Fee splitting and the management of medical practices: a history of Board of Medicine declaratory statements.
At a meeting in Tampa on October 17, 1997, the board made its most recent statement on the issue of fee splitting related to medical practice management. In its final order filed on November 10, 1997, the board declared that a management contract between Access Medical, Inc., a 15-physician internal medicine group, and a practice management company, Management Company, Inc., violates Florida's statutory prohibition on fee splitting. The management contract, described in the petition for declaratory statement, requires the group to pay Phymatrix a percentage of the group's net revenues, in addition to all actual operating costs and a flat fee of $450,000 per year. In return, Phymatrix provides management services to the group that include physician network development, managed care contracting, and other efforts to increase the number of patient referrals made to the group. Phymatrix is appealing the board's final order and the board has agreed to stay the final order pending the outcome of the appeal. The decision has attracted substantial attention at the state and national levels, as it threatens the legality of the current popular trend toward similar management contracts between physician practice groups and PPMs.
The basis for the final order appears in F.S. [sections] 458.331(1), which sets forth a list of acts or omissions for which the board may take disciplinary action against a physician's license. The list includes [sections] 458.331(1)(1), which prohibits "[playing or receiving any commission, bonus, kickback, or rebate, or engaging in any split-fee arrangement in any form whatsoever with a physician, organization, agency, or person, either directly or indirectly, for patients referred to providers of health care goods and services...."
Florida's Administrative Procedures Act authorizes an agency, such as the board, to issue declaratory statements that provide explanations of the agency's opinion with regard to the application of a specific statute, rule, or order to a particular set of circumstances. The uniform rules of procedure require a petitioner to allege the potential impact upon the petitioner's interest in order to show the existence of a controversy, question, or doubt as to the application of the specific requirement or prohibition. Florida's courts have set forth the appropriate use and scope of agency declaratory statements. To be entitled to the issuance of an agency declaratory statement, a petitioner must demonstrate an actual present and practical need for such statement. Agency declaratory statements may determine issues not presented in a petition when they are related to the application of a particular statute, rule, or order to specifically stated facts. However, such statements may not be utilized by an agency for the purpose of setting forth broad agency policies.
Agency declaratory statements generally bind the agency and the parties to the action with regard to the specific facts set forth in the petition and relied. upon in the final order. The board has been known to push the envelope in responding to petitions which set forth specific facts that arguably could apply to any number of physicians licensed by the board. Of course, licensees often are most anxious to have the board address the most prevalent factual scenarios. Issues related to fee splitting and permissible corporate structures have been the issues most frequently posed to the board.
One of the board's first declaratory statements on these issues was in In re Lundy, 9 FALR 6289 (1987), in which the board considered a petition Chat described a business entity which provided office space and equipment and also billing and collection services to a group of family practitioners. The business entity also provided newspaper, radio, and television advertising and promoted the group's services to prospective patients. In exchange, the business entity retained 40 percent of collections. The board held that this agreement was not prohibited under the fee splitting statute. It stated:
While the scenario establishes that the patients' fees would be paid to the corporation and sixty percent of the fee would be returned to the practitioner, the sixty percent of the fee is attributed to the payment for lease of the space and equipment and for the provision of advertising and administrative services. Since the fee is not in any apparent way, either directly or indirectly, tied to an arrangement whereby the corporation makes referrals to the physicians or the physicians make referrals to the corporation, the Board does not perceive the arrangement as being prohibited by the statutory provision at issue.
At about the same time as it rendered the Lundy decision, in In re Lozito, 9 FALR 6295 (1987), the board declared that a limited partnership (which included physician limited partners) that was formed to own and lease a rehabilitation center could lease the center for a fixed rent plus five percent of operating profits. The board held that the return on the physicians' investment would be proportionate to ownership interest, and, therefore, would not violate the fee splitting statute.
While the fast developing PPM industry may have taken comfort from these early declaratory statements, the board has held most recently that several other business arrangements constitute prohibited fee splitting. In 1990, the board ruled on a petition for declaratory statement that described a business corporation providing office space, staff, equipment, billing services, and marketing services of Dr. Zeterberg, an allergist. The marketing services Included creation of a "circuit" of physician's offices in which the management company would lease space and other services required for the allergist to visit and provide specialist services to patients of the practices included in the "circuit." As set forth in the petition for declaratory statement, the allergist was to be paid a percentage of revenues. The board held that this arrangement constituted indirect payments to the clinics in the "circuit" for referrals and, therefore, was prohibited under the fee splitting statute. The board distinguished this arrangement from that in Lundy because here, the allergist's agreement included marketing as well as administrative services. The provision of marketing services appears to be a "red flag" indicative of fee splitting concerns. Two years later, the board reviewed a petition for declaratory statement that described the petitioner as the owner and operator of a multispecialty clinic that provided space, staff, ancillary services, and advertising for independent contractor physicians who provided patient services on a flat fee basis per procedure performed. The board found that this arrangement violated the fee splitting prohibition because the patients "belonged to" the clinic that referred them to the physician independent contractors and in return kept part of the fee. In arriving at this decision, an important factor was that the arrangement included services provided by the independent contractor physicians in a hospital setting, as well as the services provided in the clinic. The board determined that this showed that the independent contractor physicians were paying the clinic for establishing a patient relationship, not just for goods and services provided to the physician independent contractors when they practiced at the clinic.
The fact that the arrangement included services provided outside of the clinic also was an important factor in another declaratory statement issued by the board in 1992. As described in that petition, the Green Clinic was a partnership that contracted with individual physicians to provide space, staff, supplies, billing, collection, and other administrative management services, as well as access to ancillary services such as diagnostic equipment. The partnership retained 54 percent of the physician's collections. The board held that this was "classic fee splitting," because it was based purely on billings for physician services without any relationship to the cost of those services, and because the deal included hospital as well as office services.
Subsequently, in Crow v. Agency for Health Care Administration, 669 So. 2d 1160 (Fla. 5th DCA 1996), the Fifth District Court of Appeal upheld a declaratory statement of the board. This statement involved remuneration from a company that had purchased a physician's practice to the physician as an employee subsequent to the sale. The board found the remuneration to be tainted because it was based upon the overall revenues generated by the physician including revenues generated by referrals for ancillary services. Ancillary services consist of such procedures as laboratory tests and diagnostic procedures ordered by a physician. In its opinion, the court stated that it was appropriate for the board to make it clear that selling one's practice to an HMO is not a loophole to F.S. [sections] 458.331(1)(i). The court's ruling in Crow set the stage for the petition recently filed by Dr. Bakarania.
The board's most recent declaratory statement was initiated by a petition filed with the board on June 24, 1997. The initial petitioner was Magan L. Bakarania, M.D., a Florida physician, who stated that he was considering joining the Access Medical primary care physician group in Tampa. Access Medical had a management contract that requires the company to provide the group with administrative management services such as bookkeeping, billing, and collections, and providing facilities, staff, and equipment. The company also must provide more general management services, including the development of physician networks and the negotiation of HMO and PPO contracts on behalf of those networks and the group. In return, the group was required to pay the company three separate fees: an Operations fee equivalent to the actual expenses incurred by the company in providing management services to the group; a general management fee of $450,000 annual]y; and an annual "performance fee" equal to 30 percent of the group's annual collections, net of the other two fees, and of the group's "profits" prior to its relationship with the company. The original petitioner, Dr. Bakarania, asked the board to declare whether this arrangement was lawful under F.S. [sections] 458.331(1)(i) and F.S. [sections] 817.505.
Dr. Bakarania apparently wished the board to declare the company's management contract illegal. His petition highlighted the similarity of the company's management contract to the contract described in Green Clinic, 14 FALR 3935. Similarities include the facts that the percentage payment is not related to the cost of the management services provided (in fact, the contract requires the company's direct costs to be compensated off the top of revenues) and that the payment covers revenues from all services, whether performed inside the physician's office or in a hospital. The board first addressed the Bakarania petition at its August 2, 1997, meeting. There, the chair expressed concern that, as in the Crow case, the company was providing ancillary services which might give a physician an incentive to order tests or procedures or supplies that may not be necessary for the care of the patient. The Bakarania petition asked whether "the incentive payment to the company ... could be construed to be basically a kickback for referrals because the company is obligated contractually to basically generate business for the group" and to facilitate relationships with managed care networks. The board considered the line of Florida cases out of the Second District Court of Appeal which uphold a percentage management fee. More specifically, this court has held that a 10 percent management fee chiropractors paid to Practice Management Associates, Inc., for marketing and consulting services furnished to chiropractors establishing their clinics was not unlawful either under the Illinois fee splitting statute, or under the Florida Chiropractic Act's fee splitting statute, F.S. [sections] 460.413. The board did not rule on the Bakarania petition at its August meeting. The discussion there indicated a likelihood that, despite the PMA line of Second DCA cases, the board would use an expansive interpretation of a "referral" to include provision of general marketing services resulting in patients "delivered" through networking and managed care contracts.
Indeed, the concept of "referral" is not very well defined, except within the Florida Patient Self-Referral Act, F.S. [sections] 455.236. This act defines "referral" in a somewhat circular fashion to mean "any referral of a patient by a health care provider for health care services, including ... the forwarding of a patient by a health care provider ... and the request or establishment of a plan of care...." F.S. [sections] 455.236(3)(m). The statute then continues and lists a number of specific referrals which are not "referrals" for purposes of the statute.
The PPM industry has taken a narrow view of "referrals," considering a prohibited referral as one where a health care provider refers an individual patient to a specific provider or supplier of health care goods and services in which the referring physician has a financial interest. PPMs may obtain contracts for physicians, indirectly leading to a flow of patients, but they are not licensed to practice medicine and have not considered their activities to be the "referral" of individual patients.
The board's proposed declaratory statement takes a much more expansive view on what constitutes a referral. The concept that the company's percentage compensation for managed care networking and contracting services could constitute illegal fee splitting threatened to upset the market-created status quo that has driven the proliferation of PPMs in Florida. PPMs were even more alarmed that, in response to Dr. Bakarania's inquiry, the board might declare that the company's contract violated Florida's new patient Brokering Act. This law enacted in 1997, contains criminal penalties for unlawful "brokering" of patients, a term which is not well defined in the new law.
Prior to the board's October 17, 1997, meeting, the company and its medical director, Edward E. Goldman, M.D., filed a motion to join the Bakarania declaratory action as petitioners. They also filed a memorandum attacking Dr. Bakarania's standing and arguing that the matters raised by Dr. Bakarania affect the industry generally and, therefore, should be the subject of formal administrative rulemaking, under F.S. Ch. 120, including an appropriate fact-finding hearing. The company and Dr. Goldman filed their own alternative petition for declaratory statement, noting that "the essence of the activity addressed in Dr. Bakarania's Petition is the business administration of managed care arrangements. They also argued that what Dr. Bakarania was really seeking was to ban the "corporate practice of medicine," which is not prohibited by law in Florida.
Phymatrix argued that the Second DCA's PMA line of cases established Florida law on the issue of percentage management contracts, in a manner that permitted such relationships under Florida's fee splitting statutes. The company additionally asserted that the board had no jurisdiction to interpret or apply F.S. [sections] 817.505, the Patient Brokering Act.
Also prior to the October 17 meeting, the 13 physician members of the Access Medical Group (whose management contract with the company was at issue) filed a motion to join as petitioners. Another PPM company, MedPartners, Inc., and its medical director also sought permission to intervene in the matter. At its meeting, the board granted the various motions to intervene and heard argument from the parties. The board ultimately ruled that the company's management agreement with the group was unlawful under F.S. [sections] 458.331(1)(i). This was because the group was paying the company a percentage of the group's revenues that had no correlation to the actual cost of providing management services and appeared to be provided simply to compensate the company for management services intended to develop more "patient referrals" for the group.
The final order describes how the board previously interpreted F.S. [sections] 458.331(1)(i) in the Green Clinic statement, "to prohibit an arrangement whereby a clinic retains a specified percentage (54%) of the physician's billings without regard to the cost of providing services by the clinic to the physician and without regard to whether the billings are for services performed by the physician in and out of the Clinic." The board then declared that the company contract "is a split-fee arrangement that is in violation of [sections] 458.331(1)(i), Florida Statutes. The board went on to state that "[P]ayment of fees to the Company, that are based upon revenue generated, at least in part, because of the referrals that the Company has helped to generate is a violation of [sections] 458.331(1)(i) ... [a]lthough payment of a reasonable flat fee in return for the provision of management services, including practice enhancement, is appropriate ...." However, "payment of a percentage of the revenue the management services and practice enhancement generate is not permissible." The board distinguished the Second DCA's PMA line of cases. In PMA, the contract did not require the management company to provide "more extensive referrals of patients. The company's contract in Bakarania:
[S]pecifically requires the company to create a physician provider network; develop relationships and affiliations with other physician networks; develop and provide ancillary services including pharmacy, laboratory, and diagnostic services; and evaluate, negotiate, and administer managed care contracts. Each of these activities is involved in the development of a greater number of patient referrals to Petitioner's practice.
The board declined to rule on the application of the Patient Brokering Act, a criminal statute. It wrote "[I]t is clear that the Legislature intends that payment of fees or other remuneration directly or indirectly related to the referral of patients to health care providers is no longer to be permitted in Florida" and that there is a similarity in language and intent between F.S. [sections] 458.331(1)(i) and F.S. 8817.505.
In a separate order, the board granted the oral motion made by the company and Dr. Goldman to stay the board's final order pending review by the district court of appeal.
The significance of the Florida Board of Medicine's Bakarania declaratory statement for the PPM industry cannot be overstated. If Florida courts support the board's expansive definition of referrals and its holding that a percentage management fee violates fee splitting prohibitions, a large-scale restructuring will be necessary in Florida.
The impact may be more far reaching. Other states may be influenced by the reasoning of the Florida Board of Medicine. The Florida fee splitting statutory language is not dissimilar to that of Illinois and other states. National and regional PPMs such as the Phymatrix Company and MedPartners generally have made a strategic commitment to forming physician networks in order to contract with HMOs and other payors for managed care contracts. Many believe that PPMs seek to build revenues by managing as much of the health care dollar and the managed care market as possible. Moreover, many commentators stress the importance of aligning incentives among business partners for success in the managed care industry. Revenue sharing arrangements such as the company's management contract with the group align the incentives of the physicians and the PPM company. Both seek a greater share of the managed care market in an era in which the health care industry is consolidating rapidly and network initiatives often are seen as critical to success and survival. If the physicians and the PPMs can't share revenue because of fee splitting prohibitions, and PPMs must be paid a flat fee for their services, incentives of the PPMs and physicians will not be aligned closely and the PPMs' relationships with physicians may be altered fundamentally.
Pending the outcome of the company's appeal, the final order in Bakarania may serve as the board's attempt to slow the pace of PPM deals with physicians. It may cause the PPM industry to reevaluate and redraft its contracts, to find other ways to compensate PPMs for the marketing, networking, and contracting services performed for Florida physicians. The resolution of the Bakarania case promises to be a significant event for the health care industry.
 In re the Petition for Declaratory Statement of Magan L. Bakarania, M.D., 20 FALR 395 (1998) (the final order and record materials may be obtained by contacting the clerk of the Department of Health at 850/414-8012).
 The order granting stay was filed on November 10, 1997, in conjunction with the final order.
 Similar language is also found at FLA. STAT. [sections] 455.237, applicable to all health care providers, and in FLA. STAT. [sections] 817.505, the new Patient Brokering Act, effective October 1, 1996, and in a number of other professional licensure statutes.
 FLA. STAT. Ch. 120 (1997).
 FLA. STAT. [sections] 120.565 (1997).
 FLA. ADMIN. CODE r. 28-105.
 Couch v. State of Florida Department of Health and Rehabilitative Services, 377 So. 2d 32 (Fla. 1st D.C.A. 1979).
 Crow v. Agency for Health Care Administration, 669 So. 2d 1160 (Fla. 5th D.C.A. 1996); San Souci v. Division of Florida Land Sales and Condominiums, 448 So. 2d 1116 (Fla. 1st D.C.A. 1984).
 Regal Kitchens, Inc. v. Florida Department of Revenue, 641 So. 2d 158 (Fla. 1st D.C.A. 1994); Florida Optometric Association v. Department of Professional Regulation, Board of Opticianry, 567 So. 2d 928 (Fla. 1st D.C.A. 1990).
 Lundy, 9 FALR at 6290-91.
 Id. at 6292-93.
 See also In re Myers, 10 FALR 6225 (1988).
 In re Zeterberg, 12 FALR 1035 (1990).
 In re Speiller, 14 FALR 3942 (1992).
 In re Johnson and the Green Clinic, 14 FALR 3935 (1992).
 In re Crow, Final Order #AHCA-95-00405 (1995).
 The petition suggested that the provisions of FLA. STAT. [sections] 817.505 could be interpreted by the board because FLA. STAT. [sections] 458.331(1)(g) makes it a disciplinary violation for a physician to fail to meet any obligation imposed by statute.
 Excerpt of Department of Health, Florida Board of Medicine meeting, at 11 (August 2, 1997).
 See PMA, Inc. v. Orman, 614 So. 2d 1135, 1138 (Fla. 2d D.C.A. 1993).
 See PMA v. Gulley, 618 So. 2d 259,260 (1993).
 FLA. STAT. [sections] 817.505, the Patient Brokering Act.
 PhyMatrix Management Company, Inc.'s and Edward E. Goldman, M.D.'s Petition to Intervene, Alternative Petition for Declaratory Statement and Petition for Formal Administrative Proceedings if Disputed Issues of Material Fact are Present, p. 6 (admitted into the record at the Dept. of Health Florida Board of Medicine Meeting, October 17, 1997).
 Id. at [paragraph] 8(a). Many states have statutory prohibitions on the employment of physicians by corporate entities except for professional corporations. See, e.g., CAL. Bus. & PROF. CODE [sections] 2400 (1997); CAL. Bus. & PROF. CODE [sections] 2052--53 (1997); COLO. REV. STAT. [sections] 12-36-134(7) (1997); N.Y. EDUC. LAW [sections] 6522 (McKinney 1997); and TEX. REV. CIV. STAT. art. 4495(b) (1997). No such statutory prohibition has been enacted in Florida with respect to physicians, although Florida does prohibit the corporate practice of dentistry and optometry. See FLA. STAT. [subsections] 466.0285 and 463.014 (1977), respectively.
 The board had previously denied PhyMatrix's request for formal administrative fact-finding hearing and PhyMatrix had withdrawn its motion for alternative declaratory statement.
 Bakarania final order, filed November 10, 1997. See supra note 1.
 Bakarania final order, Conclusions of Law, [paragraph] 5.
 Id. at [paragraph] 6.
 Id. at 97.
 Filed November 10, 1997.
Allen R. Grossman serves as an assistant Attorney General and is the deputy chief of the Administrative Law Section of the Florida Attorney General's Office. He currently serves as counsel for the Board of Medicine, the Board of Dentistry, and the Florida Athletic Commission. Mr. Grossman graduated from Purdue University and the Marshall-Wythe School of Law of the College of William and Mary.
R. Andrew Rock is a board certified health lawyer and a partner in the Tampa office of Rudnick & Wolfe. He is a past chair of the Health Law Section of The Florida Bar. Mr. Rock concentrates his practice in health care transactions, contracts, managed care, and Medicare reimbursement.