Print PDF
July 1999

Gain Sharing Arrangements Prohibited, OIG Says

“Gain sharing” arrangements, in which hospitals pay physicians to reduce or limit care to Medicare and Medicaid patients, violate federal law, according to a Special Advisory Bulletin issued this month by the Department of Health and Human Services’ Office of Inspector General (OIG).

While recognizing that hospitals have a legitimate interest in enlisting physicians to help eliminate unnecessary costs, the bulletin alerts hospitals and physicians that arrangements in which hospitals financially reward physicians for their efforts to reduce hospital costs by paying them a share of the hospitals’ savings are prohibited by federal law and are subject to civil monetary penalties.

Specifically, OIG found that, without adequate safeguards, gain sharing could pose a risk of abuse, could adversely affect patient care, could be manipulated to reward physicians for patient referrals and that such arrangements raised significant issues that could not be resolved through OIG’s advisory opinion process. In the absence of a change in law, OIG concluded that it does not have the authority to allow gain sharing arrangements.

The OIG’s bulletin is particularly significant given that the Internal Revenue Service approved a number of similar arrangements several months ago, according to HLB attorney Brad Tully, who said that organizations with patients in federal programs may now have to shelve plans to enter into such arrangements.

In addition, Mr. Tully said, as a result of the bulletin, hospitals will also need to reexamine their risk pools with medical groups. “We are concerned that the bulletin could be interpreted to mean that these risk pools will be prohibited where they are established pursuant to direct contracts between hospitals and medical groups,” he said.

For more information on the potential effects of the OIG bulletin, contact Mr. Tully at (310) 551-8160 or David Henninger at (310) 551-8177.

Despite Court Rulings, State Controller Continues to Perform Medi-Cal Audits

Medi-Cal laboratories, pharmacies and providers of durable medical equipment continue to be the targets of audits by the State Controller, despite a state appeals court ruling in May, as well as several previous court orders, prohibiting the Controller from performing such audits.

“Contrary to our understanding of the various court decision that only the Department of Health Services (DHS) may conduct such audits, the Controller has interpreted the ruling to mean that she can act as an agent of the state, so long as she no longer initiates withholds,” said HLB attorney Patric Hooper.

Through its representation of many Medi-Cal providers, Hooper, Lundy & Bookman is vigorously contesting the Controller’s continued involvement in Medi-Cal audits and investigations on a variety of grounds, Mr. Hooper said, including the performance of the audits themselves, as well as the validity of the finding she is turning over to DHS and the Federal Bureau of Investigation. The firm represents a growing number of Medi-Cal providers targeted by the Controller, and currently has expanded its defense to include cases pending at various levels of the administrative system, as well as state and federal courts.

A hearing is scheduled in August, where Mr. Hooper is asking a federal district court to determine once and for all:

  • If the Controller can continue to perform Medi-Cal audits
  • If the Controller can give her findings to the FBI
  • Whether DHS can rely exclusively on the Controller and the FBI in determining whether it should suspend payments to providers.

The issue of Medicaid fraud in California has received such widespread national attention that Mr. Hooper was recently interviewed by reporter Mike Wallace for a Sixty Minutesprogram scheduled to air this fall.

For more information on protecting your organization in such an audit or investigation, contact Mr. Hooper at (310) 551-8165.

Hospitals Battle with Carriers over Per Diem Rate Charges

A number of hospitals engaged in contracts to provide inpatient care for Blue Shield of California, Universal Care and other private carriers are experiencing problems in obtaining reimbursement for respiratory, laboratory and radiological charges, according to HLB Attorney Daron L. Tooch.

At issue are policies instituted by the carriers after their contracts went into effect with the hospitals. In November 1996, for example, Blue Shield published new hospital guidelines after signing contracts with the hospitals. In November 1996, for example, Blue Shield published new hospital guidelines after signing contracts with hospitals in June 1996, Mr. Tooch said. A number of health plans, Blue Shield included, have implemented new auditing and payment policies that include bundling of certain charges into per diem room and board charges.

The hospitals contend that by implementing these changes, the carriers in many cases have unilaterally rewritten their provider agreements without notice to, or consent by, the hospitals. “This has resulted in the denial of tens of thousands of dollars per claim in payments to the hospitals,” Mr. Tooch said.

HLB has successfully arbitrated this issue on behalf of several clients, recouping a substantial portion of the payments due on past claims and has been able to obtain the carriers’ agreement to pay for these charges on future claims, Mr. Tooch said.

For more information, contact Mr. Tooch at (310) 551-8192.

Firm Expands Criminal Defense Practice

Civil and criminal prosecutions and investigations alleging health care fraud have increased at an unprecedented rate in recent years.

Because this trend is expected to continue, HLB recently expanded its criminal defense practice with the addition of two seasoned experts to the firm.

An experienced trial and appellate attorney, Mark S. Hardiman joined the firm after more than eight years as an Assistant United States Attorney in Los Angeles. While at the U.S. Attorney’s office, Mr. Hardiman worked in the Major Frauds and Major Crimes Sections, where he co-prosecuted United States v. Smushkenvich, the then-largest health care fraud prosecution in U.S. history. He also received a number of awards from the U.S. Department of Justice for his achievements. He may be reached at (310) 551-8197.

Admitted to the California Bar in 1988, Daron L. Tooch has extensive litigation experience in both federal and state courts, and focuses his practice on white collar criminal defense and civil litigation. Mr. Tooch is a 1988 graduate of Harvard Law School. He may be reached at (310) 551-8192.

HLB’s Fraud and Abuse Compliance and Defense Group is unique among health care legal and consulting firms because of the many years of experience and expertise the Group’s attorneys have in health care licensing, certification, and payment issues. The firm has been and continues to be involved in some of the most important health care fraud and abuse cases in the country.


Q: Can medical practices legally be organized as limited liability companies?

A: Medical practices have traditionally been organized as sole proprietorships, partnerships, or professional corporations. In 1994, the Beverly-Killea Limited Liability Company Act (Cal. Corp. Section 17000 et seq.) was enacted. This act authorized the formation of limited liability companies (LLCs) in California. In general, an LLC combines the limited liability characteristics of a corporation with the tax treatment and management flexibility of a partnership.

Although the relevant statutes are somewhat ambiguous regarding health care organizations, it is broadly accepted that a medical practice may not be organized as an LLC. The California Secretary of State has made it clear that it will not accept LLC documents for filing if the purpose of the organization is to provide medical services. In addition, the Medical Board of California has stated its position that medical practices may not be LLCs.

Q: I think a fictitious name will assist in the marketing of our medical group. What are the rules regarding the use of fictitious names by a medical corporation? Do I need to get the name approved prior to using it?

A: Generally, a name for a medical corporation cannot be deceptive, misleading or similar to a previously authorized name, and must contain one of the following designations: “medical group,” “medical clinic,” “medical corporation,” “medical associates,” “medical center,” or “medical office.”

Prior to using the name, an Application for Fictitious Name Permit must be submitted to, and approved by, the Medical Board of California. The Medical Board takes approximately six weeks to review the application. If approved, a Fictitious Name Permit will be issued, which is valid for two years.

Unfortunately, the Medical Board does not verify the availability of fictitious names in advance. Therefore, it is possible to wait six weeks only to be told the name is not available and that you must select another name. You should plan ahead when considering the use of a fictitious name.

Please note, similar rules also apply for professional corporations in podiatry and dentistry, while other types of professional corporations, such as chiropractic corporations, are prohibited from using fictitious names.

Q&A is a regular feature of Health Law Perspectives. If you have a question you would like addressed in a future column, please send your query to HLB attorney Robert Valencia by e-mail at, or send your question to Mr. Valencia at : Hooper, Lundy & Bookman, Inc., 1875 Century Park East, Suite 1600, Los Angeles, CA 90067.

For media assistance, please contact Maura Fisher at 202-580-7714.