7 Common Mistakes to Avoid in Health Care Services Agreements
In health care services agreements, even small oversights can create significant legal and operational challenges. This article highlights seven frequent mistakes that contracting parties often make and provides practical recommendations to help you develop more effective, compliant agreements that help mitigate risk and protect your interests.
Please note, this is not intended to be a comprehensive overview of all the considerations that come into play with health care services agreements. Rather, it is intended to highlight some of the common mistakes contracting parties routinely make and provide recommendations for how to remedy them in your contracts.
Mistake #1: Not Clearly Defining the Scope of Services.
One of the most common mistakes I see in services agreements is a failure to fully and specifically define the scope of services the service provider will be furnishing. Often, the parties will include a single sentence stating that the service provider “will be responsible for performing professional medical services in [fill in the blank] specialty under the terms and conditions of this Agreement.” Not only are these types of descriptions vague and unhelpful, but they also open the parties up to regulatory risk.
In order to meet both the personal services and management contracts safe harbors of the federal Anti-Kickback Statute (“AKS”) and the Stark Law exception for personal services arrangements, the contract must specify the services that will be provided under the arrangement. Clearly identifying the scope of services the provider will perform is essential not only for meeting these requirements, but also for determining appropriate compensation and ensuring that it represents fair market value for the services performed.
Recommendations:
Ensure the contract identifies with specificity each service the service provider will be performing during the term of the agreement.
Clearly state in the contract the schedule for performing the services and the location(s) where services will be provided.
Consider including this information in an exhibit, which allows for ease of amendment if the scope, location, or schedule of services changes during the course of the agreement.
Mistake #2: Not Considering Fair Market Value When Defining Payment Terms.
Fair market value (“FMV”) is a critical issue in any health care arrangement and must be carefully considered to mitigate risks under federal and state fraud and abuse laws. As mentioned above, FMV is an important factor in meeting the AKS safe harbors and Stark exceptions. In addition, ensuring FMV is important for non-profit organizations that could be subject to sanctions or even risk their tax-exempt status if non-FMV compensation gives rise to private benefit/inurement issues.
What exactly is “fair market value?” Under Stark, FMV refers to the value in an arm’s-length transaction, consistent with the general market value of the transaction. With respect to compensation for services, it means “the compensation that would be paid at the time the parties enter into the service arrangement as the result of bona fide bargaining between well-informed parties that are not otherwise in a position to generate business for each other.” (42 C.F.R. § 411.351).
Most organizations and professionals in the health care field understand the importance of ensuring FMV compensation for health care services. However, some contracting parties, especially smaller organizations without formal contract review processes, often fail to devote enough attention to FMV review.
When determining FMV in a services contract, the parties should consider the relevant specialty, location of services, type of facility, schedule of services, and similar factors. They should also benchmark against industry standard compensation, which can often be accomplished through industry surveys. Parties should also consider relying on third-party valuation firms, especially with larger or more unique arrangements.
Recommendations:
Include contract language, either in the compensation terms or a separate standalone provision, expressly addressing FMV and stating that the contract payments are consistent with FMV in an arm’s length transaction and were not determined in a manner that takes into account the volume or value of referrals or business otherwise generated between the parties.
Consider including a clause indicating that the parties will review the compensation terms on an annual basis and will update compensation as necessary to ensure the compensation terms continue to reflect FMV.
Mistake #3: Not Carefully Considering the Parties’ Termination Rights.
Contract termination provisions can vary widely in terms of the scope of each party’s termination rights. It can be challenging to think through termination scenarios at the start of a new relationship. However, it is an important exercise for both parties to ensure they do not get stuck in a relationship that no longer serves them.
A typical services contract will have a termination for breach clause, often with an opportunity to cure during a specified period (e.g., 30 days). Contracts may also have a termination without cause provision that applies to one or both parties. However, the range of notice can vary considerably, and may sometimes be tied to the end of an initial or renewal term.
In addition, there may be other termination triggers beyond those described above:
Each party will often represent that the party and its employees, directors, and officers have not been excluded from participating with Medicare, Medicaid, or any other governmental health care programs. The contract will typically provide that either party may terminate the agreement immediately if it learns the other party’s representation is no longer accurate.
The services recipient might insist on immediate contract termination upon the service provider’s loss of license, loss of staff privileges, conviction of certain crimes, or other similar occurrences.
Depending on the nature of the arrangement, a contracting party might want the option to terminate in that the event their relationship with the other party gives rise to reputational concerns due to criminal or morally reprehensible conduct of the other party.
Finally, contracts often fail to address what happens upon termination. How and when will any remaining payments be made to the service provider? Will there be a wind down period to transition patients or assure orderly transition upon termination? These are important issues to think through and address at the outset instead of waiting until things go sour.
Recommendations:
Carefully consider termination scenarios at the outset of contract negotiation to determine what termination rights might be appropriate for each party.
Determine what notice timing is appropriate in light of the specific arrangement and how much disruption it would cause if the other party decided to terminate the contract with limited notice.
Determine how much time each party would need to wind down the contract in the event of termination. Ensure that the termination provision allows for a sufficient transition of services, if needed.
Consider what, if any, rights or obligations need to continue beyond termination of the agreement.
Mistake #4: Inadvertently Creating an Employer-Employee Relationship.
Misclassification of employees as independent contractors has been an increasing focus of regulators in recent years. Last year, Minnesota established heightened penalties for employers who misclassify employees, allowing regulators to fine employers up to $10,000 per violation for misclassification. Whether you are entering into a professional services agreement, a consulting agreement, or another form of independent contractor agreement, you must ensure the arrangement and contract terms do not create the appearance of an employment relationship.
Although there are several factors that may be relevant to the analysis, depending on the test a state uses for employee classification, problematic language typically includes any that gives the recipient of services excessive control over the methods and manner by which the service provider performs work under the agreement. This could include, for example:
Requiring the service provider to work exclusively for the other party, or significantly limiting the service provider’s ability to work for other parties;
Establishing a strict schedule for the service provider to follow; or
Subjecting the service provider to supervision and/or disciplinary action that commonly applies to employees.
Although contract language is important, regulators will typically look at the nature of the arrangement to determine whether it meets the state’s statutory or common law test for determining employment status. These are multi-factor tests, and no single factor is determinative. Rather, regulators will consider whether all factors point to establishment of an employer-employee relationship.
Your agreement might have a standard independent contractor clause, but this may not be enough to demonstrate independent contractor status. For example, some states, such as Colorado, require the contract to include certain clauses to overcome the presumption of an employment relationship.
Recommendations:
Know your state’s laws to ensure the agreement establishes appropriate parameters around the relationship to preserve independent contractor status.
Work with a lawyer with knowledge of your state’s laws in this area to ensure your arrangement would pass muster with a regulator and your contract does not undermine your intent.
Mistake #5: Not Addressing Intellectual Property Rights.
Too often, clients will send services agreements that fail to address a key issue – intellectual property (“IP”) protection. Sometimes, this is because they assume there won’t be any IP arising in connection with the services. More often, however, the client has simply failed to consider this issue at all.
For instance, I recently worked with a client that was adding a new service line to their clinic and wanted to contract with a professional to help support this new offering. Upon further discussion with the client, I learned that their clinical staff use proprietary techniques in connection with the services they offer. By supporting this practice, not only would the new professional have access to these techniques, but they could also develop new, related techniques in the course of providing services to the clinic. The contract, however, was silent on protections around any such IP.
Although contracting parties might assume that IP provisions are best suited for consulting agreements or other arrangements that focus heavily on patentable inventions, that is not necessarily the case. Having robust IP protections in your contract, in addition to ensuring confidentiality of any proprietary information accessed or created during contract performance, is essential to safeguarding potentially valuable business assets.
Recommendations:
Consider the potential for IP arising out of any services that will be provided under the contract. If needed, ensure that your contracts address ownership of IP and clearly define each party’s rights in connection with such IP.
Consider addressing ownership of pre-existing IP to clarify that each party will retain ownership of such IP during and after the agreement term.
Mistake #6: Not Requiring Appropriate Insurance Coverage.
An essential term in any health care services contract is the description of insurance coverage requirements for one or both contracting parties. A typical provision will require the service provider or both parties to maintain professional liability and general liability coverages in certain specified amounts (e.g., $1,000,000 per occurrence; $3,000,000 in the aggregate). The most watered-down version of this provision will require each party to maintain coverages in types and amounts “reasonable and appropriate for the industry and services being provided.” This should be avoided in most cases.
Many contracting parties will simply reuse template insurance terms without considering the nature of the arrangement. However, these terms require careful attention and tailoring based on the specific services being provided and the risks involved in the arrangement. In particular, parties need to consider modern risks relating to cybersecurity and breaches involving medical information. Cyber insurance is becoming an increasingly common requirement for doing business in the health care industry.
In addition, there are several other insurance policies that may be appropriate for a particular service arrangement, such as auto liability insurance, errors and omissions, etc. Some arrangements might also require specialized coverages for the types of services being provided (e.g., clinical trials coverage for a research-related agreement).
Recommendations:
Avoid vague language regarding insurance coverage requirements in the contract and instead be specific about the types of coverage and limits required.
Given the exorbitant costs and significant risks associated with a cyber breach, cyber liability insurance should be required when a contract arrangement involves access to medical information, and the scope of cyber coverage required should be adequate for the potential cyber-related liabilities under the contract.
Contract language should obligate the parties to provide evidence of the required coverage(s) upon request and notification in the event of a material change in the coverages required by the provision.
Mistake #7: Overlooking Boilerplate Miscellaneous Provisions.
It can be easy for contracting parties to rely on template boilerplate terms at the end of a contract without giving them much thought. Many of these provisions are not routinely negotiated and can be easily overlooked. However, there are critical rights and protections within these clauses, and it serves both parties to pay attention to the language included in this section. The following are a few key provisions:
Severability clause, which protects the contract in the event one or more part(s) are found to be unenforceable.
Assignment clause, which establishes whether the parties can assign any of their rights or obligations under the contract without the other party’s consent. For parties that anticipate a future acquisition or reorganization, they will want to pay careful attention to this clause to ensure they have the right to assign the contract without the other party’s consent.
Governing law, which can be a contentious provision. Often, the contract will be governed by the laws of the state where the services are provided, but some parties might insist on identifying a neutral location, such as Delaware or New York.
Force majeure, which has become an essential term following the COVID pandemic, when parties had to rely heavily on these provisions when they were unable to perform contractual obligations during lockdowns.
Entire agreement clause, which clarifies that the contract and its exhibits (if any) constitute the entire agreement between the parties on the subject matter and supersede any previous contracts between the parties relating to the same matter.
Amendment, which establishes exactly how the parties can execute an amendment to the agreement, including whether it needs to be in writing, signed by certain officials, etc.
Although many boilerplate clauses might seem inconsequential, they can play a significant role in establishing important rights and expectations between the parties and should not be overlooked.
Conclusion
In an increasingly complex regulatory environment, health care services contracts require careful attention. A well-crafted contract serves not only as legal protection but also as a roadmap for a successful business relationship. By avoiding the common mistakes outlined in this article, you can significantly reduce your organization's risk exposure. Taking the time to address these issues upfront can save substantial time, money, and stress down the road.
If you have questions about your health care services agreements, London Legal Consulting, LLC can assist. Please contact us today.