Listen to this post

All types of healthcare providers depend on medical directors to oversee clinical operations and consult with administrative leadership on facility, unit, or clinical service line plans and performance. Medical directors function at the intersection of administration and clinical care, weighing in on matters as varied and important as accreditation, capital expenditures for equipment, staffing, standard operating procedures, and peer review. In addition to clinical skills, they ideally need excellent people skills to balance competing priorities and communicate effectively with different stakeholders. They are a valuable resource and partner for compliance professionals. With proper support, medical directors can support an organization’s compliance efforts and help mitigate risk for both employee issues and healthcare regulatory matters. This article outlines five key best practices in contracting for medical director services:

  1. Regular reviews and updates of contract terms;
  2. How to structure the legal contract with a medical group or individual provider;
  3. Questions to ask your broker about applicable insurance coverage for the services;
  4. Overlap between medical director services/peer review processes; and
  5. Practical considerations for negotiations and regulatory compliance.

Best Practice #1: Regularly Review and Clearly Document Services and Compensation.

Ideally, organizations should employ a contract management system or regularly scheduled legal/compliance review to make sure all agreements, including medical director agreements, are assessed at regular intervals for any necessary updates. Absent a regularly scheduled review, organizations should always refresh medical director arrangements when they renegotiate related professional services agreements. Regular reviews ensure that the scope of services, performance standards, and compensation are up-to-date and reduces practical and regulatory risk related to stale contract terms. For new arrangements, we recommend that clients have a standard form agreement that can be flexible in terms of adoption across different specialty practice areas.

Best Practice #2: Consider Contracting Structure (e.g., Medical Group v. Individual Physician).

For new or renegotiated contracts, we recommend clarifying the legal entity responsible for the medical director (i.e., an individual physician or a larger medical group). Contracting with an individual (directly or indirectly via a wholly-owned professional practice entity) may work well if the medical director has limited duties or if the organization desires a specific physician to serve in that role. Contracting with a medical group to render services via its employed physicians may be more advantageous, particularly where services are required for multiple locations or specialties. From the physician side, having a medical group provide services allows the employer to track physician revenue that is paid to the group for medical director services closely (even if fully passed through to the physician). Having the services provided by an employee gives a medical group more insight into and input on administrative and clinical operations impacting its employee physicians. This approach can also reduce scheduling or other conflicts between a physician’s medical director obligations and his/his clinical role and allow for flexibility in substituting medical directors, which promotes continuity of services and reduces risk of gaps in coverage.

Best Practice #3: Verify Insurance Coverage for Medical Director Services.

Plaintiffs may name medical directors as defendants in a malpractice claim, but medical directors may not always be covered by professional liability coverage. For example, an injured patient may contend that the medical director was negligent in establishing standard treatment protocols that contributed to a patient’s injury from medical treatment, or in providing adequate oversight of physicians or staff. However, because the medical director is not rendering direct patient care services in this role, the organization’s or physician’s professional liability coverage may not apply. We recommend both parties to an arrangement confirm with their broker and carriers in advance about professional liability coverage and/or directors’ and officers’ liability coverage for these services. If any coverage is issued on a “claims-made” basis, the parties also need to consider tail coverage and responsibility for that cost as well.

Best Practice #4: Make Sure Your Medical Directors Understand Your Peer Review Process.

Each medical director should be well-versed in the organization’s peer review policies and processes. Medical directors are often closer to the clinical frontlines than an organization’s other administrative or management personnel. They should play a critical role in ensuring patient safety and monitoring clinician performance, both in terms of focused and ongoing professional performance evaluations. Often, medical directors are in the best position to recognize those clinicians who should make improvements to optimize patient care. Because this oversight of clinical activities may overlap with an organization’s peer review process, a medical director must understand when referrals to the organization’s peer review body or medical staff is called for and when mandated reports need to be filed. Understanding these nuanced areas is critical to promote patient safety, mitigate clinical risk, protect physicians’ administrative rights in peer review/fair hearings, and ensure that any evidentiary protections afforded to peer review activities are preserved. Reporting is crucial for patient safety and compliance purposes under state and federal law. In California, for example, Business and Professions Code § 805 requires organizations as well as specific individuals in leadership roles to report certain disciplinary actions or practice restrictions imposed on clinicians, and the failure to do so can result in penalties for both the organization and the medical director personally. On the federal level, reporting is made to the National Practitioner Data Bank.

Best Practice #5: Focus Effort on Practical Contract Terms; Take Traditional Efforts to Clearly Document the Arrangement in Order to Reduce Regulatory Risk.

When negotiating a medical director contract, the parties need to clearly outline services and compensation, but should focus on other terms that can meaningfully affect the relationship. For example, the term and termination provisions are paramount. How long should the agreement last? Should it auto-renew? Alternatively, if a party terminates the contract, will there be a gap in coverage for the services? If so, what should the transition period look like? If contracting with a medical group, should the group have discretion to appoint any current/successor medical directors, or only with consent of the organization? Which restrictions should exist, if any, on the medical director during and after the arrangement’s term with respect to protecting confidential information or other priorities of the organization? Should the parties have a corresponding Business Associate Agreement?

Recall that when physicians provide direct patient care services and make referrals for “designated health services” to the organization, the medical director agreement must comply with the Stark Law exception for personal services arrangements and the Anti-Kickback Statute’s personal services safe harbor or risk regulatory scrutiny. We recommend that medical director agreements always be in writing, reflect the expected time commitment and clearly set forth how the medical director will be compensated, including any applicable hourly rate and potential incentive compensation based on quality or other metrics. Although advisable, having a third-party valuation is not mandatory and the cost of one for this type of arrangement may be prohibitive; however, the parties should have a reasonable basis for the compensation rate (e.g., medical director’s experience, training, and scope of duties, time and effort). It is critical for compliance purposes that the organization have a process for confirming and documenting that the medical director is meeting his/her duties, particularly with respect to the expected time commitment. Organizations may do this by requiring their medical directors to sign and return periodic attestations that the medical director has fulfilled his or her contractual obligations. While not technically needed, such attestations can serve as strong evidence in the event an organization’s medical director relationships are scrutinized from a regulatory standpoint.


Organizations need medical directors to function both clinically and administratively, and medical directors play a pivotal role in improving clinical quality, ensuring patient safety, and promoting organizational compliance (both with respect to internal policies and external reporting obligations). While many relationships with medical groups and individual physicians for these services may remain in place over extended periods of time, we recommend that organizations develop a strategic plan to ensure that these contracts are regularly reviewed, refreshed, and remain compliant with these best practices.

*Daniel Shemano is a summer associate in the firm’s Century City office.