Many telehealth companies, particularly those with multi-state footprints, look to an independent contractor model when developing their network of physician providers. An independent contractor model (using 1099 contractors) can offer lower overhead costs because the telehealth provider need not shoulder the same requirements of a W-2 employer model. It also provides scalability when the provider wants to move into new states with initially lower patient encounter volumes. We already know that physician contracts must comply with fraud and abuse laws, as reminded in the June 2015 OIG Fraud Alert on Physician Compensation Arrangements. But another question arises: could these independent contractors actually be considered employees?
The answer is not as simple as it may seem. Case in point: Teladoc’s S-1 filing issued in connection with its upcoming IPO. The filing describes how the Texas based company uses an independent contractor model with its healthcare providers in a manner Teladoc states results in an independent contractor relationship. The filing states:
“We structure our relationships with our Providers in a manner that we believe results in an independent contractor relationship, not an employee relationship. An independent contractor is generally distinguished from an employee by his or her degree of autonomy and independence in providing services. A high degree of autonomy and independence is generally indicative of a contractor relationship, while a high degree of control is generally indicative of an employment relationship. Although we believe that our Providers are properly characterized as independent contractors, tax or other regulatory authorities may in the future challenge our characterization of these relationships.”
If the answer is not as simple as looking at the contract between the telemedicine provider and the physician, how does one determine whether the physician is an independent contractor or an employee? And how can telemedicine providers confirm their relationships with physicians are structured as independent contractors? The answer is found in the IRS’ 20-Factor Test.
In Revenue Ruling 87-41, 1987-1 CB 296, the IRS developed 20 factors used to determine whether a worker is properly characterized as an independent contractor or an employee. These factors are not 100% conclusive, but provide a general framework for examining both types of relationships. The central theme is the concept of direction and control of a worker.
If the answer to the above is ‘yes’, then the agreement may indicate an employer-employee relationship. Conversely, if any of the below criteria are answered in the affirmative, the arrangement may indicate an independent contractor relationship.
These concepts are further examined in an audio presentation provided by the IRS from its May 2009 Phone Forum.
What happens if an independent contractor is deemed to be an employee? Financial tax liability for the employer is one unintended consequence. The S-1 filing describes the financial impact as follows:
“If such regulatory authorities or state, federal or foreign courts were to determine that our Providers are employees, and not independent contractors, we would be required to withhold income taxes, to withhold and pay social security, Medicare and similar taxes and to pay unemployment and other related payroll taxes. We would also be liable for unpaid past taxes and subject to penalties. As a result, any determination that our Providers are our employees could have a material adverse effect on our business, financial condition and results of operations.”
Telehealth providers already offer an incredible benefit to employers and patients in the form of increased access, care coordination and lower overhead compared to many traditional brick and mortar practices. Using an independent contractor model for physician network development further augments these savings and can be a cost-effective way to engage physician providers. That said, when preparing a standard physician telehealth agreement for an independent contractor arrangement, be certain the terms of that agreement actually reflect the characteristics of independent contractors. The IRS’ 20-Factor Test is a useful guide for this assessment.