Claire Turcotte, Esq.

Hospitals employing increasing numbers of physicians need to be mindful of applicable legal and regulatory requirements, including the federal physician self-referral law known as the Stark law (42 USC 1395nn). Recent federal government enforcement actions clearly demonstrate that the government is becoming more sophisticated in its understanding of physician compensation arrangements and the applicable legal requirements. Recent cases suggest that the government has access to legal and valuation experts who can and will thoroughly scrutinize hospital-physician employment and other compensation arrangements. Moreover, when investigating or prosecuting a hospital for alleged violation of these laws, the government has certain advantages over its hospital targets, such as the benefit of 20/20 hindsight. For these reasons, now more than ever before it is essential for hospitals to carefully structure compensation arrangements to meet applicable laws, to obtain defensible valuation opinions to support the compensation paid in physician employment and similar compensation arrangements, and to avoid certain problematic features in compensation arrangements that may give the government reason to question the arrangement's compliance with applicable laws.

Stark law background. If a hospital wants to employ or enter into another type of compensation arrangement with a physician who will in the future refer to the hospital for services reimbursable by Medicare, that compensation arrangement has to be structured to meet all requirements of a Stark law exception. Key exceptions for employment or other services arrangements with hospitals are the employment exception and the personal services exception. Another exception that may be available is the indirect compensation exception (42 CFR 411.357). All three of these exceptions require a hospital to pay a physician at fair market value and not taking into account the volume or value of the physician's referrals. They also require that the terms of the arrangement are commercially reasonable without taking into account future referrals from the physician. In other words, does the deal make sense for the hospital even if it does not receive future referrals from the physician for inpatient or outpatient hospital services? At first blush, these Stark requirements seem fairly straightforward. Yet in practice, they can be anything but that. To help nail these down, it has become prudent practice for hospitals to turn to valuation experts who can determine fair market value and also give opinions on commercial reasonableness. Hospitals should take caution, however, that in the face of a government prosecution, even with a seemingly defensible valuation opinion, certain features of physician compensation arrangements, discussed further below, may raise red flags suggesting that the arrangement fails to meet these key elements.

Recent enforcement actions. Any recent discussion of legal concerns arising from hospital employment of physicians has centered around a few highly acclaimed U.S. Department of Justice cases alleging violation of the Stark law, and a related law known as the False Claims Act (31 USC 3729 et seq). One case in particular, U.S. ex rel. Drakeford v. Tuomey Healthcare System, Inc., stands apart from all the rest. The Tuomey case involved employment contracts for approximately 19 part-time surgeons. The hospital employed the surgeons only for purposes of their procedures at the hospital's outpatients surgery sites and allowed the physicians to maintain their private practices for all other purposes. The employment contracts were for a term of 10 years without termination. The hospital paid the part-time physicians base compensation, plus productivity compensation of 80 percent of their collections and incentive compensation up to 7 percent of their productivity compensation if they met certain qualitative targets. Productivity and incentive compensation were paid with the first dollar of collections (as opposed to paying a percentage of collections over a specified dollar amount of collections (e.g., 50 percent of collections over $500,000). The hospital also provided the physicians with health and other employment benefits (malpractice coverage, and cell phone, medical journal, and continuing education reimbursement) equal to benefits it provided to its full-time employees. The government's case centered around charges that this compensation package violated the Stark law because it was well in excess of fair market value for the services provided, and also that the terms of the agreements were not commercially reasonable. In an unprecedented jury verdict, in March 2010 the jury concluded that Tuomey had violated the Stark law. In a later court proceeding, the U.S. District Court ordered Tuomey to pay the government $44.8 million-the amount of reimbursement Tuomey had collected for Medicare services referred by the 19 part-time surgeons.

Lessons learned. The government's position in Tuomey highlights several important lessons to put into practice when structuring hospital-physician compensation arrangements.

First, if a deal seems too good to be true, or lacks any significant risk or downside for the physician, the government may view it as noncompliant. In Tuomey, the long,10-year, no-cut contract term, coupled with generous base compensation, as well as productivity and incentive compensation triggered with the first dollar, may have appeared to the government like a dream come true, with little downside risk. Also problematic was the government's allegation that the total amount of the compensation package was excessive when compared with physician productivity. To avoid government scrutiny, hospitals should ensure that these two measures (total compensation and productivity) are consistent.

Second, consistency across all similar arrangements within the hospital or health system is critical. The government in Tuomey made hay over the fact that Tuomey gave the part-time physicians benefits equal to what it gave its full-time employees. The mismatch in benefits to employment status left Tuomey vulnerable when it could easily have tailored benefits down to an appropriate part-time level. Compensation levels for similarly situated physicians should also be consistent, such as paying compensation within similar ranges for physicians with comparable specialties, experience, and obligations.

Third, unusual or overly complex arrangements warrant caution and perhaps restructuring or simplifying. In Tuomey, the part-time employment arrangements for only outpatient surgical services, while allowing the surgeons to maintain their private practices for all other services, were highly unusual if not unprecedented in the industry. Coupled with high compensation and benefits, the arrangement may have pushed the boundaries of commercial reasonableness beyond what the law (or the government) currently tolerates.

Recent cases like Tuomey strongly suggest that hospitals and others involved in structuring hospital-physician compensation arrangements will continue to learn many new and perhaps difficult lessons as the law and the industry continue to unfold. While this process is ongoing, however, one can at the very least try to avoid the pitfalls of those who preceded us.

Claire Turcotte, Esq., is a partner, Bricker & Eckler LLP, Cincinnati-Dayton, Ohio, and a member of HFMA's Southwestern Ohio Chapter (   

For more information, see Kim Mobley and Claire Turcotte's "Structuring Competitive Physician Compensation Models," hfm, December 2010

Publication Date: Wednesday, December 01, 2010

Login Required

If you are an existing member, please log in below. Username and password are required.



Forgot User Name?
Forgot Password?

If you are not an HFMA member and would like to access portions of our content for 30 days, please fill out the following.

First Name:

Last Name:


   Become an HFMA member instead