In a notable decision, the Tennessee Court of Appeals recently voided a hospital-based physician agreement for violation of the state's fee-splitting prohibition (Cookeville Regional Medical Center Authority v. Cardiac Anesthesia Services, PLLC, et al). Tenn. Code Ann. § 63-6-225, which applies to physicians and surgeons only, prohibits dividing a fee with any other person unless the patient or payor is informed of the fee division and consents, or the payment is a percentage reasonably related to the value of goods or services provided by an independent contractor. This second exception permits typical management, collections and similar service arrangements with physician groups.
The decision is remarkable because the agreement wasn't. It was a common assignment of an anesthesia group's collections (minus a percentage for collection expenses – the problematic "split") in return for a fixed monthly payment from the hospital. That structure is commonplace where collections must be subsidized to obtain hospital-based physician services, especially anesthesia, due to poor reimbursement and payor mix. The hospital terminated the agreement alleging breach by the group and later sued, alleging the breach and raising the illegality defense. The group counterclaimed and was awarded nearly $1.4 million in lost profits by the trial court jury.
On appeal, the Court of Appeals held that the trial court erred in rejecting the hospital's argument that the entire agreement was unenforceable because it involved an illegal fee-splitting arrangement. That the hospital raised an illegality defense was remarkable, as fee-splitting is a Class B misdemeanor for which treble damages may be recovered.
The Court's reasoning was straightforward. The anesthesia group did not contend that the 80/20 split did not at least implicate the statute, or that either statutory exception applied. Instead, the group contended that the purpose of fee-splitting statutes is to prevent kickbacks for referrals, and that because no such intent was alleged, the statute was not violated. The Court turned that argument on its head, concluding that because the legislature had recently amended other portions of the statute, and knew of other state fee-splitting bans with explicit anti-referral intent, no such intent could be read into the unadorned and unambiguous Tennessee law. The Court also noted that if the fee-splitting provision was limited to payments for referrals, it would be rendered superfluous by the services exception which bars payments for referrals regardless of the form they take. The Court was unimpressed with the group's argument that such a ruling would impact agreements that are common across the state. It felt its finding that the statute means what it says was unremarkable.
The Court also rejected the group's argument that the statute did not apply because the agreement was between the group and the hospital, rather than the individual physician members, noting that the physicians had to participate in the prohibited fee-splitting in order for the group to comply with the contract. The Court also rejected the group's argument that it relied on the hospital's repeated use of such contracts to assume their legality, noting that it was the group's responsibility to read the statute, and that the illegality defense compels the Court to refuse to enforce illegal agreements regardless of the behavior of either party, however guilty or innocent.
On the other hand, the Court made no mention of the hospital payment to the group. It should presumably have been argued that there is no fee split in substance if the hospital's fixed monthly payment exceeded the group's total fees, because the net result is that the group's fees were supplemented by the hospital, not shared with it. While the Court does not discuss whether that was the case, an assignment of fees by the group in return for fixed payments by the hospital would presumably be unnecessary were it not.
Notwithstanding the Court's impression, the holding does warrant attention by hospitals, physicians, management companies, and other entities for its potential impact on agreements with similar structure. Unique among contract doctrines, an illegality defense is useful to whichever party would benefit from using it under the circumstances, even if guilty of breach. A court accepting the defense refuses to, in effect, participate in the illegality by affording a remedy for breach to either party. Instead, the Court leaves the parties where they lie. Gambling that you will be the party that is content with where you lie when a relationship goes south would seem unwise, especially with misdemeanor criminal exposure, and unnecessary, given readily available alternatives. For example, while posing a greater administrative burden, a subsidy structure under which a hospital makes up any shortfall of collections below an agreed sum over time avoids the fee-splitting issue. As noted above, percentage agreements for services are also permissible.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
