Question of the Week

QUESTION:        We need to employ physicians in order to provide the care needed by our patients.  The main reasons that private practice is no longer a viable option for many physicians are the ever increasing costs of operating a practice (especially malpractice insurance and EHR costs) while professional reimbursement keeps decreasing.  However for the same reasons, we rarely break even on a physician practice.  Does anyone in the government understand this or do they assume that we overpay physicians to get their referrals?

ANSWER:          Unfortunately, many courts do not understand your dilemma.  Some courts seem to take the position that a hospital paying a physician more than the physician generates in professional fees is evidence of unreasonable compensation that violates the Stark Law.

However, help is on the way.  In the October 19, 2019, proposed Stark Regulations, CMS has provided an excellent description of the analysis that should be followed when assessing whether the compensation paid to a physician violates the Stark Law.

For the first time, CMS has included a definition of the term “commercially reasonable” that specifically states that an arrangement may be commercially reasonable even if “it does not result in a profit for one or more of the parties.”  CMS has also substantially revised the definition of “fair market value” and has made it clear that in order to violate the “volume or value” standard there must be a direct correlation between the physician referrals and the amount to be paid to the physician.

CMS also stated that salary surveys are to be treated as benchmarks, not the last word on physician compensation and even provided easy to understand examples such as the following in order to make this point crystal clear:

By way of example, assume a hospital is engaged in negotiations to employ an orthopedic surgeon.  Independent salary surveys indicate that compensation of $450,000 per year would be appropriate for an orthopedic surgeon in the geographic location of the hospital.  However, the orthopedic surgeon with whom the hospital is negotiating is one of the top orthopedic surgeons in the entire country and is highly sought after by professional athletes with knee injuries due to his specialized techniques and success rate.  Thus, although the employee compensation of a hypothetical orthopedic surgeon may be $450,000 per year, this particular physician commands a significantly higher salary and the general market value (or market value) of the transaction may, therefore, be well above $450,000.  The statute requires that the compensation is the value in an arm’s length transaction, but that value must also be consistent with the general market value (or market value) of the subject transaction.  In this example, compensation substantially above $450,000 per year may be fair market value.

The proposed rules also provide much needed guidance on value-based arrangements.

The comment period will end on December 31, 2019.  We hope that CMS will finalize these proposed regulations as soon as possible after that date and that the federal courts begin to adopt CMS’s analysis.