Moving the HME Industry Forward


OIG Fraud Alert – Physician Compensation Arrangements

June 22, 2015

AMARILLO, TX – There are two important principles that a DME supplier must adhere to. The first is that the DME supplier “lives in a glass house.” If the DME supplier is doing something it should not be doing, then “someone knows about it.”

This “someone” might be an existing employee, a former employee, a competitor, or an employee of a person (e.g., a physician) with whom the DME supplier has a business relationship. A person who is aware of what the DME supplier is doing wrong might end up becoming a qui tam (whistleblower) relator (plaintiff).

The second principle is this: If your brain tells you one thing, and your stomach tells you something else, then you need to ignore your brain and trust your stomach. As humans, we are capable of rationalizing dishonest or unethical decisions. However, our stomachs never lie.  

With these principles in mind, let us examine the relationship between a DME supplier and a physician. It is not uncommon for a DME supplier to enter into a Medical Director arrangement with a physician in which the DME supplier pays compensation for the physician’s services. The challenge is this: Is this a legitimate arrangement in which the DME supplier is paying fair market value compensation for substantive services, or is this a “sham” designed to provide compensation to a referral source?  

On June 9, 2015, the Office of Inspector General (“OIG”) addressed this issue by issuing a Fraud Alert entitled “Physician Compensation Arrangements May Result in Significant Liability.”  The fraud alert states:

“Physicians who enter into compensation arrangements such as medical directorships must ensure that those arrangements reflect fair market value for bona fide services the physicians actually provide. Although many compensation arrangements are legitimate, a compensation arrangement may violate the anti-kickback statute if even one purpose of the arrangement is to compensate a physician for his or her past or future referrals of Federal health care program business. OIG encourages physicians to carefully consider the terms and conditions of medical directorships and other compensation arrangements before entering into them.

OIG recently reached settlements with 12 individual physicians who entered into questionable medical directorship and office staff arrangements. OIG alleged that the compensation paid to these physicians under the medical directorship arrangements constituted improper remuneration under the anti-kickback statute for a number of reasons, including that the payments took into account the physicians’ volume or value of referrals and did not reflect fair market value for the services to be performed, and because the physicians did not actually provide the services called for under the agreements. OIG also alleged that some of the 12 physicians had entered into arrangements under which an affiliated health care entity paid the salaries of the physicians’ front office staff. Because these arrangements relieved the physicians of a financial burden they otherwise would have incurred, OIG alleged that the salaries paid under these arrangements constituted improper remuneration to the physicians. OIG determined that the physicians were an integral part of the scheme and subject to liability under the Civil Monetary Penalties Law.

Those who commit fraud involving Federal health care programs are subject to possible criminal, civil, and administrative sanctions. For more information on physician relationships, see OIG’s “Compliance Program Guidance for Individual and Small Group Physician Practices” available at and OIG’s “A Roadmap for New Physicians: Avoiding Medicare and Medicaid Fraud and Abuse” available at
If you have information about physicians or other providers engaging in any of the activities described above, contact the OIG Hotline at or by phone at 1-800-447-8477 (1-800-HHS-TIPS).”

From a substantive standpoint, the Fraud Alert is not telling us anything new. Over the years, the OIG has made it clear to all health care providers (not just DME suppliers) that an arrangement with a physician must be legitimate…it cannot be a subterfuge to funnel money into the pockets of the physician. What is significant is that the OIG is “firing the proverbial shot across the bow.” It is putting providers on notice that sham physician compensation arrangements are on the rise and that the OIG will start bringing aggressive enforcement actions. In other words, the OIG is saying: “You have been warned…the hammer is about to fall.”

The message to the DME supplier is that it is perfectly legitimate to enter into a Medical Director arrangement with a physician. In doing so, both the supplier’s brain and stomach need to tell it that the arrangement is legitimate. The remainder of this article discusses the legal guidelines that the DME supplier should follow when it enters into a Medical Director arrangement with a physician.

Under the Medicare anti-kickback statute, it is a felony for a DME supplier 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 Medicare or Medicaid patients to the supplier.

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 for an MDA to comply with the “sporadic or part-time basis” requirement of “(iii)” and with the requirement in “(v)” that in calculating the fixed annual compensation, the parties cannot take into account any business generated between the parties. 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. Smith is a referral source to XYZ Medical, Inc. Assume that XYZ 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 to Dr. Smith. Rather, XYZ must truly have a need for a Medical Director. The fact that Dr. Smith refers patients to XYZ, and the fact that XYZ will pay money to Dr. Smith, raises problems under the anti-kickback statute and Stark. XYZ might argue that it is paying for Dr. Smith’s 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.

Therefore, in order 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. Smith’s services. This 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. Smith’s time is worth $250 per hour, and if the DME supplier intends to pay him $12,000 per year ($1000 per month), then Dr. Smith needs to expend at least four hours per month in his capacity as medical director. Dr. Smith 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 the following webinar, sponsored by Medline Industries Inc:
Retail Sales: A Critical Component of the Successful DME Supplier
Presented by: Jeffrey S. Baird of Brown & Fortunato, P.C.
Wednesday, June 24, 2015
12:00-1:00 p.m. CENTRAL TIME
A DME supplier can no longer survive while being dependent on Medicare fee-for-service. With competitive bidding, stringent documentation requirements, lower reimbursement, post-payment audits, and the fact that Medicare is tightening its purse strings, Medicare fee-for-service should only be a component of the supplier’s total income stream. There are 78 million Baby Boomers (people born between 1946 and 1964); they are retiring at the rate of 10,000 per day. Boomers are accustomed to paying for things out-of-pocket. The successful DME supplier will be focused on selling upgrades, utilizing ABNs, and selling items for cash. These retail sales may take place in a store setting, or they may take place over the internet. Even when Medicare is not the payor, there are a number of requirements that the DME supplier must meet. This program will discuss the federal and state requirements that the DME supplier must meet as it sells DME at retail. These requirements include state licensure, collection and payment of sales and/or use tax, qualification as a “foreign” corporation, obtaining a physician prescription, and complying with federal and state telemarketing rules. In addition, the program will discuss how the supplier can sell Medicare-covered items at a discount off the Medicare allowable.

Registration link:
Sign up now for Retail Sales: A Critical Component of the Successful DME Supplier on Wednesday, June 24, 2015, 12:00-1:00 pm CT, with Jeffrey S. Baird, of Brown & Fortunato, PC.
Contact Maggie Andersen at if you experience any difficulty registering.
This webinar is free for attendees.

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