Management Services And Billing Agreements: What Physicians Need To Know

by Gregory J. Naclerio
Chairman, Healthcare Regulatory Department
and Jay B. Silverman
Health Law Department


Over the last decade, the health care industry has been experiencing revolutionary changes. These changes have prompted the creation of new economic arrangements between health care providers, payers and businesses to survive and prosper in this changing environment. These new economic arrangements often raise questions under the federal and state fraud and abuse laws, prohibitions against fee splitting and self-referrals.

One new economic arrangement involves physician practices entering into management services arrangements where management responsibilities of the practice are delegated to a management company. Management services arrangements offer several benefits one of which are the enhanced efficiencies which arise when the practice is professionally managed, allowing the physicians to concentrate on providing medical services to patients.


The typical management services agreement delegates to the management company the responsibility of employing and providing all non-medical personnel such as a practice administrator to manage and administer the practice’s business functions and clerical, secretarial, bookkeeping and collection personnel. The management company will lease or sublease the practice’s medical offices and in conjunction with the lease manage and maintain the offices in good condition and repair including the provision of janitorial services.

Under the typical management service agreement, the management company will provide and is responsible for repairing and maintaining all of the office furniture, fixtures and equipment as well as the medical equipment. The management company will order and purchase the medical and office supplies required for the operation of the practice, provide management information systems services, bookkeeping, accounting services, billing and collection services and marketing.


The Office of the Inspector General (“OIG”) of the Department of Health and Human Services has issued an advisory opinion, which concludes that certain types of management agreements between physician groups, and management companies may violate the federal anti-kickback statute. The federal anti-kickback statute provides that it is a felony to knowingly and willingly solicit or receive any remuneration directly or indirectly, overtly or covertly, in cash or in kind in return for referring an individual to a person for the furnishing of any item or service for which payment may be made by any federal or state health program.

In Advisory Opinion No. 98-4, the OIG examined a proposed management services agreement between a management company and a physician group. The physician group would provide all medical services at a clinic. The management company would provide or arrange for all operating services with respect to the clinic, including accounting, billing, purchasing, and the hiring of non-medical personnel and outside vendors.

The management company would also provide the physician group with management and marketing services for the clinic, including the negotiation and oversight of contracts with various payers. In return for its services, the management company would receive a management fee that included a percentage of the medical group’s monthly net revenues.


The OIG analyzed the proposed management services agreement in light of the safe harbor for personal services and management contracts. In order to qualify for the safe harbor protection, a personal services or management services contract must satisfy all of the following criteria:

• the agreement must be set out in writing and signed by the parties;
• the agreement must specify the services to be performed;
• if the services are to be performed on a part-time basis, the schedule for performance must be specified in the contract;
• the agreement must be for at least one year;
• the aggregate amount of compensation must be fixed in advance based on fair market value, and not determined in a manner that takes into account the volume or value of referrals between the parties; and
• the services performed under the agreement must not involve the promotion of business that violates any federal or state law.

The OIG concluded the safe harbor was not satisfied since the management fee that the management company would receive would not have been an aggregate amount fixed in advance but instead would fluctuate based upon the physician group’s monthly net revenue. Additionally, the OIG also found the proposed arrangement potentially violated the anti-kickback statute because the management company was to have received a percentage of the physician group’s net revenue derived from its marketing efforts, the arrangement did not contain any safeguards against overutilization and included financial incentives that would have increased the risk of abusive billing practices since the management company would have had the financial incentive to maximize the physician group’s revenues.


In a letter dated April 17, 1997 to this law firm, the general counsel of the New York State Department of Health (“Department”) set forth the Department’s opinion regarding three hypothetical compensation arrangements between a physician group and either a management services company or a billing company that provides billing and collection services.


The first compensation arrangement involves a management company receiving a per visit fee for each visit made to the physician practice. The Department advised that this arrangement was “legally unacceptable” because the management company was “involved in marketing and other management activities” for the physician practice. Further, the Department stated that a “non-licensee can be paid only for the fair market value of the services provided in an arms-length transaction” and that, since the management company generates referrals through its marketing activities, its agreement with the physician practice could not be “arms-length”.


The second compensation arrangement involves a physician practice paying a management services company a fee equal to the company’s actual cost of providing the services plus a “fair market mark-up”. Reiterating its position that a “non-licensee can be paid only for the fair market value of the services provided in an arms-length transaction” the Department refused to offer “prospective advice as to what range of fees for management services would or would not constitute a reasonable fair market fee.”


The third compensation arrangement involves a physician practice paying a billing company for billing and collection services a fee equal to a percentage of the amount the management company collects. The Department maintained that “any compensation arrangement which is based upon a percentage of physicians’ gross revenues or profits, or net revenues or profits … constitutes illegal fee splitting unless expressly authorized by statute.”

The letter from the Department goes on to state “The only percentage compensation arrangement which this office recognizes as being outside the scope of the fee-splitting prohibition is
the traditional percentage compensation arrangements entered into between physicians and collection agencies attempting to collect past due bills which would otherwise be uncollectible. In such cases the actual fee paid would have a remote connection, if any at all, to the revenues or profits generated by the practice or any discrete portion of the practice. Thus, the percentage fees paid to such agencies would not give the agencies an interest in the revenue of the physician’s practice, create the appearance of an ownership interest in a non-licensee, serve as a basis for a non-licensee to attempt to influence the internal workings of the practice, or establish any other ill the statute was intended to prevent. The same cannot be said of percentage compensation arrangements between billing companies and physicians when the billing company is performing billing services for all or a specific part of a physician’s practice. Further, nothing in the statute permits the characterization of such arrangements as anything but an illegal fee-splitting arrangement.”


While the above only reflects the views of the Department and not a court of law, it is still important for physicians to be aware of the Department’s view regarding such arrangements. Physicians should evaluate any arrangement that is out of the ordinary very carefully and should consider speaking with legal counsel prior to signing a contract. In this day of ever-expanding scrutiny of medical professionals not by just Medicare and Medicaid but now by New York State Workers’ Compensation and the private insurance carriers involving No-Fault claims, physicians must be sure all their business transactions will pass governmental examination.

Gregory Naclerio, formerly the Director of the Long Island Regional Office of the Deputy Attorney General’s Medicaid Fraud Control Unit, is a Senior Partner with the law firm of Ruskin Moscou Faltischek, P.C. and is Chairman of the firm’s Healthcare Regulatory Department. He can be reached at 516-663-6633 or

Jay Silverman, formerly the Assistant General Counsel of the Medical Society of the State of New York is a Senior Associate in the firm’s Health Law Department.