Printer Friendly

Vine Street's impact on PPO/doctor business arrangements: 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 nonphysician 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. (healthLink) 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 HealthLink 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 allegasting 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 Orman (16) 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) pharmacists (21) and optometrists (22) 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 healthcare 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. 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.


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.

(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 43435.

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.
COPYRIGHT 2007 Illinois State Bar Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2007 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:preferred provider organization
Author:Hindmand, Rick L.; Favia, Michael V.
Publication:Illinois Bar Journal
Date:Jul 1, 2007
Previous Article:The naked truth: Fourth Amendment lessons from the U.S. Supreme Court: a review of recent home-search cases from the U.S. Supreme Court, including...
Next Article:Member-to-member: referral directory.

Terms of use | Privacy policy | Copyright © 2020 Farlex, Inc. | Feedback | For webmasters