Illinois Law Prohibits Percentage-Based Compensation Arrangements Between Physician Groups and Medical Billing Companies: Parallels in Federal and State Perspectives

14 July 2008 Publication
Author(s): Nathaniel M. Lacktman Judith A. Waltz

Legal News Alert: Health Care

On May 28, 2008, the Illinois Appellate Court, Third Division (Appellate Court) held that a percentage-based fee arrangement between a physician group and a medical billing company was prohibited and void under the state’s Medical Practice Act (MPA). 225 ILCS 60 22(A)(14) (2008). In Center for Athletic Medicine Ltd. v. Independent Medical Billers of Illinois Inc., Ill. App. Ct., No. 1-07-1594 (May 28, 2008), the Appellate Court examined the MPA and its accompanying case law and concluded the statute bans sharing, pooling, dividing, or apportioning professional fees, regardless of the reason or whether the parties’ agreement implicates the anti-fraud and abuse policies behind the MPA. Percentage-based compensation has traditionally been used in physician billing and other arrangements in the health care industry, and this ruling will have a substantial impact on how private medical practices are managed and operated in Illinois. Illinois physician groups and medical billing companies should examine their existing compensation arrangements to ensure compliance with the MPA and associated coding and billing rules.

Center for Athletic Medicine (CAM), a professional corporation of sports medicine physicians, contracted with Independent Medical Billers (IMB) to provide billing, accounts receivable, and collection services at a rate of 4.5 percent of all reimbursements and 6.25 percent of all claims not originally processed by IMB. CAM filed suit against IMB, claiming performance failures and breach of contract. IMB defended the suit by filing for summary judgment, claiming the contract was void under the MPA. In support of its motion, IMB argued that Section 22(A)(14) of the MPA prohibits “fee-sharing agreements whereby a licensee divides with anyone, for any service rendered to the licensee, a percentage of the monies earned by the licensee for medical services he or she has performed.”

The MPA provides for three exceptions where fee-sharing may be allowed: (1) where physicians divide fees in an approved partnership, corporation, or association; (2) where approved medical corporations form a partnership or joint venture; and (3) where physicians concurrently render professional services to a patient and divide a fee, provided the patient has full knowledge of the division and provided that the division is made in proportion to the services performed and the responsibility assumed by each. IMB argued that none of the exceptions applied to this case. The trial court agreed and entered summary judgment for IMB. CAM appealed.

Appellate Court Ruling
The Appellate Court affirmed the trial court decision, finding that this type of percentage-based fee splitting arrangement, though fairly common in physician arrangements, is void in Illinois “irrespective of the purpose and common practices involved in medical billing agreements.” The Appellate Court based its ruling largely on the leading Supreme Court of Illinois case interpreting the MPA to prohibit fee splitting, Vine Street Clinic v. Healthcare Inc., 222 Ill. 2d 276 (2006), in which a percentage-based fee compensation for administrative services between physicians and a health care network provider was found void under the MPA.

A percentage-based arrangement, the Appellate Court reasoned, may motivate a non-professional to recommend a particular health care professional out of financial self-interest, rather than the professional’s competence. Additionally, the professional’s judgment may be compromised because “the awareness that he would have to split fees might make him reluctant to provide proper (but unprofitable) services to a patient, or, conversely, to provide unneeded (but profitable) treatment.” However, the Appellate Court did note that a flat-fee arrangement based upon volume and complexity of services — and not based upon or linked to revenue, gross receipts, or collected billings — would probably be valid and enforceable.

Parallels in Federal and State Perspectives
While Illinois is unique in the language of its MPA and its strict restrictions on private fee-sharing arrangements, the U.S. Department of Health & Human Services, Office of Inspector General (OIG) has expressed concern with the potential problems associated with percentage-based compensation arrangements, particularly when it involves Medicare, Medicaid, and other federally funded programs. Percentage-based arrangements, which tie medical consultants’ and billing agents’ compensation to their level of performance, are widely used because they efficiently apportion risk between the parties. Under these arrangements, billing services or other administrative support entities have an incentive to use resources efficiently and maximize collection efforts.

Yet, according to the OIG, percentage-based billing arrangements may increase the risk of upcoding, unbundling, and other reimbursement manipulations. See, 98-1 Op. Office of Inspector Gen.; 98-4 Op. Office of Inspector Gen. OIG Advisory Opinions have commented on the lack of effective safeguards against fraud and abuse under percentage-based compensation arrangements. According to the OIG, not only do percentage-based arrangements create a significant financial incentive for billing or other administrative support entities to engage in abusive marketing and billing practices, there is even greater opportunity for such abuse where marketing and sales agents enjoy direct contact with physicians and their patients.

The Medicare reassignment rules allow payment to an agent of the provider of services (such as a medical billing company) only if the agent’s compensation is not related in any way to the dollar amount billed or collected, and the agent’s compensation is not dependent upon the actual collection of payment. 42 U.S.C. § 1395u(b)(6). The U.S. Congress had been concerned about third-party direct billing because "[s]uch reassignments have been a source of incorrect and inflated claims for services and have created administrative problems with respect to determinations of reasonable charges and recovery of overpayments." H. Rep. No. 92-231, at 104 (1971), as reprinted in 1972 U.S.C.C.A.N. 4989, 5090. In 2007, the Centers for Medicare & Medicaid Services (CMS) released a proposed revision to certain compensation exceptions under the Stark law that would prohibit percentage-based compensation from qualifying as “set in advance.” 72 Fed. Reg. 38184 (July 12, 2007). Foley wrote about this proposed rule on July 3, 2007 ( While not yet finalized, the proposed revision to the Stark exception reflects the CMS concern regarding percentage-based compensation arrangements outside the medical billing context. Interestingly, however, CMS utilizes percentage-based compensation for its arrangements with Recovery Audit Contractors (RAC) auditors. This arrangement indicates the government sees the benefits from these compensation arrangements, at least when CMS is the recipient of services.

Although percentage-based fee arrangements are not explicitly prohibited at the federal level for Medicare funds, some states, including Florida, prohibit their use for Medicaid funds. Fla. Stat. §409.913(10) (2007). Florida’s approach parallels its health care reform efforts to improve the integrity of the Medicaid program by cutting out channels that may lead to fraud, abuse, and overpayments of federal programs. Although Florida's prohibition is not as broad as Illinois' MPA, percentage-based fee arrangements are generally not favored in Florida because enforcement authorities view them as potentially violating Florida's fee-splitting law (where physicians are not allowed to share profits with non-physicians).

In light of the Appellate Court ruling, the MPA prohibits the sharing, pooling, dividing, or apportioning of professional fees regardless of the parties’ intent or the purpose of the agreement. Illinois physician groups and medical billing companies should examine their existing compensation arrangements to ensure compliance with the MPA and associated coding and billing rules. They also should consider alternate payment methodologies to eliminate fee-splitting while protect themselves against having to pay the billing company’s costs without receiving sufficient collections. An option to consider might be paying the billing company a fixed amount per claim.                                                                                          

It remains unclear whether other states will follow Illinois’ broad approach to curbing fraud and abuse. But medical groups participating in Medicare outside Illinois should periodically review their fee arrangements to ensure they comply with federal anti-kickback statutes and corresponding state laws. If percentage-based compensation arrangements are used, medical groups are best served by selectively choosing an ethical billing or services partner and exercising caution in negotiating the terms and conditions of such arrangement by including contractual safeguards and ethics requirements to curtail fraud and abuse.

Access a copy of the Illinois Appellate Court opinion here:

Access a copy of Illinois’ Medical Practice Act here:

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our health care clients and colleagues. If you have any questions about this alert or would like to discuss this topic further, please contact your Foley attorney or any of the following individuals:

Janice A. Anderson
Chicago, Illinois

Tina E. Dunsford
Tampa, Florida

Nathaniel M. Lacktman
Tampa, Florida

Judith A. Waltz
San Francisco, California





Related Services