Many physicians believe the difference between an “employee” and an “independent contractor” is pure semantics; a distinction with little difference. Whether members of your workforce are contractors or employees impacts many facets of your practice, including: (i) type of insurance (workers’ compensation insurance generally is mandated for employees only); (ii) payroll (employees are subject to payroll deductions); and, (iii) compliance with healthcare regulations (complying with Stark and the Anti-Kickback Statute, for example, varies depending upon whether there is an employment relationship between the parties).
Testing the Relationship
Whether a physician is an independent contractor or an employee is a question of fact, not a determination to be made by the practice group. According to the IRS, an individual is an independent contractor if the person (or practice) for whom the services are performed has the right to control or direct only the result of the work and not the means and methods of accomplishing the result.
In the context of a medical practice, the following factors should be considered: (i) whose patients are being treated, (ii) who owns the equipment being used, (iii) whether the practice exercises any control or discretion over the physician or his work methods, (iv) whether the physician is free to provide similar services to others, (v) who determines scheduling, (vi) how the physician is compensated, and (vii) what, if any, benefits the physician receives from the practice.
If the hiring practice appears to be dictating the “manner and means” by which the recruited physician performs his duties at the practice (e.g., hours, holidays, work days, methods of care, etc.), the IRS will consider the new doctor an employee. If the contract states that the patients (and patients’ charts) remain the property of the practice, employment status is indicated.
A physician working in a practice on a part-time employment basis may, in fact, be an independent contractor if the following factors are present: (i) the physician brings his equipment, (ii) the practice does not exercise any control or discretion over the part-time physician or his work methods, (iii) the part-time physician is free to provide similar services elsewhere, (iv) the part-time physician is paid only for services rendered, (v) the part-time physician does not receive any employee benefits from the practice, and (vi) the part-time physician controls his own schedule.
Last, if you are considering requesting an associate or junior physician to sign a restrictive covenant (i.e., a non-compete clause), then the independent contractor classification is undermined. Judges are accustomed to seeing non-compete clauses in physician employment agreements and not independent contractor agreements. It makes sense that an employer would require such a non-compete covenant by an employee physician before introducing the physician to the practice’s referrers and patients, and there is plenty of precedent for enforcing such covenants against physician employees. However, judges will certainly question a non-compete clause in an independent contractor agreement. A judge will question the clause because independent contractors typically render services to many clients in a geographic area and therefore it makes little sense that a bona fide independent contractor would knowingly agree to a clause that potentially restricts the contractor’s future provision of services in that area. Thus, utilizing independent contractor agreements may raise questions in the judge’s mind as to whether the non-compete covenant is a reasonable and enforceable restriction.
Stark Law Concerns
The designation of an employee or independent contractor is critical in determining if the medical practice is in compliance with many areas of billing for services. The Stark Law prohibits physicians from making referrals for designated health services (DHS) payable by Medicare to an entity with which the physician has a financial relationship unless an exception applies. Under the in-office ancillary services exception, a practice may make a referral to a member of the group if the medical practice meets the definition of a “group practice.”
In order for a medical practice to constitute a group practice, the Stark Law requires that two or more members of the practice perform “substantially all” of the patient care services rendered by a group practice (that is, at least seventy-five percent (75%) of the total patient care services of the practice) be furnished through the group and billed under a billing number assigned to the group, and that the amounts received are treated as receipts of the group. Under the Stark Law, members of a group practice include physician employees, locum tenens physicians, and on-call physicians (while the physician is providing on-call services for members of the group practice). Importantly, independent contractors are not included under the definition of a group practice physician.
If your practice engages physicians on a full-time or part-time basis, it is important to examine whether those physicians are employees or independent contractors. As a management matter, it is good practice to have a written agreement for all engaged physicians (independent contractor agreements or employment agreements) to protect the practice and make clear the responsibilities and liabilities between the practice and physicians. It is also critical as a compliance matter to ensure that the practice’s physicians are properly categorized as employees or independent contractors, especially if your practice intends to qualify as a “group practice.”
If your practice engages independent contractor physicians and bills for self-referred DHS, it is critical that you review whether you constitute a group practice based on the 75% test described above. In conjunction with that analysis, you should review the criteria for the designations of employees and independent contractors to make sure that your engaged physicians are appropriately categorized based on how they perform services for the practice.
A W-2 physician employee of a group practice readily qualifies as a “physician in the group practice” for purposes of meeting the in-office ancillary services exception to Stark. However, it is now harder for an independent contractor physician to qualify as a “physician in the group practice” for purposes of meeting the in-office ancillary services exception to Stark. An independent contractor physician will qualify as a “physician in the group practice” for purposes of meeting the in-office ancillary services exception to Stark only during the time the independent contractor physician is furnishing patient care services to the group practice’s patients in the group practice’s facilities.
Thus, for example, if the independent contractor physician is going to order, furnish, or supervise designated health services to be billed by the group (e.g., drugs, A and B scans), then the independent contractor physician can only provide those designated health services in the practice’s facilities and not at other locations such as at a hospital, nursing home, or other out-of-office location.
Also, under Stark, the group’s contract must be directly with the individual independent contractor physician and not with a separate legal entity such as another physician’s practice entity or a staffing company.
Medicare Billing Issues
Basic Medicare reassignment rules specify that in a group practice billing Medicare for its physicians’ services, the physician must reassign his right to Medicare payments to the group. Both a W-2 physician employee and an independent contractor physician can properly assign his right to receive payment from Medicare to the group practice under the Medicare reassignment rules.
Medicare reassignment is generally done via a simple provision in the physician’s (employee’s or independent contractor’s) contract stating that all payments for the physician’s services are being assigned to the group and are the property of the group. The physician (employee or independent contractor) is enrolled as a member of the group via the appropriate CMS form.
A second reason to review the status of engaged physicians is that, under the new Medicare Claims Processing Manual, a medical practice may only bill for employees of the medical practice unless specific steps are taken to notify Medicare and other third-party payors of the independent contractor affiliation. Medical practices may not bill Medicare or other third-party payors and collect monies for independent contractors working on behalf of the medical practice unless:
(i) the medical practice has a written contractual relationship with the independent contractor; and
(ii) the medical practice receiving payment and the physician that furnished the service are both subject to the following program integrity safeguard requirements: (a) that the entity receiving payment and the person that furnished the service are jointly and severally responsible for any Medicare overpayment to that entity, and (b) that the person furnishing the service has unrestricted access to claims submitted by an entity for services provided by that person.
It is critical to recognize the distinction between a reassignment from an employee and a reassignment from a contractor. For independent contractor reassignment, the entity accepting the reassignment must ensure that there are adequate written agreements containing the required language in addition to the CMS 855R form. The physician or practitioner entering into a reassignment under a contractual arrangement also must understand that there is the potential for FCA liability for claims submitted under an independent contractor reassignment.
Last, tax deductions and withholding issues are a reason to be sure a physician is indeed an independent contractor. If the practice erroneously treats a physician as an independent contractor (and therefore does not withhold any employment taxes), and the contractor fails to pay his federal income or social security (FICA) taxes (and even if he does pay them), the IRS may seek to hold the practice responsible for the taxes that it should have withheld—plus interest and penalties.