Weiss Zarett Brofman | Sonnenklar & Levy, P.C. | Attorneys At Law

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Understanding Third Party Vendor Relationships

On Behalf of | Jan 16, 2012 | Abuse and Regulatory Compliance, Articles, Fraud, Healthcare Law, Healthcare Transactions

By: Mathew J. Levy, Esq. and Stacey Lipitz Marder, Esq.


Throughout a physician’s career, he/she will enter into several relationships with third party vendors – billing companies, EMR companies, marketing companies, internet providers, staffing companies and medical device/equipment suppliers to name a few. Prior to entering into these arrangements with third parties it is imperative that the agreement be reviewed from a business and legal perspective in order to ensure that the physician is protected.  Furthermore, physicians must do their homework and research the third party vendor.  If a third party vendor is not trustworthy this could have a major impact on the practice.  We have outlined a few key concepts that need to be taken into consideration when reviewing an agreement with a third party vendor.


It is important to have the compensation and fee structure reviewed in order to ensure that it is appropriate.  This is not only important from a business standpoint, but is also crucial to ensure compliance with the myriad of state and federal laws regulating this area including but not limited to the Anti-Kickback Statute and the New York State law regarding Fee Splitting. Federal and state regulators and prosecutors are aggressively pursuing allegations of improper financial relationships between physicians and vendors, and failure to comply with the applicable rules and regulations can result in hefty fines, charges of professional misconduct resulting in loss of license, and potentially even jail time.

Specifically, compensation should be set in advance, be fair market value for the services provided, and not take into account the volume or value of patient referrals[1].   Physicians must also ensure that they do not allow the third party vendors to share in the fees for professional services[2]. Therefore, physicians should be weary if an agreement indicates that the compensation to be paid constitutes a percentage of, or is otherwise dependent upon, the income or receipts of the professional services rendered by the physician, or if the fee is grossly above or below fair market value.

The agreement should also clearly list when payment is due, and if there are late fees.  Final payments should also be conditioned upon the third party vendor’s complete performance of its obligations. The third party vendor’s reimbursement, if any, of expenses should be addressed as well.

Exit Strategy:

When reviewing an agreement with a third party it is important to make sure that you have an exit strategy and can terminate the agreement.  Otherwise, in the event the arrangement is not working out and you terminate the agreement you may be in breach.  Furthermore, many agreements have penalties in the event of termination. These penalties can be very high, and should be limited if not removed entirely.  It is also important that each of the party’s responsibilities be delineated in the event of termination.


It is also imperative that the parties define their specific duties and responsibilities with respect to the arrangement. If you are entering into an agreement with respect to provision of a service, you must understand and document exactly what services will be provided, how often such services will be performed, what type of training is available and how accessible a representative is.  Furthermore, the agreement should address the date, time, place, method, standards and other specific requirements of performance.  If the parties are not on the same page with respect to expectations, then the arrangement will not work out.  It is also advisable that each party appoint a point person to address specific concerns and to check-in with on a regular basis.

Governing Law/Venue:

Since many third party vendors are located out of state, many agreements will indicate that any dispute will be governed by the laws of the state of the third party vendor, and that any legal action must be brought in that state.  Physicians must be aware that the laws of the other state may not be advantageous to the physician.  Furthermore, since the third party vendor is doing business in New York, the laws of the state of New York should govern any dispute.  With respect to venue being outside of New York, physicians must recognize that they would have to travel to that state in the event they bring a lawsuit against the vendor.  If the venue is California for instance, bringing a suit would be expensive and time consuming.  This must be taken into consideration when evaluating a potential arrangement.


Many agreements with third party vendors include a limitation of liability provision which essentially limits the amount that the third party vendor can be sued for.  This provision should be removed or at minimum the third party vendor’s liability should be increased. Furthermore, many agreements contain a provision indicating that there are no warranties with respect to the service or product being offered.

Confidential Information:

In the event the third party vendor will have access to confidential information involving your patients, HIPAA requires that you enter into a business associate agreement with the third party vendor.  As such, if applicable, you must enter into such an agreement with the third party vendor outlining how the third party vendor will protect the confidential information.  Especially with the passage of the Healthcare Reform Act, the government is taking a strong position with respect to the protection of patient information.


In order to ensure that the vendor cannot have another entity perform its duties it is recommended that there be a non-assignment provision added to the agreement.


Third party vendors are an important part of a physician’s practice.  Prior to entering into a relationship with a third party vendor, it is important to evaluate the agreement in order to ensure that the arrangement is compliant and offers protections for the physician. To that end, it is in the best interest of the physician to have all potential relationships reviewed by a healthcare attorney since there may be serious implications as the result of such a relationship.

About the Authors:

Mathew J. Levy is a Partner of the firm and co-chairs the Firms corporate transaction and healthcare regulatory practice. Mr. Levy has particular experience in advising health care clients with respect to contract issues, business transactions, practice formation, regulatory compliance, mergers & acquisitions, professional discipline, healthcare fraud & billing fraud, insurance carrier audits including prepay and post payment review, litigation & arbitration, and asset protection-estate planning. You can reach Mathew Levy at 516-627-7000 or email: [email protected].

Stacey Lipitz Marder is an associate at Weiss Zarett Brofman Sonnenklar & Levy, PC., with experience representing healthcare providers in connection with transactional and regulatory matters including the formation and structure of business entities, negotiating and drafting contracts and commercial real estate leases, stock and asset acquisitions and general corporate counseling.  Ms. Marder also has experience advising healthcare clients on a wide range of regulatory issues including Stark, the Anti-Kickback Statute, fraud and abuse regulations, HIPAA, reimbursement and licensing matters.


[1]Any compensation arrangement that involves the payment of fees in connection with furnishing professional medical services subject to reimbursement by Medicare or Medicaid must be compliant with the Federal anti-kickback statute.  The Federal anti-kickback statute, provides, in pertinent part:

(1) whoever knowing and willfully solicits or receives any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind –

(A) in return for referring an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program …

shall be guilty of a felony and upon conviction thereof, shall be fined not more than $25,000 or imprisoned for not more than five years, or both, unless the physician complies with one of the “Safe Harbors”. See 42 USCA §1320a-7b(1)

In addition to the criminal penalties described above, violation of the Federal anti-kickback statute can result in civil penalties and exclusion from participation in Medicare and Medicaid.  See42 USCA §1320a-7.

[2] See New York Education Law Section 6530(19) and Section 6531 regarding fee-splitting.