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Regulators interested in administrative services agreements

Radiology Administrator's Compliance and Reimbursement Insider, January 1, 2005

With radiologists in short supply, many hospitals are turning to innovative retention strategies, including offering to compensate their radiologists for the administrative services they provide. And some radiology groups looking to benefit from this situation are demanding extra compensation for administrative duties that were previously considered part of the job. Before you give too much back to your radiologists, understand that this extra compensation may get you into trouble with the Office of Inspector General (OIG) and the Internal Revenue Service (IRS). We'll explain the protections that your hospital-and your practice-should have in place to ensure that your administrative services agreement passes legal muster.

Regulators have increasingly turned their focus onto the compensation of department heads and hospital-based physicians, says healthcare attorney Ralph DeJong, Esq., of Gardner Garton & Douglas, LLC, in Chicago.

You may think that this doesn't affect your practice-after all, radiologists generally don't admit patients to the hospital, so relationships between hospitals and radiologists don't raise the same anti-kickback concerns as relationships between surgeons and hospitals. But that doesn't mean radiologists get a regulatory pass, warns Joseph Truhe Jr., Esq., general counsel for Eisenhower Medical Center in Rancho Mirage, CA.

Interventional radiologists refer patients to hospitals, and those referrals are often lucrative for the facility. Many hospitals maintain good will in the community and increase surgical referrals by offering services for which they need radiologists, such as mammography. Also, joint ventures between hospitals and radiologists to offer high-end services such as PET are becoming more common, and government regulators are increasing scrutiny in this area-as evidenced by the numerous OIG alerts and opinions concerning joint ventures for radiology services.

The status of radiologists is changing, Truhe says, and the OIG is examining payments to them more carefully to determine whether the compensation is an attempt to induce or reward referrals or to encourage the use of hospital facilities for high-end procedures.

'Excessive' compensation can lead to IRS sanctions

The IRS keeps an eye on any arrangement in which a not-for-profit or charitable institution-such as a hospital-pays "excessive" compensation to an individual, says DeJong. (The IRS has not, as of presstime, defined "excessive.") When a hospital pays a physician to provide administrative services, if the parties can't prove that the physician performed valuable services in return, the IRS may determine that the payment is an improper benefit. That is, it's being paid for the benefit of the individual rather than to further the hospital's charitable purpose. The IRS calls this an "excess benefit transaction," and although the hospital is likely to bear the brunt of any action by the IRS, the radiologist who accepts the excessive compensation is also subject to penalties.

For example, if the IRS determines that a physician's compensation arrangement constituted an improper benefit, that physician could be fined anywhere from 10% to 200% of the benefit that the IRS determines he or she received improperly, DeJong says.

So if a physician received $50,000 a year for five years from a hospital for services the IRS determines were worth only $10,000 per year, the IRS could impose fines-called interim sanctions-on the physician, in an amount ranging from $20,000 to $400,000, depending on the circumstances.

Define duties

If your hospital pays-or plans to pay-a radiologist in your practice for administrative duties, it is important to be able to articulate and defend precisely what he or she is being paid for. To do this, Truhe suggests discussing with the hospital what duties the radiologist would perform. Ask yourself the following eight questions:

1. If the radiologist doesn't perform these duties, will the hospital hire a consulting radiologist to perform them?

If the answer is no, the hospital should reconsider having the radiologist perform the duties, and the radiologist should carefully consider all risks before accepting the position, says James Unland, president of The Health Capital Group in Elgin, IL. That's because if the hospital wouldn't hire someone to perform the duties, it raises a legitimate question about whether the duties to be performed are necessary-or whether the position is an improper benefit masked as an administrative job.

If the answer is yes, conduct more analysis to determine whether the job requires your radiologist's particular skills.

2. Must a radiologist perform these duties?

3. Must the radiologist performing these duties be a radiologist?

If the answer to either or both of these questions is no, that raises at least a perception that the administrative job is being offered for nonlegitimate business reasons. It may actually be what the IRS considers an improper benefit, Unland says.

So if you decide to go forward, have solid objective reasons that explain why your radiologist was the best person for the job. Truhe says that if you answered yes to questions two and three, or if both you and the hospital feel comfortable that the radiologist has particular, nonmedical skills that support his or her candidacy for the position, continue to analyze the scope of the administrative duties the radiologist would perform for the hospital by asking the following:

4. What is the value of the service(s) in furthering the hospital's charitable purpose?

5. What sort of time commitment will the duties require?

6. What results are expected-such as increased efficiency, productivity, or market share, or perhaps development of new markets and technology?

7. How will the results be evaluated and the quality assessed?

8. Who will verify the time and tasks being compensated?

Document results

Once you've answered the questions above and determined what administrative duties the position requires, the results that the hospital expects, and the procedure for verifying, monitoring, and evaluating the radiologist's duties, Unland suggests creating a document that contains

  • a job description

  • goals for the position

  • reporting mechanisms

  • benchmarks

    Documentation can help both the radiologist and the hospital in several ways, says Truhe. It helps the hospital articulate the need for the administrative position should it ever be questioned. It benefits the radiologist to know exactly what's expected and protects the radiologist in the event of an inquiry by the OIG or IRS. A document that shows a well-defined set of responsibilities and goals and a method of tracking performance and quality will go a long way toward showing that the job is necessary and is being performed in accordance with the parties' expectations, Truhe says.

    Such a document is particularly important if the physician holds a number of positions, Truhe says, because one person with roles in several corporations, departments, and institutions can attract regulators' attention. Regulators may wonder whether the administrative position carries real duties if the physician's other time commitments seem excessive, Unland explains.

    Note: It is crucial for the hospital to follow through on monitoring the physician's performance and documenting the results, DeJong says. The hospital should have documentation of the hours that the radiologist worked on the administrative tasks, the radiologist's performance goals and whether they were met, any quantifiable results of the radiologist's administrative work, and performance reviews and evaluations.

    These records will be useful to the hospital and to the physician if regulators ever question the legitimacy of the compensation, DeJong says. If your radiologist has an administrative position with a hospital and doesn't receive periodic objective and subjective performance reviews, he or she should pressure the hospital to begin them, DeJong advises.

    Set reasonable compensation

    An administrative services agreement with well-defined duties won't help much if payment for those services seems out of line, says DeJong. Although it's difficult to assess the reasonableness of compensation, he says there are ways parties can ensure that compensation isn't excessive and to steer clear of trouble.

    Compensation for administrative duties is often calculated on a straight-time basis. For example, if a radiologist earns $300,000 in her practice and the hospital expects the radiologist to spend 20% of her working time on hospital administrative duties, then the hospital pays her $60,000 for these duties.

    But DeJong advises against this approach, because each element of the equation-the physician's annual income, time spent, etc.-is based on assumptions. Instead, DeJong suggests that compensation be calculated from the actual value of the duties performed. Determine this value by asking what the hospital would pay someone with no relationship to the hospital, its patients, or its referral sources.

    He also advises the parties to look at the total compensation paid for the total bundle of services provided, rather than to compartmentalize the services and pay separately. The latter approach risks the aggregate of the radiologists' compensation being so out of line that it attracts unwanted regulatory attention.

    Unland emphasizes the need to assess the radiologist's commitments both inside and outside the hospital to determine whether the time and effort the radiologist has available to devote to hospital administrative duties justifies the compensation.

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