Employment arrangements between hospitals and physicians often include productivity-based compensation.  This can be in the form of bonuses or adjustments to salary.  A common measure of productivity is the physician’s work Relative Value Units (“RVUs”).  Such productivity measures are intended to motivate newly-hired physicians and to support the fairness of compensation paid and earned.

 The “Stark Law” (42 U.S.C. § 1395nn) is implicated in practically all employment arrangements between hospitals and physicians. Under the Stark Law, a physician is prohibited from referring Medicare patients for “designated health services” (including inpatient and outpatient hospital services) to an entity with which the physician (or his or her immediate family member) has a financial relationship unless an exception applies. It is assumed that a physician employed by a hospital will refer patients in need of hospital services to his or her employer, although the employment agreement may or may not require such referrals.  A “financial relationship” includes any compensation arrangement between the hospital and the physician. The Stark Law provides exceptions for many financial relationships, including an exception for bona fide employment. The Stark Law also prohibits a hospital from billing for services provided pursuant to a prohibited referral.

The bona fide employment exception requires that:

  • The employment is for identifiable services;
  • The remuneration is consistent with fair market value and is not determined in a manner that takes into account (directly or indirectly) the volume or value of referrals by the physician; and
  • The remuneration would be commercially reasonable even if no referrals were made to the employer.

The bona fide exception explicitly permits productivity bonuses based on services that are personally performed by the physician. Productivity bonuses are generally not permitted under other applicable exceptions including the personal services exception and the fair market value compensation exceptions.  Since under the bona fide employment exception productivity payments are only permitted for “personally performed” services, such productivity payments may not take into account “incident to” services (revenues or work RVUs generated by non-physician personnel working under the supervision of the physician, such as nurses or physician assistants).

The hospital and physican must make certain that  “incident to” work RVUs are not included in determining the productivity bonus payable to the physician.  The Work RVUs must also exclude the technical component or facility fees associated with a professional service as those fees do not (or at least typically do not) reflect personally furnished services.