United States: Employed Physicians and Independent Contractors: A Brief Overview

Physicians (or a group of physicians) may establish a relationship with hospitals, health systems or other providers either as employees or independent contractors. (The term "provider" in this article is used to refer to any entity that may employ or contract with physicians for services.) Although the basic differences between these two types of relationships are somewhat commonly known, this article will highlight the important characteristics and implications of entering into a particular type of physician/provider relationship.

Merely labeling a physician as an "employee," or even entering into a written employment agreement with a physician, does not conclusively determine that physician’s status. Instead, several factors will determine whether a physician has been properly classified as an independent contractor. In general, the greater the control or right to control exercised by a provider over the performance of a physician’s work, the more likely it is that the physician will be classified as an employee. Some of the "common law" factors used to determine whether a physician is an employee or an independent contractor include:

• The extent of control which, by agreement, the provider may exercise over the details of the physician’s work.
• Whether the physician’s work is usually performed under the direction of the employer or without supervision.
• Whether the provider or the physician supplies the instrumentalities, tools and place of work.
• The length of time over which the physician has worked.
• Whether or not the physician’s work is part of the regular business of the provider.
• Whether or not the parties believe they are creating the relation of employer and employee.
• The physician’s opportunity for participation in the profit or loss of the provider.
• Whether or not the physician has invested in the provider’s business. If a physician is classified as an employee of a provider, instead of an independent contractor, there are several requirements related to that status:

• The provider will be required to withhold the applicable Social Security, FICA and unemployment taxes with respect to the physician, along with the physician’s required income tax withholdings, and to ensure that all withholdings are timely paid to the applicable taxing authority.
• The provider will be responsible for one-half of the applicable Social Security and FICA taxes for the physician.
• The physician will be eligible to participate in the provider’s employee benefit plans that are available to other employees.
• The physician will be subject to, and could benefit from, many labor and employment laws such as the Family Medical Leave Act and the Age Discrimination in Employment Act.
• The physician will be entitled to workers’ compensation coverage from the provider.
• The physician could be entitled to unemployment compensation benefits upon the termination of his or her employment with the provider.

• The physician’s compensation will be included in any nondiscrimination and coverage analysis of a provider’s qualified benefit plan under the Internal Revenue Code and ERISA.

• The provider will automatically be entitled to bill and collect for the physician’s professional services rendered on behalf of the provider, under the Medicare "reassignment rules" and comparable policies of other third party payors.

• The relationship between the physician and the provider will be subject to the federal "Stark Law" and Anti-kickback Statute. The Stark Law prohibits physicians from referring patients to entities with which they have a "financial relationship" (such as an employer/employee relationship) for the performance of certain enumerated "designated health services," unless an exception to the prohibition applies. The Anti-kickback Statute prohibits the offering, payment, solicitation or receipt of "remuneration" for (1) the referral of patients, or arranging for the referral of patients, to receive services for which payment may be made under a federal or state healthcare program; or (2) the purchase, lease, order, or arranging for the purchase, lease or order, of any good, facility, service or item for which payment may be made under a federal healthcare program. Although a detailed analysis of the Stark Law and the Anti-kickback Statute requires more space than can be allotted to this overview, it is crucial that the compensation paid by a provider to an employed physician be consistent with the "fair market value" for such services and not be determined in a manner that takes into account the volume or value of any referrals, which are the primary factors in determining the applicability of an exception or safe harbor under both the Stark Law and the Anti-kickback Statute.

• The provider (along with the physician) could be held responsible for acts and omissions of the physician. Therefore, the provider must ensure that the physician is adequately covered by medical malpractice and general liability insurance, whether at the provider’s expense or at the physician’s expense.

Written service agreements between providers and independent contractor physicians should include a clause that states that the parties intend the independent contractor relationship and not an employer/employee relationship. If a physician is determined to be an independent contractor of a provider:

• The physician will be solely liable for all applicable Social Security, FICA, unemployment and income taxes. The parties may also agree in writing on whether the physician or the provider will bear any liability in the event that the physician is determined to be an employee of the provider for tax purposes, although some agreements by a physician to indemnify a provider with respect to such liabilities (e.g., with respect to pension plan liabilities) may be unenforceable.

• The physician will not be eligible to participate in any of the provider’s employee benefit plans.

• The physician will not be subject to the Family Medical Leave Act, the Age Discrimination in Employment Act and other labor and employment laws, or workers’ compensation coverage.

• The physician will not be entitled to unemployment compensation benefits upon the termination of the independent contractor relationship.

• Either the provider or the physician may bill and collect from third party payors for the physician’s professional services rendered on behalf of the provider. In either case, a written agreement between the parties should set forth their understanding. If the physician bills and collects and retains the amounts received, such amounts are typically the physician’s sole compensation for professional services rendered on behalf of the provider. Under the Medicare "reassignment rules" and comparable policies of other third party payors, the provider may bill and collect for the physician’s professional services if: (1) the services were provided by the physician under a contractual arrangement with the provider; (2) a written contract between the physician and the provider states that the physician and the provider are jointly and severally liable for any overpayment made by Medicare in connection with the claim; and (3) the physician will have "unrestricted access" to documentation of claims submitted based on his or her services. It is common for providers and physicians to contractually allocate liability for Medicare overpayments to one party or the other by an indemnification provision, notwithstanding the requirement of clause (2) above. If the provider bills and collects for the physician’s services, the agreement between the parties typically includes the payment of a fee (hourly, daily or per procedure) by the provider to the physician, as compensation for his or her professional services.

• The Stark Law and Anti-kickback Statute apply to independent contractor physicians as well as employed physicians. Thus, it is crucial that the compensation paid by a provider to an independent contractor be set in advance, consistent with the "fair market value" for such services and not be determined in a manner that takes into account the volume or value of any referrals. In addition, in order for one of the exceptions or safe harbors to apply, there must be a written agreement between the provider and the physician that details the relationship, and the term of the agreement must last for at least one year.

• The question of whether the provider may be held responsible for acts and omissions of the physician is less clear in the independent contractor context, and requires a discussion that is beyond the scope of this article. Medical malpractice and general liability insurance are usually maintained by the independent contractor physician at his or her expense. Any services agreement between a provider and an independent contractor physician should include clear requirements of the type and amount of insurance coverage that must be maintained, and should specify the party responsible for maintaining and paying for such insurance coverage.

This article is for general information and does not include full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The description of the results of any specific case or transaction contained herein does not mean or suggest that similar results can or could be obtained in any other matter. Each legal matter should be considered to be unique and subject to varying results. The invitation to contact the authors or attorneys in our firm is not a solicitation to provide professional services and should not be construed as a statement as to any availability to perform legal services in any jurisdiction in which such attorney is not permitted to practice.

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