The billing company relationship: A most significant ‘other’

By Alice G. Gosfield, Esq., July 1, 2025

Every month, DermWorld covers legal issues in “Legally Speaking.” This month’s author is a health care attorney at Alice G. Gosfield and Associates, P.C.

One of the most critical factors affecting the financial viability of any medical practice is how well it performs the billing of claims. While many groups perform this with in-house staff, about 41% of practices outsource their billing. The respective responsibilities and accountabilities between the practice and the billing company are set forth in a contract. Unfortunately, most practices don’t read them or negotiate them. Given the liabilities these organizations can create for a practice, this is foolhardy. This article sets forth some considerations when confronting a billing company contract.

Background and risks

The billing company industry emerged out of collection companies. Those companies historically got paid on a contingent fee basis for their collections after the claimant’s efforts had failed. This made sense since the level of effort expended by the outside company in collection was fairly calculated on a percentage of receipts. For billing purposes, however, although percentage-based compensation has been the tradition, it makes little sense. The level of effort to enter the data on a claim form for the simplest procedure is precisely the same as for the most complex. Paying on a percentage of what the company recovers for its practice client does not accurately reflect the level of its effort, yet it remains the predominant form of payment for billing services. This is unlikely to change until the customers start demanding a different approach. Payment per claim, payment on time spent, or fixed monthly payment make far more sense.

The risks to their clients from untoward behavior by billing companies are considerable. The OIG has entered into a range of settlements with physicians where billing companies engaged in misbehavior include changing diagnosis codes to get rejected claims paid and using higher paying codes than the services which were provided. It is straightforward under the law that the principal (the practice) is responsible for the acts of the agent (the billing company). Breach of contract lawsuits have occurred with millions of dollars in damages where the billing company was negligent or inefficient in their recovery of dollars for their client. The FTC has even taken note of the types of problems and scams that can arise in this sector of health care. A well-crafted contract between the parties can prevent some of these outcomes.

Performance metrics

After determining the basis for compensation, the performance metrics to which the billing company will agree are essential to assuring the effectiveness of the relationship, although they are frequently absent from these documents. While the industry has traditionally resisted being contractually committed to performance, they tout their performance as the reason to use them as opposed to keeping things in-house. Timeliness of claim submission, days in accounts receivable, and percentage of accounts receivable older than 60 days are all meaningful. First-pass resolution rate — how many claims get paid on the first submission related to denial rate — is important; but this rate can also turn on issues created by the physicians like medical necessity denials. Even if the company won’t commit to these in the agreement, getting data about their performance on these types of issues and confirming with references prior to signing can be helpful.

Allocation of responsibilities

The first issue that arises here is who will do the coding — ICD as well as CPT — the physicians or the billing company? Even if the physicians retain all the responsibility here, there are instances when the billing company should flag errors as with medically unlikely edits. This is a mechanism the Medicare Administrative Contractors (MACs) use to flag improper claims. These include things like billing for two appendectomies on the same patient when the patient has only one appendix. For dermatology, this would include billing for one type of tissue removal followed by billing for the same tissue being removed by a different method. On the other hand, it is fair for the company to expect, as the practice should as well, timeliness in the physicians’ production of the data for billing.

The company should represent that they have a compliance program and comply with the practice’s compliance program. The OIG has a model compliance program and has published its General Compliance Guidance for all stakeholders. The company should be obligated to carry errors and omission insurance. That coverage should be reviewed to assure that they have coverage to participate in any false claims defense.

Data and audit issues

There are a range of issues that arise here. The data in encounter forms or superbills should always be owned by the practice. Who owns the reports the company produces? The practice will want to own their specific reports. The company will be a ‘Business Associate’ to the practice under HIPAA, so that needs to be part of the base agreement. Specifying the reports the company will provide — and how often — is essential to be included in the base rate the practice is paying. Special reports might be charged at a different rate which should be specified as well.

The obligation to communicate denials and their basis is critical since the practice has an ongoing obligation to make voluntary repayments of amounts improperly paid. The government has taken the position that a single denied claim is the basis for a practice to look further at the underlying issues to determine if an internal audit needs to be done. Since the statute of limitations for false claims is six years, finding a problem in a current year can lead to the obligation to look back further to determine if other payments were improper. Specifying the role the company will play in any audits generated by payers, or other investigations, is important. Communications from payers including inquiries, profiling reports, or other data regarding the practice is essential for the company to convey to the practice if the company is the “pay to” address on claims and the practice is not getting those reports directly.

Indemnifications

The company should indemnify the practice for its negligence in claims submission, breach of a representation regarding performance, or failure to provide data reports. Many companies have sought to limit their damages explicitly to no more than the last three months of fees paid or fees paid during some other period. Virtually all disclaim responsibility for punitive damages, but those are unusual in this context anyway. One mechanism of protection is for the practice to retain the right to bring in an outside auditor to evaluate the company’s claim submission; but this can also be a problem if the practice had the right to do so and never exercised it when there were signals that problems were lurking.

Termination and after

Medicare requires that the billing agent relationship be terminable at will. Other requirements are that there must be a written agreement and payment must be made in the name of the physician. Establishing the bases for cause terminations ought to include failure to meet standards, failure to collect effectively, failure to provide reports, and breach of HIPAA. The company can take the position that physician requests to submit improper coding, ineffective documentation after company provided notice, or lack of timeliness of data submission, could be grounds for them to terminate. To prevent whistleblowers, if the company has concerns about the way the practice is submitting claims or one of the physicians wants to submit claims, the contract ought to specify that they must bring those concerns to the practice before they take them to any government agency or act as whistleblowers themselves.

Post-termination issues should really be addressed in the initial agreement. For how long will the company have control of post-termination collections? The company’s obligation to turn over all the practice’s data, in what format, and within what time frame is fundamental. The failure to have these stated in the agreement is a major problem when these relationships sour. Even including injunctive relief can be important. The company should be obligated to cooperate with post-payment audits, voluntary repayments post termination, and appeals. Whether those would be paid at a different rate should be negotiated when the parties are dancing in the daisies at the outset of a new relationship and not later when they are adversaries for some reason.

Conclusion

The billing company relationship is one of the most significant contracts a practice will enter. The biggest gaps that can lead to problems are a lack of specificity on the parameters addressed here. This article is merely a summary of the over-arching considerations in these relationships. Physician practices should pay far more attention to what they are getting. Good billing companies are not bothered by any of the suggestions made in this article.

This article is provided for informational and educational purposes and is not intended to provide legal advice and should not be relied upon as such. Readers should consult with their personal attorneys for legal advice regarding the subject matter of this article.

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