Ever-Changing Federal and State Laws and Regulations are Transforming Third-Party Billing Contracts

laws regulation changes affect billing agreement - Liles Parker

(July 28, 2022): The business side of medicine has changed considerably over the last decade. Health care laws, regulations, and administrative policies are constantly evolving. A number of these changes have impacted health care practices, billing companies, and the third-party billing contracts executed between these parties. From its earliest beginnings, the majority of third-party billing companies have been paid on a percentage-of-collections basis. Unsurprisingly, percentage-based billing is still the industry’s most common compensation model. It just makes sense. Percentage-based billing is simple, convenient, and expedient for both the health care practice and the biller to understand and calculate. Arguably, basing compensation on the billing company’s ability to properly bill and collect monies owed to a health care practice incentivizes the biller to process claims in a timely fashion, ensure that claims are properly submitted, and ensure that collections are carefully managed. Unfortunately, the regulatory and enforcement environments facing third-party billing companies and the health care practices they service have transformed the way that billing companies must conduct business. This article examines how these changes have impacted third-party billing contracts around the country.

I. Early Guidance by the Office of Inspector General (OIG) Regarding Billing Arrangements:

In 1998, the Department of Health and Human Services, Office of Inspector General (OIG) published compliance program guidance for third-party billing companies.[1] As the OIG indicated at that time:

“The OIG has a longstanding concern that percentage billing arrangements may increase the risk of upcoding and similar abusive billing practices.”[2]

It is worth noting that the OIG has also addressed this issue in its October 2000 compliance guidance to individuals and small group physician practices[3]. As the OIG wrote:

“One of the most common risk areas involving billing services deals with physician practices contracting with billing services on a percentage basis. Although percentage-based billing arrangements are not illegal per se, the Office of Inspector General has a longstanding concern that such arrangements may increase the risk of intentional upcoding and similar abusive billing practices.” [4] (emphasis added).

As these early Federal Register issuances reflect, percentage-based billing agreements and contracts have been a concern for the OIG for almost 30 years. Despite repeated admonitions to the contrary, percentage-based compensation arrangements between physician practices and third-party billing companies are still widely used in many states around the country.

II. State Actions to Restrict Percentage-Based Billing Contracts:

A. State Fee Splitting Prohibitions

Many states have enacted “Corporate Practice of Medicine” and/or “Fee-Splitting” statutes which prohibit the payment by a physician of a portion of his professional fees to a non-physician or to a physician who was not involved in the delivery of the professional service. While the language of these statutes varies by state, there are ongoing concerns that these statutes effectively prohibit the payment by a physician of a percentage of his or her fees with a third-party billing company. In fact, many states consider it unprofessional conduct for at least some of their practicing medical professionals to enter into such an agreement at all, and if they do, they could be subject to fines, Civil Monetary Penalties, suspension, exclusion, or even the revocation of his or her professional medical license. Some states, such as Virginia and Tennessee have made percentage-based fee-splitting arrangements subject to criminal penalties (misdemeanor). Every few years this issue arises in one state or another and must be addressed by a State’s Medical Practice or Licensing Board. Though this is a legitimate concern, most State Medical Practice or Licensing Boards have chosen to just ignore the third-party billing company fee-splitting issues. Then something happened…

B. New York Enforcement Efforts Focused on Percentage Billing Agreements.

In 2017, New York’s Medicaid Fraud Control Unit (MFCU) sent overpayment warning letters to health care providers in New York State alleged to have entered into "percentage of collection” arrangements with outside, third-party billing companies. New York’s MFCU demanded that such providers refund monies paid to them by Medicaid, arguing that such billing arrangements were illegal under the Medicaid law and may also constitute unprofessional conduct under New York’s Education Law, N.Y. Educ. § 6530, punishable by up to $10,000 in fines per violation. Yes, you read that correctly – the practice is prohibited under a provision of New York’s Education Law.

The letter was based on the MFCU’s interpretation of 42 C.F.R. 447.10(f), which stated generally that, when claims are reassigned by a health care provider, (an unusual practice for most, except for very small providers who are short on staff and find this arrangement more convenient), then the biller may be paid directly, as long as compensation for their service is “not related on a percentage or other basis to the amount that is billed or collected.” Like many states, New York had long prohibited fee-splitting under its state law, but the New York MFCU’s interpretation of this Federal statute was that it didn’t just outlaw certain reassignments, it also prohibited any percentage-based billing arrangement as an illegal fee-split (kickback). Suddenly, it was a brave new world for both physician practices and third-party billing companies working in New York.[5]

Virtually overnight, every percentage-based billing arrangement in New York became illegal in the eyes of the New York MFCU; practices and billers were now eligible for further prosecution under the Anti-Kickback Statute as well as New York state laws. The New York MFCU’s warning letters went out to hundreds of practices and billers. Many were pursued by New York regulators for repayment. While some could repay the overpayments and penalties assessment by the government, others were effectively put out of business. To make matters worse, other states started to notice what New York had done and wondered if they were missing an enforcement opportunity that could return more money to their own state Medicaid programs. It is also telling that to date, no other MFCU has adopted New York’s aggressive interpretation of this regulation, but it certainly got other state OIGs’ attention.

C. What is the Status of Percentage-Based Billing Arrangements in Your State?

As you can imagine, most health care providers and suppliers would be extremely unhappy to learn that they had been persuaded to enter into a percentage-based billing agreement only to later learn that such an agreement is prohibited in their State. Unfortunately, this has turned into a virtual minefield for third-party billing companies around the country. For billers, percentage-based billing agreement prohibitions, which could once be routinely ignored, are now an active and very dangerous minefield with real consequences. This is especially problematic when you consider the fact that just because a third-party biller’s percentage-based agreement was permissible last year, there is no guarantee that state laws, regulations and administrative requirements may have changed since the contract was last reviewed. Billing companies should review their contracts on an ongoing basis (at least annually) to ensure that their compensation arrangements are compliant with Federal and State law.

Although most of the country hasn’t gone to the extremes that New York has—at least, not yet. There is, however, a growing trend among the states to delineate between billing practices that the State will allow, and that which they will not tolerate. Every state is different. For example:

  • California. Despite the contradictory guidance that has been repeatedly issued by State regulators, California, which currently allows most percentage-based agreements, provided that fair market value is exchanged for the services received and no part of the remuneration received either creates or induces (directly or indirectly), referrals.
  • Texas. Some states are now addressing percentage-based billing issues in their Medicaid provider enrollment applications and guidance. For example, Texas Medicaid Provider Enrollment Application Requirements expressly state that:

    “(e) Provider and Biller agree to establish a reimbursement methodology to Biller that does not contain any type of incentive, directly or indirectly, for inappropriately inflating, in any way, claims billed to the Medicaid program.”

    Texas has also adopted (and modified) one of the practices used in New Jersey—Texas requires that third-party billing companies hired by a provider to process Medicaid claims be registered with the State. As the Texas Medicaid Provider Enrollment Application Requirements notes:

    “(f) Biller agrees to enroll and be approved by the Medicaid program as a Third-Party Billing Vendor prior to submitting claims to the Medicaid program on behalf of the Provider.”

    Ultimately, State regulations and percentage-based prohibitions are a moving target. While percentage-based arrangements may appear to be permissible in a state, we have seen numerous instances where a specific disciple State Licensing Board (such as the Board governing podiatrists) may have issued its own regulations which effectively outlaw percentage-based agreements.


D. Additional Risks Facing Billing Companies Servicing Out-of-State Providers.

Third-party billing companies serving out-of-state health care providers are especially vulnerable to the shifting sands of state laws and regulations. Multi-state billing companies need to review the state laws, regulations and guidance of EACH STATE WHERE A PROVIDER WORKS OR IS BASED.

III. When Investigating Health Care Fraud, Federal Prosecutors are Carefully Examining the Role Played by a Billing Company:

Mother was right—you are judged by the company you keep. Now more than ever before, it is essential that you conduct due diligence before bringing on a new client. Moreover, you need to have processes in place to assist you in identifying potentially problematic or fraudulent claims before billing them to Federal health care benefit plans or private payors.

Federal prosecutors around the country are now taking a hard line when evaluating the role played by a third-party billing company in a health care fraud case. For example, in a recent Alabama case, Federal prosecutors investigating allegedly fraudulent claims submitted by a psychology clinic also pursued criminal charges against the clinic’s third-party biller. The biller was convicted and sentenced to 18 months in prison for her role in the submission of fraudulent claims for counseling services to Medicaid that were never provided. The government argued that the Biller’s role in the scheme included submitting claims using the Medicaid identifications of friends’ and family members’ children for counseling services that never took place. In its Press Release, the U.S. Attorney’s Office specifically noted that the clinic owner (a psychologist), paid the Biller a 10 percent commission for all claims paid by Medicaid.

IV. Recommendations:

Exercise care prior to bringing on new out-of-state providers as clients. You must build your client’s billing contract around the most restrictive aspects of both your state and the states(s) where a provider works or is located. As a biller, you must make the most of your time. You must ask yourself, is it worth the risk to use a percentage-based arrangement for my clients? Does it make more sense to go flat-fee, hourly or per claim? Is it practical to sort claims multiple times to determine which types can be processed under a percentage-based methodology, and which ones have to be handled on a flat fee or per claim basis? If your third-party billing company has employees, who is going to train them? Who is ensuring that they correctly submit only the claims that can be legally submitted under a percentage-based arrangement in a particular state? If your provider client is audited or put on pre-payment hold, can you terminate your agreement to avoid working without pay for months on end until it is resolved? These are real world questions that require answers and only the biller can decide them.

richard-pecore-lilesparker-Healthcare Attorney

My name is Richard B. Pecore, and I am an experienced health care attorney. My practice is concentrated on health care law exclusively and particularly on appeals of claims, regulatory guidance, compliance planning, and third-party billing agreements. If you need help sorting out your next move, give me a call at (202) 298-8750 or e-mail me at rpecore@lilesparker.com.

Richard Recore represents third-party billing companies and health care providers/suppliers around the country in connection with claims audits and investigations by Federal health care plans and private payors. He also represents licensed providers in connection with complaints filed with State Licensure Boards.

For a complimentary consultation regarding your case, please give us a call at: 1 (800) 475-1906.

  • [1] 63 Fed. Reg. 70137, (December 18, 1998).
  • [2] Id. at footnote 40, 70143. See also: 98 Op. Inspector Gen. 1 (1998); and 98 Op. Inspector Gen. 4 (1998).
  • [3] 65 Fed. Reg. 59434 (October 5, 2000)
  • [4] Id. at 59447.
  • [5] New York state is the most restrictive jurisdiction, prohibiting percentage-based agreements as a whole by use of various state statutes and regulations, such as 18 NYCRR §360-7.5(c) (mirror statute to 42 CFR § 477.10); 18 N.Y. Comp. Codes R. R Regs. 18, § 360-7.5(c) (mirror regulation); 8 NYCRR §29.1(b)(4) (compensation such as leased space, equipment or personal services); and N.Y. Educ. § 6530 (professional misconduct); N.Y. Health § 230-a (penalties for professional misconduct). On the other side of the ledger, California is most lenient, allowing most percentage-based agreements based on fair market value of services and not related to referrals. The remaining 31 states vary widely in their priorities and restrictions on PBAs, but every state has them. Although there is a slowly increasing trend to allow PBAs in more states as between physician practices and medical billing practices, many other medical disciplines and services remain prohibited.