Screening Independent Contractors: A Small Clinic's Guide to OIG Rules (42 CFR § 1001.1901)

Small clinics frequently rely on independent contractors such as locum tenens physicians, billing specialists, IT vendors, and laboratory couriers to maintain operations. Federal regulations prohibit payment for items or services furnished by excluded individuals or entities, regardless of employment status. This article explains how exclusion rules apply to contractors, outlines compliance risks, and provides practical tools small clinics can use to reduce exposure.

Independent contractors play a critical role in many small healthcare practices. Because these individuals are not traditional employees, practices sometimes assume that compliance screening responsibilities rest with the contractor. This assumption creates significant regulatory risk.

Federal exclusion rules apply based on who furnishes, orders, or prescribes items or services connected to federal healthcare program claims, not on employment classification. When excluded individuals or entities are involved in reimbursable services, payment is prohibited, and enforcement actions may follow. For small clinics, understanding how exclusion rules apply to contractors is essential to maintaining compliance.

Regulatory Overview: Scope and Effect of Exclusion

What 42 CFR § 1001.1901 Establishes

42 CFR § 1001.1901 governs the scope and effect of exclusion from participation in federal healthcare programs. The regulation provides that:

• No payment may be made for items or services furnished by an excluded individual or entity.

• Payment is also prohibited for items or services furnished at the direction of, or on the prescription of, an excluded individual when knowledge or reason to know of the exclusion exists.

• Exclusion applies across Medicare, Medicaid, and all other federal healthcare programs.

• Excluded individuals may not submit or take assignment of claims during the exclusion period.

The regulation focuses on payment prohibition, not on employment relationships or contractor classification.

Contractors and Exclusion Exposure

Independent contractors are subject to the same exclusion effects as employees when their work is connected to federally reimbursed services. This includes both clinical and operational functions when those functions support the furnishing, ordering, or billing of items or services.

If a claim includes work performed by an excluded contractor, that claim is not payable under federal healthcare programs. The regulation does not distinguish between full-time, part-time, or contract-based arrangements.

Criminal background checks, licensing verification, and reference checks are common components of contractor onboarding. While these measures are important, they do not identify whether an individual or entity is excluded from federal healthcare programs.

OIG exclusion screening serves a distinct purpose: confirming whether participation in federal programs is legally prohibited due to prior misconduct or enforcement actions. Both processes address different risks and are not interchangeable.

Case Study: Remote Billing Contractor

A small cardiology clinic outsourced billing functions to an independent contractor operating remotely. The clinic verified references and performed a background check but did not review the OIG List of Excluded Individuals and Entities (LEIE).

Several months later, a claims review identified billing activity connected to an individual who had been excluded from federal healthcare programs years earlier. Claims associated with that work were determined to be non-payable.

Outcome

• The clinic was required to repay improperly reimbursed claims.

• Enforcement actions focused on payment prohibition and exclusion rules.

• The clinic implemented internal corrective measures to prevent recurrence.

Key Takeaway

Contractor status does not alter the effect of exclusion. When excluded individuals are involved in services tied to federal healthcare program claims, payment is prohibited regardless of how the relationship is structured.

Common Pitfalls in Contractor Oversight

Assuming Contractors Are Responsible for Their Own Compliance

Contractors may not disclose exclusions, and exclusion status is not always revealed through standard background checks.

Screening Only at Onboarding

Exclusion status can change over time, creating risk if contractors are not periodically reviewed.

Overlooking Non-Clinical Contractors

Billing, IT, and administrative contractors may still be connected to federally reimbursed services.

1. Identify Covered Contractors
   Determine which contractors perform services connected to federal healthcare program claims.

2. Review Exclusion Information
   Verify whether contractors appear on federal exclusion resources prior to engagement.

3. Document Reviews
   Maintain dated records demonstrating that exclusion information was reviewed.

4. Monitor Active Contractors
   Periodically reassess contractors during the term of engagement.

5. Respond to Findings
   If an exclusion is identified, discontinue involvement in federally reimbursed services as required.

Contractor oversight should be incorporated into routine compliance activities rather than treated as a one-time administrative task. Integrating exclusion awareness into contracting, audits, and leadership review helps practices maintain consistency and accountability.

Independent contractors are essential to many small clinics, but exclusion rules apply regardless of employment status. Under 42 CFR § 1001.1901, items or services furnished by excluded individuals or entities are not payable by federal healthcare programs. Understanding the scope and effect of exclusion and maintaining awareness of contractor involvement helps small clinics reduce compliance risk and payment exposure.

Compliance should be a living process. By leveraging a regulatory tool, your practice can maintain real-time oversight of requirements, identify vulnerabilities before they escalate, and demonstrate to both patients and payers that compliance is built into your culture.

1. 42 CFR § 1001.1901 – Scope and effect of exclusion (eCFR)

2. HHS OIG – List of Excluded Individuals/Entities (LEIE)

3. HHS OIG – Exclusions Program (overview)

4. 42 U.S.C. § 1320a-7a – Civil Monetary Penalties Law (Federal authority referenced in exclusion enforcement context)

5. 42 CFR Part 1003 – Civil Money Penalties, Assessments, and Exclusions (eCFR)