Investing in Ancillary Service Providers: Legal Risks for Physicians

July 27, 2014
Martin Merritt

A tax and business formation lawyer shares the legal risks physicians must consider prior to investing in or working for ancillary service providers.

A number of doctors are being asked to either invest in, or sign personal services contracts with, ancillary services providers including compounding pharmacies, home healthcare agencies, and skilled nursing centers.  While these arrangements can have self-referral and anti-kickback statute implications, there are also several “non-health law” considerations.  

I asked Robert Feiger, JD, LLM, a tax and business formation lawyer, to share some

of the basic legal implications of these arrangements.

Martin Merritt: What are some of the “non-health law” legal implications that doctors need to be aware of when offered a chance to invest, or work for, an ancillary service provider?

Robert Feiger: First of all, most investment offers are offers to become a passive participant in the profits and losses of a pass-through entity, such as a limited liability company, subchapter S corporation, or limited partnership.  Typically doctors are informed by the people forming these entities that their investments are safe because they meet the Medicare and Medicaid small business “safe harbor,” by keeping the percentage of physician investors below the 40 percent threshold. 

The principals of such businesses may not be entirely forthcoming with investors and doctors need to be aware.  While doctors are typically shielded from personal liability from passive investments in pass-through entities, when a doctor makes a referral to a company in which he also has invested, he has done something “active.” Thus, the limited liability he would otherwise enjoy from such a passive investment would not be available if the "active" referral violates Stark Law or the Anti-Kickback Statute.

MM:  Are there other ways the law distinguishes “activities” in these doctor-service provider relationships?

RF: Another typical problem is one of treatment of a doctor as an “employee” verse an “independent contractor.”  The IRS has a 20 point checklist of factors to balance for determining whether a person is an independent contractor or an employee.  The primary question is one of “control”  (whether a company hiring a doctor maintains enough control over the work for the doctor to be considered an  employee).  Though these rules are intended only as a guide and the IRS says the importance of each factor depends on the individual circumstances, they should be helpful in determining whether a company wields enough control to show an employer-employee relationship with a doctor. 

MM: In health law, the difference between a bona fide employee and a “personal services contractor” can be of crucial significance in compliance with Stark Law and the Anti-Kickback Statute. Is the distinction also important in tax and business law?

RF: Incorrectly designating an “employee” as an “independent contractor” could have state and federal tax consequences, workers’ compensation insurance consequences, and tort law liability implications.  Withholding for bona fide employees is different than independent contractors.  Many employers find the tax burden is lower for independent contractors. However, this designation is subject to “reclassification,” either by the IRS or a state taxing authority. 

MM: Sometimes, doctors are approached about investing in an ancillary services company, and then become a medical director or consultant.  Does this change in roles carry any legal significance?

RF:  Generally speaking, tort reform laws vary from state to state, but doctors must be aware that changes in roles can mean changes in exposure to liability.  We previously discussed that a doctor’s status from passive “investor to “referring doctor” can have legal implications. So too, when a doctor who may be a passive investor becomes either a W-2 or 1099 independent contractor of a company, his status changes to an “active” participant.  Tort liability may not attach to a passive investment, but liability may attach to harm caused from negligence in actively carrying out certain functions.  It is always best to consult an attorney before entering into any such business arrangement, whether it is passive or active.

Robert Feiger is a law partner in Dallas-based law firm Friedman & Feiger.  The foregoing is for informational purposes only and does not constitute legal advice.