Profit Sharing and Bonus Distribution

Health care businesses commonly use profit-sharing arrangements, productivity bonuses, incentive compensation, and other bonus distributions to reward physicians, employees, owners, and executives. In the health care industry, however, compensation arrangements must be structured carefully.

A bonus or profit distribution that would be routine in another industry may raise significant concerns when compensation is connected, directly or indirectly, to patient referrals, federally reimbursed services, or business generated for a health care organization.

Federal and state fraud and abuse laws can affect how physicians and other health care professionals are compensated. These laws include the federal Anti-Kickback Statute, Stark Law, state anti-kickback and fee-splitting laws, and professional licensing requirements.

G2Z Law Group assists physicians, medical practices, health care organizations, and other businesses in structuring and reviewing profit distributions and bonus compensation arrangements to reduce fraud and abuse risk.

Why Can Health Care Bonuses and Profit Distributions Create Legal Risk?

The federal Anti-Kickback Statute (AKS) prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration to induce or reward referrals or the generation of business involving items or services payable by a federal health care program such as Medicare or Medicaid.

The term “remuneration” is interpreted broadly and includes more than direct cash payments. Compensation arrangements, bonuses, profit distributions, management fees, and other financial benefits may potentially constitute remuneration.

Accordingly, a health care organization should consider more than simply whether a bonus is reasonable from a business perspective. It should also evaluate what conduct is being rewarded and how the amount of compensation is calculated.

For example, a bonus arrangement may present greater regulatory risk if compensation increases based upon:

• the number or value of patient referrals;

• revenue generated from referred services;

• use of particular laboratories, imaging facilities, pharmacies, or suppliers;

• referrals to affiliated health care entities;

• federal health care program business generated by the recipient; or

• other conduct that could create a financial incentive to direct health care business.

The legality of an arrangement ultimately depends upon its particular facts and circumstances.

Are Physician Productivity Bonuses Permitted?

Physicians and other health care professionals may receive productivity-based compensation in many circumstances. However, the compensation methodology should be evaluated carefully.

For example, there is an important distinction between compensating a physician for personally performed professional services and rewarding the physician for referrals of other services or business.

Depending upon the arrangement, compensation formulas may need to be reviewed under both the Anti-Kickback Statute and the Stark Law, particularly where a physician has a financial relationship with an entity furnishing designated health services payable by Medicare.

An arrangement that satisfies one regulatory requirement does not necessarily satisfy another. The Office of Inspector General has specifically cautioned that compliance with an exception under the physician self-referral law does not automatically protect an arrangement under the Anti-Kickback Statute.

Can Employees Receive Bonuses for Generating Business?

The Anti-Kickback Statute includes statutory and regulatory protections applicable to certain payments made by employers to bona fide employees.

However, the existence of an employment relationship should not automatically be treated as a blanket authorization for every possible compensation structure. The actual employment relationship, nature of the services, compensation methodology, and applicable federal and state laws should be reviewed.

The OIG identifies payments to bona fide employees among the business practices that may qualify for protection under applicable Anti-Kickback Statute safe harbors.

Healthcare organizations should therefore carefully distinguish legitimate employee incentive compensation from arrangements designed to purchase or reward referrals.

Can Owners Receive Profit Distributions?

Health care entity owners may ordinarily receive legitimate returns on their ownership interests. However, ownership arrangements can create regulatory concerns when investment returns are linked to referrals or when ownership itself is offered as an inducement to generate health care business.

For example, an ownership arrangement involving physicians who can refer patients to the entity may require closer scrutiny than a passive investment with no referral relationship.

The federal Anti-Kickback Statute includes safe harbors for certain investment interests and other arrangements, but safe-harbor protection requires compliance with all applicable conditions.

Importantly, the OIG has also explained that common ownership between related entities does not, by itself, eliminate Anti-Kickback Statute concerns. Financial arrangements between commonly owned health care entities may still require evaluation under the statute.

Does Fair Market Value Make a Bonus Arrangement Compliant?

Fair market value is important, but it is not a complete defense to an Anti-Kickback Statute violation.

OIG guidance expressly states that ensuring compensation is consistent with fair market value is a useful compliance practice and may reduce risk. However, an arrangement can still violate the Anti-Kickback Statute even when the compensation is at fair market value.

The analysis also considers the structure of the arrangement, the relationship between the parties, the services performed, the compensation methodology, and the parties’ intent.

Therefore, organizations should avoid assuming that obtaining a valuation automatically makes an incentive arrangement lawful.

What Are Anti-Kickback Statute Safe Harbors?

Federal regulations establish safe harbors for certain payment and business arrangements that might otherwise implicate the Anti-Kickback Statute.

Safe harbors address several common health care relationships, including certain employment arrangements, investment interests, personal services and management contracts, leases, and other business practices.

Compliance with a safe harbor is voluntary. An arrangement that does not satisfy a safe harbor is not automatically illegal. However, an arrangement seeking safe-harbor protection must satisfy all of the conditions of the applicable safe harbor. Arrangements falling outside a safe harbor are generally evaluated based upon the totality of their facts and circumstances.

What Can G2Z Law Group Do for My Health Care Business?

G2Z Law Group assists physicians, medical practices, health care organizations, employers, and other businesses with the development and review of health care compensation arrangements.

Our attorneys can evaluate physician bonus formulas, employee incentive compensation, owner profit distributions, productivity bonuses, management compensation, and other financial arrangements for compliance with applicable federal and state fraud and abuse laws.

We also assist clients in evaluating compensation arrangements under the Anti-Kickback Statute, Stark Law, state fee-splitting requirements, Corporate Practice of Medicine restrictions, and other health care regulatory requirements.

Careful planning can allow health care organizations to reward productivity and business performance while reducing the risk that a compensation arrangement will be viewed as improperly rewarding patient referrals or federally reimbursed health care business.