Health care organizations face a great deal of regulatory risk in physician-hospital contracts, billing issues, quality and privacy. For physician-hospital contracts, the laws, enacted to discourage fraud, require complex contracts along with a high level of documentation. Failing to follow the rules of the contract or failing to document actions under the contract are technical violations and may result in settlements with the federal government. These settlements can run into the millions of dollars, so effective compliance is paramount.

A report released in April by the Office of Inspector General, the American Health Lawyers Association, the Association of Healthcare Internal Auditors and the Health Care Compliance Association helps board members to oversee compliance at their organizations. “Practical Guidance for Health Care Governing Boards on Compliance Oversight recommends that board members evaluate and discuss how the management team identifies compliance risks, investigates specific risks and implements corrective actions. The report also encourages boards to determine what communication channels are used within the organization.

“Practical Guidance” suggests questions board members can ask managers to ensure that the organization is current in its compliance program. It is the board’s duty to ask the tough questions about processes and to ensure that the organization is taking all prudent steps to reduce risk.

Physician Referral and Arrangement Risks

When a physician refers a patient to another health care provider, there is a risk that the provider will inappropriately influence the decision if the physician receives something of value for that referral. The Stark Law, the Anti-Kickback Statute and the False Claims Act all punish providers and physicians who engage in inappropriate referral reward relationships.

Under these laws, the hospital cannot pay the physician unless the contract fits within the specified safe harbors — payment and business practices that are not considered kickbacks, bribes or rebates under the Medicare and Medicaid programs. To fit within the safe harbors for these regulations, organizations spend tremendous resources to set up and monitor contracts.

Many hospitals use templates and have internal legal experts review new physician arrangements to ensure that their setup is appropriate. They take care to make sure all safe harbors are met: The relationship is commercially reasonable, the length of the contract is at least one year, it is in writing, it clearly details the duties to be performed, payment is reasonable and at fair-market value, the aggregate payment is set in advance, and the compensation is not related to volume or value of business. The legal department may use a contract management system to facilitate the setup of the contract. This system serves as a master database and sends reminders when the contract nears expiration.


The Office of the Inspector General issues press releases daily about new settlements, many related to physician-hospital relationships. The office estimates that greater than 60 percent of Stark and Anti-Kickback settlements are due to a whistleblower, usually an employee of the hospital. This speaks to the importance of having a hotline, one of the components of a solid compliance program.

While some settlements involve intentional bad behavior, many are related to technical violations, or a failure to follow the contract as written.

Essentially, the contracts are so complex it is just too easy to break their own conditions. Unfortunately, intent is irrelevant: A recent $10 million settlement in Ohio was related to documentation and missing physician time logs.

As an example, the contract may require the physician to turn in a time log within 60 days of the end of the cycle. If a payment was made, but there is no time log associated with the payment, it is a violation. Each payment is a violation, and every referral from the physician from that point in time goes into the settlement calculation.

Operational and Financial Oversight

With recent settlements, the organizations had contract management systems in place and had spent considerable time at the start to ensure that safe harbors were met. Later on, the organizations failed to follow their own contracts.

Organizations must actively manage the contract every time a payment is made, not just at the time it is executed. Every physician’s time log must be compared against the original contract and the current year-to-date payments to ensure compliance. Every handwritten time log presents an opportunity for a misstep that could result in a violation.

Board members should ask how the current processes support the monitoring of these payments. They need to carefully monitor referral relationships and arrangements, billing problems, privacy breaches and quality-related events.

Hospital boards need to be actively involved in reviewing the current physician arrangement risk, and understand what the leadership team is doing to minimize the risks.

The Tough Questions

It is critical that contracts are followed exactly as written; doing so requires active management of the payments, not just the contracts. Most organizations do a good job of setting up the contract to clearly fit within safe harbor, but it is easy to fall out of compliance.

Technical violations result, and with Stark, Anti-Kickback and the False Claims Act, the settlements can be devastating.

Board members need to involve themselves in the high-risk field of physician arrangements and ask the difficult questions:

• How many physician contracts do we have and how many physicians do we pay?

• How do we ensure that contracts are set up correctly and each payment is appropriate?

• How can the board support hospital leaders in monitoring the processes and outcomes to ensure compliance?

Lacking effective financial and operational systems for physician arrangements opens an organization to tremendous risks that can be avoided with an ounce of prevention. 

Gail Peace ( is president of Ludi Inc., Chicago.

Common Causes of Violations

Watch out for several ways in which contract conditions can be broken:

• The contract ends, yet the physician keeps turning in time logs. Those approving and processing payments miss the expiration and continue to pay.

• The physician turns in a whole year’s worth of time logs at once, outside of the time allowed for submission.

• The payment is automatic each month. The organization pays without time logs being submitted.

• The time log is illegible.

• The time log contains non-compensable items, yet the hospital paid the hours.

• The contract rate is not the amount being paid, financial checks are lacking or there was a process failure.

• The same time log is paid multiple times — G.P.