Stark Law Exception: Fair Market Value in Physician Compensation Arrangements

By Sarah Charles Wright

As health systems move toward physician alignment and clinical integration, models for physician compensation arrangements continue to evolve.

The Stark Law generally prohibits a physician from making referrals for Medicare-covered designated health services to an entity with which the physician or an immediate family member has a “financial relationship.”

A Stark Law “bona fida employment” exception applies to physician compensation arrangements that are consistent with fair market value: the value in arm’s-length transactions, consistent with the general market value.

Models for physician compensation arrangements continue to change as health systems move toward physician alignment and clinical integration. Determining fair market value is critical for any physician compensation arrangement to satisfy the federal Stark and Antikickback laws. These laws prohibit the payment or receipt of remuneration based on the volume or value of referrals of services paid for by a federal healthcare program. This article discusses the challenging task of determining fair market value under the Stark Law exception for physician employment arrangements.

The Stark Law prohibits a physician from referring Medicare beneficiaries to an entity (clinic, hospital, physician practice) for designated health services (DHS)[i] when the physician (or his/her immediate family member) has a financial relationship with the entity. Stark further prohibits the entity from presenting claims to Medicare for the prohibited referrals of DHS. A physician has a financial relationship with an entity if he or she has an ownership or investment interest in the entity, or a direct compensation arrangement with the entity, e.g., as an employee or independent contractor. The physician and entity are held strictly liable under Stark if a prohibited referral for DHS is made and a claim is presented to Medicare, regardless of intent, and could be ordered to pay monetary penalties and treble damages.

In short, if you have a compensation arrangement with a hospital or clinic that furnishes designated health services to Medicare beneficiaries and bills Medicare for those services, you are prohibited from referring Medicare patients to the entity for DHS, and the entity is prohibited from filing a claim with Medicare for the DHS unless a Stark exception applies. Every Stark exception to compensation arrangements, including the exceptions for “bona fide employment” and “personal services” arrangements has three requirements: (i) compensation must be consistent with Fair Market Value (FMV) for the services performed; (ii) the volume or value of referrals generated or that could be generated by the parties cannot be taken into account; and (iii) must be commercially reasonable. For example, if the entity is paying you for a medical directorship and also for chairing a medical staff committee, your compensation should be FMV for each service you provide, as well as FMV in the aggregate. This “stacking” of physician services can sometimes result in total compensation falling outside the range of FMV.

The regulations do not define commercial reasonableness, and their definition of FMV is less than helpful. FMV is the value in arm’s-length transactions, consistent with the general market value. General market value means that the compensation (i) is the result of bona fide bargaining between well-informed parties who are not otherwise in a position to generate business for each other, (ii) has been included in other contemporaneous bona fide service agreements with comparable terms; and (iii) is not determined in any manner that takes into account the volume or value of anticipated or actual referrals.

Employed physicians can be paid in a manner that directly correlates to their own personal labor, including labor in the provision of DHS, but they cannot be paid for generating referrals of DHS performed by others. This means that physicians need to ensure that the services they provide in consideration for compensation are well-documented. If the entity’s records do not sufficiently show that the services were performed by the physician, the agreed compensation could be viewed as payment for referrals.

To determine FMV, an entity will typically obtain an independent professional opinion from a specifically qualified and experienced appraiser to protect the compensation arrangement from future legal scrutiny. The request for a FMV opinion should be made by the entity’s legal counsel to ensure that it is performed using an accepted methodology, includes comparable and appropriate benchmark data, and does not take into account the volume or value of referrals of DHS or other business that could be generated by the parties. When comparable data is unavailable, as is often the case for rural or health professional shortage areas, the appraiser may need to exercise professional judgment in adjusting the compensation range.

Once a FMV range of compensation is determined, it may be used to establish a base salary and/or an hourly or per work RVU rate of pay. Unit-based compensation is “deemed” by the Stark regulations to not take into account the volume or value of referrals or other business generated between the parties as long as (i) the hourly rate or dollars per unit is FMV for the services performed, and (ii) does not vary during the course of the arrangement in any manner that takes into account the volume or value of referrals or other business generated between the parties (including private pay health care business).

The Stark Law exceptions are complex and determinations of fair market value are inherently subjective and subject to scrutiny. More than one exception may apply to a physician compensation arrangement, and arrangements that seem fair and reasonable to the parties may still not be viewed as fair market value arrangements. If you are contemplating a compensation arrangement with an entity that you believe is subject to the Stark Law, make sure you consult with an experienced attorney if you have any compliance concerns.

Originally published in M.D. Update Magazine, January 2016.

[i] Designated Health Services include: clinical laboratory, physical therapy, occupational therapy, outpatient speech-language pathology, radiology/imaging services, radiation therapy, home health, outpatient prescription drugs, inpatient and outpatient services, durable medical equipment, parenteral and enteral nutrients/equipment/supplies, prosthetics, orthotics and prosthetic devices/supplies. Id.