As CMO and administrator for our employed medical group, I reluctantly accepted the fact that many of the individual physician practices in our group experienced financial John Juricalosses each year. The financial reports for certain specialists and primary care clinics showed a negative bottom line year after year, regardless of whether indirect costs such as human resources were included. This was generally accepted as the cost of being in the physician-employment business, given that overhead for hospital-based groups is generally higher than for physician-owned groups and that physician-owned groups frequently offer ancillary services to generate additional sources of income.

These financial losses generally were justified on the grounds that:

  • Independent physicians could not afford to recruit new associates, and there were several provider gaps in our community that we believed we needed to fill for our patients.
  • If we did not bring in additional physicians, our existing physicians would leave because of lack of sufficient coverage and heavy workloads.
  • The hospital system would benefit from having a larger network, and would generate revenues through testing and admissions that would more than compensate for the losses incurred in some of the practices.

Our average loss per physician ran less than $100,000, which was lower than the rates of $100,000 to $200,000 per physician per year as reported in national surveys. Most newly established practices lose money even in a physician-owned group because of the time needed to market and acquire patients and become credentialed with payers, along with typical insurer payment delays.

CMS and New Challenges

Several federal laws directly impact how physicians are paid by any health system that cares for Medicare patients. The Stark Law and False Claims Act (FCA) require that physicians be paid at a fair market rate based on productivity and not on referrals for testing or treatment.a

Many hospitals assign starting salaries in part based on salary ranges reported by surveys such as those published by the Medical Group Management Association (MGMA) and the American Medical Group Association. It is generally believed that if a physician’s salary falls under the 90th percentile—and certainly under the 75th percentile—the risk of being accused of paying higher-than-market levels of compensation is mitigated or eliminated.

However, there have been recent reports of Centers for Medicare & Medicaid Services (CMS) investigations, hospital self-disclosures, and fines related to these issues.These allegations and fines suggest that paying employed physicians above-average salaries while their practices consistently experience losses might be interpreted by CMS as a failure to meet fair market value compensation requirements. Allegations of wrongdoing are strengthened when hospital system board minutes and other internal documents refer to the potential “downstream” financial benefits—i.e., from referrals—of hiring physicians.

Consider a hypothetical hospital-based group of four cardiologists, all of whom are being paid at the 75th percentile of MGMA cardiology salaries for a given region. The group shows an annual loss in excess of $500,000 per year on its income statement. In this kind of situation, the compensation might be viewed as being in excess of fair market value and in violation of the Stark Law. Investigators may assume that payments from laboratory testing, imaging, specialty referrals, and surgeries are being considered when the system sets future compensation at existing levels, even in the face of continued losses. These allegations have been made in similar cases even in the absence of direct evidence (e.g., memos, minutes) of incentives for referrals.

Reducing Risk

Because the government may suspect a Stark violation when the arrangement seems commercially unreasonable, it makes sense for physician employers to look at other compensation models and make serious efforts to reduce or eliminate losses on physician practices. Reducing overhead, linking salaries to collections generated for services personally performed by the physician, and negotiating better terms with payers are good strategies for reducing the risk of allegations.

If a practice still uses salary surveys to drive compensation offers, the surveys should be appropriately interpreted and applied. Engaging an expert third party to provide independent analysis and recommendations regarding appropriate compensation, especially for highly compensated physicians, should help reduce the risk of Stark-related allegations.

Additional Steps

Taking additional steps during the recruiting and “on-boarding” of new physicians also can help prevent these kinds of risky scenarios from developing.

Explain to new candidates that the compensation you are providing will not be fully supported by their collections during their early years, and that you need to work together to grow a thriving, productive, and efficient practice. They need to understand that their visit volume, worked RVUs, and collections will need to come in line with their salary within two to three years.

Ensure that your billing practices are effective and aggressive, collecting for services in a timely manner. You will need to educate your new physicians so that they understand the importance of accurately documenting their medical care and working with your billing department to clarify billing issues when they arise.

Teach your new physicians from the very beginning to contribute to an effective marketing effort that may include flexibility in their hours or calling patients personally to follow up on care until the practice gets busy. And advise them that they will be asked to participate in process improvement projects designed to reduce costs and improve patient flow in their practice.

Explain that you will help them to master coding for their specialty and to understand productivity measures and financial statements once they are employed. Then follow through by producing and sharing quarterly reports that list each physician’s visit volumes, distribution of visit types, worked RVUs, and gross billings and collections, compared with survey medians for similar physicians and with their peers in the organization. And inform your physicians that your staff will meet with them quarterly to go over the reports, answer questions, and develop action plans to address problem areas.

Using these tactics, hospital systems will be better able to bring practices to a break-even financially and avoid allegations of Stark and FCA violations.

John V. Jurica, MD, MPH, CPE, is CMO at PromptMed Urgent Care, Waukegan, Ill.



a. Becker, S., et al., “ Physician Compensation: 10 Core Legal and Regulatory Concepts,”Becker’s Hospital Review, Aug. 19, 2013.

b. The Salcido Report, “ Minimizing Exposure to Stark Law Liability in False Claims Act Cases,” Akin Group Straus Hauer & Feld LLP, Oct. 28, 2015.

Publication Date: Thursday, April 07, 2016