties; and (vi) the services performed must not involve a business arrangement that violates any state or federal law. Note that it is difficult, if not impossible, for an MDA to comply with the “sporadic or part-time basis” requirement of “(iii).” For this reason, the best that an MDA can normally hope to accomplish is to substantially comply with the safe harbor.

OK, so what does all of this mean? Assume that Dr. Jones is a referral source to ABC Medical Inc. Assume that ABC has a legitimate need for a medical director. This cannot be a “made up” need or a “sham” designed to find a way to funnel money Dr. Jones. Rather, ABC must truly have a need for a medical director. The fact that Dr. Jones refers patients to ABC, and the fact that ABC will pay money to Dr. Jones, raises problems under the anti-kickback statute and Stark. ABC might argue that it is paying for Dr. Jones’ services as a medical director…..rather than paying him for referrals. However, a number of federal jurisdictions have adopted what is known as the “one purpose” test.

This provides that if “one purpose” behind a payment (no matter how small that “purpose” is) is to reward the referral source for referrals, then the anti-kickback statute is violated, notwithstanding that the primary purpose of the payments is to compensate the referral source for legitimate services. This is your classic “duck” test: “If it looks like a duck, walks like a duck, and sounds like a duck…then it is a duck.”

Therefore, to avoid problems under the anti-kickback statute and Stark, the safe harbor and exception, discussed above, must be met. A properly drafted MDA is about seven pages long. It has a term of at least one year and the compensation is fixed one year in advance (e.g., $12,000 for the year, payable in 12 equal monthly payments of $1000). The fixed annual compensation must be the fair market value equivalent of Dr. Jones’ services.

These services may include: (i) review current medical literature that is pertinent to the DME supplier’s business and advise the supplier regarding new developments that may be relevant to its business; (ii) review the policies and clinical procedures utilized by the DME supplier, provide opinions concerning same, and advise the DME supplier of suggested revisions; (iii) being available to communicate with physicians, insurance companies, and other payers that request additional information from the DME supplier concerning the products and services provided by the supplier; (iv) report to the DME supplier’s management team on a periodic basis concerning trends in the DME industry and assist the supplier in developing future products and services; and (v) being available to respond to medical questions from the DME supplier’s employees.

If Dr. Jones’ time is worth $250 per hour, and if the DME supplier intends to pay him $12,000 per year ($1,000 per month), then Dr. Jones needs to expend at least four hours per month in his capacity as medical director. Dr. Jones will be paid the same…regardless of whether he refers 1000 patients or zero patients. In other words, he is being paid for his services, not for his referrals.

Jeff Baird will be presenting two webinars this week. One focuses on waiving or reducting Medicare and commercial co-payments. The other focuses on properly structuring arrangements with referral sources. See information listed below:

“Legal Guidelines for Waiver or Reduction of Medicare & Commercial Co-payments”
Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato, P.C.
Tuesday, April 8, 2014
2:30-4:00 p.m. EASTERN TIME

Sign up now for Legal Guidelines for Waiver or Reduction of Medicare & Commercial Co-payments on Tuesday, April 8, 2014, 2:30-4:00 pm ET, with Jeffrey S. Baird, Esq., Brown & Fortunato, PC.

FEES:  Member: $99.00    Non-Member: $129.00

Please note: AAHomecare has adopted a new online meeting registration system; please contact Ika Sukh at if you experience any difficulties registering.

HME Compliance Connection 2014 Webinar Series
“How You Can Legally Structure Arrangements with Referral Sources”
Presented by: Jeffrey S. Baird, Esq., Brown & Fortunato, P.C.
Wednesday, April 9, 2014
1:00-2:00 p.m. EASTERN TIME

To register, please use this link:

Jeffrey S. Baird, JD, is Chairman of the Health Care Group at Brown & Fortunato PC, a law firm based in Amarillo, Tex. He represents DME suppliers, pharmacies, infusion companies, and other health care providers throughout the United States. Mr. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization and can be reached at (806) 345-6320 or