Subcontracting Payment Issues

Neil B. Caesar Law Associates, PA : Helath Law Center

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There are many questions in the industry about how subcontracting agreements may be arranged and, specifically, how payments from contractor to subcontractor should be arranged.  The following opinion is offered by Neil Caesar of The Health Law Center (link to and is not intended to offer legal advice. It is advised all subcontract agreements be reviewed by counsel prior to taking effect.

Payment Structures

The key in setting payment structure is to be certain that fee structure does not suggest a reward for referrals. Initially, many providers desire to set up payment to the subcontractor as a percentage of Medicare reimbursement, but providers should avoid this type of agreement. The concerns for paying different percentages are:

  1. The Office of the Inspector General is suspicious of percentages
  2. It’s harder to prove fair market value with a percentage
  3. Percentages suggest a direct relationship between referrals and rewards ( a fee equal to 80% looks just like the flip side of a kickback of 20%).

Also, payments may vary from one subcontractor to another. However, if payments vary the variances must be defensible for legitimate reasons, such as:

  1. More or less work
  2. Higher or lower profit margins
  3. Capacity to handle more or less volume

A variance, because there is an expectation that one subcontractor may send you more patients than will another subcontractor, is not a legitimate reason for a fee variance. 

Unconditional Payments

Fees must be paid to the subcontractor regardless of payment status from Medicare to the contract supplier. Setting up a subcontracting payment agreement where conditions such as or similar to “You don’t get paid unless we get paid” or “You don’t get paid until we get paid” will be perceived as special benefits awarded to the contractor in order to get referrals. Because the contractor will have the lion’s share of the reward, it consequently will have the lion’s share of the risk. The only time a fee may be conditioned on collections is when it’s a billing fee and the contingency relates to poor performance by the biller. Subsidized risk is not a new idea and has been tried many times.  It has led to fines and penalties and exclusions many times.  The safest payment plans may be net 30, net 45, net 60 or whatever is commercially reasonable.

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