Throughout history, the medical profession has had to deal with the ethical issue of physicians accepting payment of any kind for referring patients or ordering services.  Such arrangements could result in unnecessary surgeries and/or procedures and referrals of patients to incompetent specialists. In this type of arrangement, physicians would pay their professional peers for their referrals and it is considered fee splitting.

Many states have taken legislative approaches in an attempt to prevent these types of transactions.  The problem is that many of the legislative measures adopted by some states actually reach far broader than necessary and prohibit appropriate business relationships. 

Each state has their own laws regarding this matter and they vary greatly.  There are still a handful of states that have not adopted fee splitting statutes, but about two thirds of the states have some form of fee splitting prohibitions in place.  The issue with most of these statutes is that they are extremely broad and can be used against providers who utilize a percentage based billing agreement with a billing service.

While most states have broad statutes which require interpretation and which can be used against physicians, some have more specific statutes regarding arrangements with billing services.  California and Illinois have statutes that prohibit fee splitting; however, the statutes specifically authorize percentage based billing agreements.  California authorizes percentage based billing arrangements on "fees collected" while Illinois also allows it on "fees billed."

Other states, such as New York, have statutes that specifically prohibit percentage based billing agreements.  Although these statutes are rarely enforced, they do still make it illegal for a provider to enter into a percentage based billing agreement with a billing service.

Even though in many states, percentage based billing arrangements are a violation of the fee splitting statutes, it is still the most common type of billing arrangement between a service provider and a billing service.  Both parties feel that the arrangement is advantageous.  The provider is obviously only paying for services when payment is received.  The billing service is receiving payment for their work based on the amount of revenue collected by the provider. 

There are several providers who do not believe in using the percentage based arrangement, but it is the most commonly used arrangement.  When providers pay a flat fee to a billing service, they have the risk that the billing service will not handle non-payment of claims, or that they will not pursue unpaid claims.  However, with the percentage based arrangement, there is the chance of up-coding or other abusive billing practice, but it is a very low risk.

Therefore, the percentage based billing arrangements have remained the most commonly used method between providers and billing services.  Until recently, these fee splitting statutes have not been enforced against percentage based billing arrangements. 
Just this year, the New York State Medicaid Fraud Control Unit has taken action against providers enrolled in the New York State Medicaid system that have engaged in percentage based billing agreements with billing services.

Over the past couple of months, Medicaid has been sending letters to physicians in New York State demanding that providers pay back substantial amounts of money.  These demands are not for any overpayments or errors in billing.  The Medicaid Fraud Control Unit has found a new way to take millions of dollars away from doctors based on these antiquated fee splitting statutes. 

New York State Medicaid has always stated that the percentage based billing arrangement is a violation of the fee splitting statute.  In an article in Volume 16 Number 3 of a Medicaid update issued in March of 2001, they advised providers that it is illegal to engage in a percentage based billing arrangement.  

The article states that billing agents are prohibited from charging Medicaid providers a percentage of the amount claimed or collected.  They state that it is prohibited by these antiquated fee splitting laws and even though they advised providers that it is illegal, nothing else was done, until now.

The letters that have been sent out to providers go on to state that they understand that these practices are very common but it is not acceptable under the Medicaid program.  The letter then goes on to state that during the period from 1/1/2010 to present time, Medicaid paid out $XXXXXX.XX to the provider, and that the provider paid the billing service $XXXX.XX.  The letter then demands that one half of the amount the provider paid to the billing service during that time frame be repaid to Medicaid.  The amounts Medicaid is demanding are staggering.  One letter sent to a New York State provider demanded over $48,000 be repaid.  To add fuel to the fire, Medicaid is charging 9% interest on the amount owed even though providers were unaware that money was due.

What can be done about this?  Even though it is a clear violation of the fee splitting statute, many providers and billing services are hiring attorneys to fight it.  

What effect can this have on Medicaid providers and Medicaid recipients?  One family practice that we know of has decided to go out of business.  They have notified their patients and are closing their doors.  Other doctors may choose to drop out of the Medicaid program.  One doctor that we spoke with said that he sees Medicaid patients as a service to the community and went on to state that the money that he receives from Medicaid barely covers his expenses.  Over the years, Medicaid has made several changes to their reimbursement system that this provider has not been happy with, but this is the last straw for him.  He has not made a final decision, but indicated that he most likely will no longer continue to treat Medicaid patients.

How will all of  this affect Medicaid patients if doctors give up participation with the program?  It is already difficult in some areas for patients to find providers who participate in the Medicaid program.  If participating providers decide to leave the Medicaid program, it will make it even more difficult for Medicaid patients to seek treatment.
Even though it has been known for years that charging a percentage is considered fee splitting in several states, including New York, it is still the most common method used between billing services and medical providers.  One of the problems is that most providers want to be charged a percentage because they feel that this is the best way to make sure that the billing service is doing their job.  They are only paid if and when the provider is paid.  However, at the end of the day, it is still considered fee splitting.

At this time, it appears that it is only straight New York State Medicaid that is enforcing this law; however, we have heard rumors that the Medicaid Managed Care Plans may follow.   Commercial insurances could also decide to follow suit.  What if other states decided to follow as well?

Even though it is the most common method, it appears that percentage billing arrangements may become a thing of the past.  Providers that are engaged in percentage based billing arrangements are being advised to switch to another method of payment immediately.  Whether they agree with the law or not, they cannot take the risk of insurance carriers deciding to take action against them based on these fee splitting statutes.