What Every Medical Directorship Agreement Must Include to Stay Audit-Ready 

Medical Directorship Agreements are not just paperwork. They serve as a frontline defense against multimillion-dollar compliance violations. When these contracts are poorly written or loosely enforced, regulators can interpret them as warning signs for possible breaches under the Stark Law, the Anti-Kickback Statute (AKS), and the False Claims Act.

The stakes are high. In recent years:

• A large health system paid over $20 million in settlements because its Medical Directorship agreements lacked proper Fair Market Value (FMV) justification.
• A hospital was fined after auditors found medical directors logging hours without clear definitions of what activities “counted”, leading regulators to view the payments as disguised kickbacks.
• Smaller physician groups have faced penalties simply for expired agreements that were never updated or renewed, even though services continued.

 

These cases prove a tough reality: intent doesn’t matter. Even if your organization never intended to bend the rules, weak and inconsistent contracting can put you at risk.

Why Medical Directorship Agreements Are Under the Microscope

Medical Directorship agreements are especially risky because they blend compensation and compliance. From the regulator’s perspective, if a physician is being paid for vague, loosely defined “administrative services,” it can easily raise suspicion of a potential kickback for referrals.

For Compliance Officers and Contract Managers, this means the agreement itself has to do the heavy lifting. It should:

• Spell out duties and responsibilities in detail;
• Document how those duties tie to patient care quality or operational improvement;
• Prove that compensation is reasonable, benchmarked, and not referral-driven.

 

The Non-Negotiable Elements of an Audit-Ready Agreement

To withstand regulatory scrutiny, every Medical Directorship agreement should include:

Clearly Defined Duties (Clinical vs. Administrative)

Agreements should clearly distinguish between clinical and administrative responsibilities. An example could be: “Medical Director will spend up to 10 hours per month reviewing infection control protocols and preparing quarterly quality reports.” Furthermore, terms like “advisory services” or “general oversight” should be avoided as they have been flagged by auditors for failing to demonstrate specific measurable outcomes.

FMV Justification

Compensation must align with independent FMV benchmarks. For example, if the market rate for Medical Directorship work is $150.00/hour, paying $300.00/hour without a tangible rationale creates an immediate Stark/AKS risk.

Activity Definitions and Tracking

Define what activity counts as billable to prevent ambiguity and establish accountability from the beginning. These could be attending policy meetings, developing care pathways, reviewing quality metrics, etc… In addition, ensure that they include time tracking for logged hours and documented tasks.

Consult our Practical Guide: Medical Director Administrative Activity Log

Timekeeping and Documentation

Agreements should require physicians to log hours monthly with activity details. While it may seem like administrative busywork, timekeeping is your first line of defense if auditors ask, “What did you pay for, and why?”.

Software can streamline the process, making it more efficient and reliable.

Expiration and Renewal Clauses

Regulators have penalized organizations simply for continuing payments after an agreement has expired. To avoid such accidental non-compliance, contracts should include clear expiration dates, and renewal tracking should be built into your compliance workflow.

What “Audit-Ready” Actually Means

“Audit-ready” isn’t just corporate jargon; it is an operational standard that should be set in place to avoid delays and scrambling at the last minute during auditing season. For a healthcare organization, being audit-ready means, if CMS or the DOJ knocked on your door tomorrow:

• You can immediately produce signed, current agreements for every medical director;
• You can show time logs matched to duties, not just a lump sum of hours;
• You’d have compensation benchmark files on hand, proving every rate was FMV;
• Expiration dates would be tracked and flagged; no “we forgot to renew” excuses.

In practice, audit-ready agreements save money, reputation, and time. Non-compliance costs millions, while clean contracts protect revenue streams and strengthen physician relationships.

More Lessons from the Field: Common Pitfalls

Here are a few lessons learned from real-world cases; these could have been prevented with robust and well-documented agreements.

Example: Timekeeping Failures

A regional hospital paid $3 million in penalties when regulators found physicians billed for “administrative hours” with no contemporaneous logs. Had the agreements required detailed activity tracking, the organization would have been protected.

Example: Expired Agreements

A physician group faced Stark penalties simply because agreements rolled over informally after expiration. Every dollar paid during that “gap” was considered improper compensation.

Example: Overpayment Risk

A health system settled after paying medical directors above-FMV rates for years without independent validation. The physicians did real work, but the lack of documentation made the payments look like inducements.

Beyond the Legal Minimum: Strengthening Medical Directorship Agreements

To further minimize risk and improve consistency, consider enhancing your Medical Directorship agreements with provisions that go beyond simple and legal compliance. Some examples include:

• Automated renewal reminders built into your contract management system;
• Cross-references to compliance policies, to ensure agreements align with organizational standards;
• Retention requirements for time logs and FMV studies (e.g., “Records will be retained for at least seven years”).

 

These details not only make you audit-proof, they also streamline internal operations by forcing consistency and accountability across contracts.

Downloadable Checklist: Are Your Agreements Audit-Ready?

We’ve created a practical Medical Directorship Agreement Checklist you can use to assess your current contracts today. It covers the seven must-have clauses and provides a quick gut-check for compliance risks before regulators do.

Final Word

Healthcare organizations don’t stumble into compliance trouble because they’re reckless. More often, it’s because agreements weren’t updated, duties weren’t clear, or documentation wasn’t enforced. Getting ready today means being protected tomorrow.
By building agreements with clear duties, FMV support, and strict timekeeping requirements, compliance leaders can:

• Defend their contracts during an audit;
• Avoid multimillion-dollar settlements;
• Protect both physician relationships and the organization’s bottom line.

 

Ready to rethink or start building stronger Medical Directorship agreements?

Our team is here to help close the compliance gaps.

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Author: Caleb Amaral