Health Care Law
Vine Street's
Impact on PPO/ Doctor Business Arrangements
By Michael V. Favia and Rick L. Hindmand
The Illinois Supreme Court's
ruling in Vine Street Clinic v HealthLink Inc, which prohibits
PPOs from taking a percentage of physicians' revenue for administrative
fees but lets them charge a flat fee, sets ground rules for structuring
physician arrangements with management companies. This article analyzes
the decision and offers practice pointers.
Last
September, the Illinois Supreme Court interpreted section 22(A)(14) of
the Illinois Medical Practice Act of 19871
for the first time in Vine Street Clinic v HealthLink, Inc.2
The court held that this section prohibits the administrator of a network
of health care providers from charging participating physicians a percentage
of their medical fees as payment for administrative services, but that
an administrative fee based on the volume of claims processed and the
specialty of the physician does not violate section 22(A)(14).
This article discusses the
Vine Street opinion and its likely implications for common business
transactions involving physicians.
The statute Section 22(A)
of the Illinois Medical Practice Act of 19873
sets forth various grounds for the Illinois Department of Financial and
Professional Regulation (IDFPR) to discipline physicians. Section 22(A)(14)
states as follows in relevant part:
(A) The Department may revoke,
suspend, place on probationary status, refuse to renew, or take any
other disciplinary action as the Department may deem proper with regard
to the license or visiting professor permit of any person issued under
this Act to practice medicine, or to treat human ailments without the
use of drugs and without operative surgery upon any of the following
grounds:
(14) Dividing with anyone
other than physicians with whom the licensee practices in a partnership,
Professional Association, limited liability company, or Medical or
Professional Corporation any fee, commission, rebate or other form
of compensation for any professional services not actually and personally
rendered.4
Section 22(A)(14) provides
exceptions for group practices and for joint ventures of medical corporations.
In addition, this section recognizes that physicians may receive compensation
for concurrent services if the patient has full knowledge of the division
and the division is made in proportion to the services performed and responsibility
assumed by each physician.
Prior case law
Section 22(A)(14) is sometimes
referred to as a "fee splitting" prohibition, although the statute
is not limited to traditional fee splitting such as a surgeon sharing
part of his or her fee with the physician who referred the patient. The
Illinois Appellate Court has consistently indicated that section 22(A)(14)
and section 16(14) of the prior Medical Practice Act,5
which the Illinois Supreme Court characterized as "equivalent"6
to section 22(A)(14), generally prohibit physicians from paying compensation
based upon medical practice revenue except within group practices, and
are not limited to traditional fee splitting.
In particular, Illinois appellate
districts have held that section 22(A)(14) and prior section 16(14) prohibit
the payment of a percentage of collections generated by marketing activities
of a non-physician consultant,7
a percentage of net income for management services and the referral of
patients,8 a percentage of
future professional income as the purchase price for a medical practice,9
and administrative fees directly related to professional revenues even
when the fees are not calculated on a percentage basis.10
The facts of
Vine Street
The Vine Street case
arose out of contracts which HealthLink, Inc. (Health-Link) entered into
with physicians and other health care providers who participate in a health
care network operated by HealthLink. The physicians agreed to provide
medical services at discounted rates to members covered under health plans
offered by insurance carriers, self-insured employers, and other payors
who contracted with HealthLink for access to the network. The physicians
were included in HealthLink's list of network providers and sent claims
for reimbursement to HealthLink, which processed and submitted the claims
to the payors for determination of benefits and for payment.
HealthLink received fees from
payors who contracted for access to the network. In addition, HealthLink
collected an administrative fee from participating physician providers
equal to a percentage of the fees allowed under the network fee schedule.
In response to an inquiry
from a state legislator, Illinois Attorney General James E. Ryan issued
Opinion No 02-00511 on March
5, 2002. The Attorney General determined that the five percent administrative
fee violated section 22(A)(14) and that therefore the fee provision in
HealthLink's preferred provider agreements was void.
HealthLink then changed to
a fixed fee structure. The new fee was based on each physician's specialty
and the volume of claims submitted by the physician during the preceding
calendar year.
Plaintiff Vine Street Clinic
participated in the HealthLink network from 1989 until 2001. Plaintiff
Ursula Thatch, MD, participated in the network and paid percentage fees
from 1993 until the 2002 adoption of the new fee schedule. Dr. Thatch
was charged $600 per month under the new fee schedule beginning in 2002
but refused to pay the revised fee.
Trial and appellate decisions
In 2003 the plaintiffs filed
an amended complaint seeking a declaration that the percentage fee as
well as the flat fee violated section 22(A)(14) and that the Illinois
Insurance Code prohibited Health-Link from recovering any administrative
fees. In addition, the complaint sought to recover administrative fees
which had been paid to HealthLink.
The circuit court dismissed
the request for the repayment of administrative fees and entered judgment
on the pleadings, holding that the percentage fee violated the Medical
Practice Act but that the flat fee did not. In addition, the trial court
dismissed the count alleging that the Insurance Code prohibited HealthLink
from collecting administrative fees.
The appellate court affirmed
the trial court ruling that the percentage fee violated section 22(A)(14)
and that plaintiffs were not entitled to the repayment of administrative
fees, but held that the subsequent flat fee also violated section 22(A)(14).12
Illinois Supreme Court
agrees with trial court
The supreme court affirmed
the appellate court holdings that the percentage fee violated section
22(A)(14) and that the plaintiff providers were not entitled to the return
of the administrative fees which they had paid, but reversed the holding
that the flat fee violated section 22(A)(14).
HealthLink's percentage
fee. In holding that the percentage fee violated section 22(A)(14)
the supreme court expressed the general rule that "[n]onphysicians
can receive a fee for services rendered, apart from referral, but cannot
receive a percentage of the physician's profit, or its equivalent."13
The supreme court determined
that section 22(A)(14) prohibits not only traditional fee splitting, which
the court described as "a dividing of a professional fee for a specialist's
medical services with the recommending physician,"14
but also the sharing of a percentage of the physician's fees for medical
services performed by the physician.15
The court rejected HealthLink's
argument that it should follow the holding of a Florida court in Practice
Management Associates, Inc. v Orman16
that section 22(A)(14) prohibited only traditional fee splitting and not
the payment of a percentage of professional profits to a nonlicensed corporation
in exchange for marketing and management services.
HealthLink's fixed flat
fee. The supreme court upheld the flat fee based on its determinations
that the flat fee is for administrative services rather than for referrals,
is determined independently of professional revenue, and does not violate
the public policy of section 22(A)(14).
The supreme court concluded
that "the flat fee now in place is for administrative services and
not for patient referrals."17
The court explained as follows:
It is the member-patient
who makes the choice of physician, not HealthLink, and this fact constitutes
the difference between a prohibited referral for a percentage of the
physician's fee and the provision of a service to both HealthLink's
participating physicians and its payors.18
The supreme court then determined
that the flat fee, which was based on the volume of claims processed by
Health-Link for the physician during the prior year and the physician's
specialty, was independent of revenue, gross receipts and collections
and fairly compensated HealthLink for its administrative services.
Moreover, the court rejected
the plaintiffs' claim that the flat fee was against public policy, which
the court identified as eliminating the danger of self-interested referrals
and maintaining the professional independence of physicians.19
Refund of fees. The
supreme court applied the doctrine of in pari delicto to affirm
the denial of the plaintiffs' request for the return of fees which they
paid. The court stated the principle that a plaintiff who participated
in wrongdoing should not recover damages resulting from the wrongdoing
and rejected the plaintiffs' contentions that they were coerced into signing
the agreements in order to have access to patients.
The supreme court also held
that the plaintiffs were without standing to seek the return of HealthLink's
administrative fees under the Illinois Insurance Code because a private
right of action is not available.
Fee sharing analysis after
Vine Street
The Vine Street decision
provides a warning to physicians as well as billing companies, consultants
and other businesses who provide services to physicians and are compensated
based on medical revenue or fees. Provisions which are deemed to violate
section 22(A)(14) will be void and may subject participating physicians
to discipline.
Furthermore, the influence
of Vine Street will extend beyond physicians in light of similar
prohibitions which apply to various other health professions. For example,
podiatrists,20 pharmacists21
and optometrists22 are subject
to discipline under provisions which are substantially similar to the
prior section 16(14) which the Illinois Supreme Court interpreted to be
equivalent to section 22(A)(14).23
Fee-splitting analysis will
typically focus on the following three issues:
- Whether the fee paid by
the physician is directly related to revenue or profits generated by
the physician's professional services;
- Whether the arrangement
creates the risk of self-interested referrals or threatens the professional
independence of physicians; and
- Whether the arrangement
satisfies one of the section 22(A)(14) exceptions or is otherwise authorized
by law.
Compensation directly related
to medical revenue. The central issue under section 22(A)(14) is typically
whether the compensation is directly related to medical revenue, income
or fees. Illinois courts have used broad language suggesting that percentage
fees inherently violate section 22(A)(14) even if the payment is for legitimate
services and the purpose is benign, unless the arrangement is among physicians
who practice together or satisfies another statutory exception.24
Moreover, in Vine Street the prior percentage fee was invalid because
it was calculated as a percentage, even though there was no suggestion
that the object of the agreement violated public policy or that HealthLink
provided improper services.25
Percentage and other variable
compensation will need to be reviewed to determine whether the method
of determining the compensation is directly related to medical revenue.
Vine Street indicates that compensation that automatically fluctuates
based on medical revenue will violate section 22(A)(14) but that compensation
that is based on the volume or complexity of administrative services and
does not automatically increase with medical revenue may be acceptable
unless the arrangement creates public policy dangers.
Compensation not directly
based on revenue but on factors that indirectly correlate to revenue may
fall within a gray area. In Vine Street, the supreme court did
not address the possibility that the flat fee could be manipulated to
correlate to the prior percentage fees for claims generated during the
prior year. Public policy factors will be particularly relevant in analyzing
arrangements not directly based on revenue but that could serve as circumvention
schemes.
Public policy. Section
22(A)(14) is designed to address two public policy dangers. First, a nonprofessional
may be motivated to recommend a physician due to self-interest rather
than competence. Second, a financial arrangement may interfere with the
physician's professional judgment by making him or her reluctant to provide
proper services or creating incentives to provide unneeded treatment.
The first danger is likely
to be a concern if the recipient of the compensation refers or directs
patients to the physician, although Vine Street shows that some
degree of influence over patient selection will not necessarily be fatal
if the compensation is not based on revenue. The supreme court indicated
that the inclusion of physicians on the preferred provider list did not
put HealthLink in the position of referring or recommending patients to
the participating physicians.
Exceptions. An arrangement
involving percentage fees or referrals may still comply with section 22(A)(14)
if an exception under section 22(A)(14) or other provisions of Illinois
law is satisfied. Section 22(A)(14) sets forth exceptions for group practices
and for partnerships or joint ventures of medical corporations.
In addition, compensation
is allowed for concurrent services as long as the patient has knowledge
of the division of the fee and the division is in proportion to the services
and responsibilities of the physicians.
Statutes other than section
22(A)(14) may implicitly authorize physicians to enter into arrangements
which would otherwise appear to violate section 22(A)(14). For example,
section 10.8 of the Hospital Licensing Act authorizes hospitals and their
affiliates to employ physicians, and the Illinois Professional Service
Corporation Act allows professional service corporations of physicians
and other health-care professionals such as podiatrists, dentists and
optometrists.
Professional discipline.
Illinois courts have traditionally allowed physicians to use section
22(A)(14) as a shield to invalidate their contractual obligations. Physicians
need to keep in mind, however, that entering into a fee sharing agreement
in violation of section 22(A)(14) may subject them to potential disciplinary
action.
In recent years IDFPR has
not placed a high priority on section 22(A)(14). From 2001 to the present
the public records of IDFPR reveal only one disciplinary action against
physicians based on section 22(A)(14).
The impact of the Vine
Street opinion on IDFPR enforcement activity is uncertain. As the
Illinois Supreme Court has now confirmed the broad scope of section 22(A)(14)
IDFPR may take a more active role in enforcing this section.
Practice pointers: restructuring
common physician business relationships
Some common physician business
arrangements are vulnerable to challenge under section 22(A)(14) in light
of Vine Street and prior case law. Management contracts, billing
contracts, and other agreements create particular risk under section 22(A)(14)
when the service provider's compensation is determined based on a percentage
of medical practice revenue or charges.
Similar transactions involving
other health care professionals may be subject to challenge under other
professional licensing statutes. Counsel for clients who enter into such
arrangements may wish to review these business relationships in light
of Vine Street.
Percentage management agreements.
Percentage management agreements
will typically violate section 22(A)(14) and should be restructured to
base the compensation on factors other than professional revenue.
Percentage billing contracts.
It is common for billing companies to receive a fee equal to a percentage
of collections received by the medical practice for claims processed by
the billing company. Percentage billing contracts appear to create substantial
risk of violating section 22(A)(14). It may be possible to assert a defense
that billing contracts are unlikely to pose the public policy dangers
of referrals tainted by self-interest and compromises to professional
independence that section 22(A)(14) is designed to address, although the
case law indicates that benign purposes do not protect percentage fee
arrangements.
IPA/PHO fees. Independent
practice associations (IPAs) and physician hospital organizations (PHOs)
that charge participating physicians an administrative fee based on a
percentage of fees billed or collected create some risk of violating section
22(A)(14) due to the resemblance to the Vine Street percentage
fees. It may be possible to distinguish these arrangements from the HealthLink
percentage fee because physician ownership and control of an IPA may alleviate
some of the public policy concerns and may arguably allow the IPA to satisfy
the joint venture exception depending on how the IPA is structured and
on how broadly the joint venture exception of section 22(A)(14) is interpreted.
Credit card fees. Credit
card fees appear to be acceptable under section 22(A)(14) because these
fees are based on the amount financed, rather than directly on medical
fees, and because these arrangements do not appear to implicate the public
policy concerns of section 22(A)(14). In light of the case law focus on
percentages, however, it is conceivable that even credit card fees could
be challenged under section 22(A)(14).
Restructuring fee, billing
arrangements. Vine Street allows considerable flexibility to
base compensation on factors relating to the underlying medical services
and claims volume so long as the compensation is not directly related
to medical revenue and the recipient of the compensation does not refer
patients to the physician.
The Vine Street holding
on the fixed fee presents planning opportunities to restructure percentage
compensation to reflect the value of the services provided to the physician.
It may even be possible to structure a formula which largely duplicates
a percentage fee by combining variables other than medical revenue. Care
should be taken with this approach, however, if the alternative formula
could be viewed as a circumvention scheme which violates the public policy
of section 22(A)(14).
Billing companies and physicians
may wish to consider restructuring the billing fee structure from a percentage
of collections to other factors that reflect the work performed by the
billing company and account for the volume and complexity of claims processed
by the billing company.
For example, the billing fee
may be determined based on the number of procedures, visits or CPT entries
billed, as well as the physician specialty. These approaches, however,
may limit the incentives of the billing company to be diligent in collection
activities, and may therefore not be attractive to physicians.
Conclusion
Business relationships of
physicians and other healthcare professionals should be examined in light
of Vine Street and other case law to determine whether there is
a need to restructure the relationships in order to comply with section
22(A)(14) or comparable statutory provisions relating to the licensing
of other healthcare professionals.
Rick
L. Hindmand is a partner with McDonald Hopkins LLC and is a member
of the ISBA Health Care Section Council. Michael V. Favia is a
health care/medical practice attorney in Chicago and the former chief
of prosecution for the Illinois Department of Professional Regulation.
He is a member and past chair of the ISBA Health Care Section Council.
1. 225 ILCS
60/22(A)(14).
2. 222 Ill 2d 276, 856 NE2d 422 (2006).
3. 225 ILCS 60/22(A).
4. 225 ILCS 60/22(A)(14).
5. Ill Rev Stat 1985, ch 111, par 4433(14).
6. Vine Street at 289, 856 NE2d at 431.
7. E&B Marketing Enterprises, Inc v Ryan, 209
Ill App 3d 626, 568 NE2d 339 (1st D 1991).
8. Practice
Management, Ltd v Schwartz, 256 Ill App 3d 949, 628 NE2d 656 (1st
D 1993).
9. Lieberman
& Kraff, MD, SC v Desnick, 244 Ill App 3d 341, 614 NE2d 379 (1st
D 1993).
10.
TLC The Laser Center, Inc v Midwest Eye Institute II, Ltd, 306
Ill App 3d 411, 714 NE2d 45 (1st D 1999).
11.
2002 Ill Atty Gen Op No 02-005.
12. Vine Street Clinic v HealthLink, Inc, 353
Ill App 3d 929, 819 NE2d 363 (4th D 2004), affd in part and revd in part,
222 Ill 2d 276, 856 NE2d 422 (2006).
13.
Vine Street, 222 Ill 2d at 293, 856 NE2d at 434 (citation omitted).
14.
Id at 286, 856 NE2d at 430, quoting Webster's Third New International
Dictionary 835 (1986).
15.
Id at 292, 856 NE2d at 433.
16. 614 So 2d 1135 (Fla App 1993).
17. Vine Street, 222 Ill 2d at 293, 856 NE2d at
434.
18.
Id.
19. Id at 295, 856 NE2d at 435.
20. See 225 ILCS 100/24(12).
21. See 225 ILCS 85/30(9).
22. See 225 ILCS 80/24(11).
23. See Vine Street, 222 Ill 2d at 285-286, 856
NE2d at 429, for discussion of the prior statute.
24. See Desnick at 346, 614 NE 2d at 382.
25. Vine Street, 222 Ill 2d at 294, 856 NE2d at
434-35.
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