August 8, 2019

Healthcare Laws May Impact Physician Contract Negotiations

Studies show physicians feel undercompensated despite increased compensation because of the financial burden of attending 8 plus years of medical school, the cost of licensure/maintenance of board certification, the cost of malpractice insurance, etc.  At the same time, increased overhead expenditures and higher personnel costs with declining Medicare reimbursement and additional factors have driven physicians from private practice to employed positions.

Physician Compensation Laws

Today the healthcare industry is experiencing a shortage of physicians so new doctors entering the workplace can basically negotiate and receive well-endowed compensation packages.  One exception to the notion that doctors can demand generous compensation packages are hospital employers. Hospitals and physicians negotiating employment agreements must adhere to the healthcare laws that cover compensation or face severe penalties.  Three main laws impacting physician compensation are:

  1. The Stark Law, Section 1877 of the Social Security Act.
  2. The Federal Anti-Kickback Statute.
  3. The Internal Revenue Service (IRS) guidelines for certain non-profit entities such as hospitals.

The original Stark Law was enacted by Congress in 1989 to prevent fraud and abuse by prohibiting physicians to make referrals to any entity in which they had a “financial relationship.”  The law includes several exceptions each with detailed requirements and penalties for non-compliance.  The exceptions require physician compensation arrangements to be commercially reasonable, to be at fair market value and not dependent on volume or value of referrals or services.

The Anti-Kickback Statute again addresses fraud and abuse by making it a crime to knowingly and willfully pay, offer, solicit or receive payment for referrals and services from a federal program i.e. Medicare and Medicaid.  Non-compliance may include fines, jail time and exclusion from participation in federal health care programs.

The IRS provides for certain entities such as a non-profit hospital to qualify as a 501(c)(3), exempt from federal taxation.  This designation comes with benefits but also the requirement to follow specific rules regarding compensation structure for employed physicians.  “A tax-exempt hospital cannot pay more than reasonable compensation for services rendered to the organization.”

Healthcare Law Violators

The Department of Justice has stepped up investigations to severely punish healthcare law violators as a means of deterrence. For specific examples please see the Office of Inspector General website. One such case involved Toumey Healthcare System found guilty of Stark Law violations “based on allegations that physicians were paid in excess of fair market value that took their referrals into account.”  The hospital was fined $237 million.  

Employers and physicians must know and understand the law when negotiating an employment compensation package and have written contracts reviewed by legal counsel to protect all parties.

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