Attorneys Provide Their Perspective on Hospital Employment of Physicians

On September 25, 2018, AGG Attorney Jenny Tyler co-presented a continuing education webinar titled “Hospital Employment of Physicians: Stark Law and Anti-Kickback Statute Compliance, Physician-Hospital Alignment” through Strafford Publications. The panel provided the following insight and practical tips regarding physician employment arrangements:

• • The Continuing Trend of Physician Employment. The percentage of physicians who are employed by hospitals continues to grow as independent practices become less common. This can be advantageous to hospitals who are trying to increase their market share, satisfy coverage needs, and bring in profitable specialties. This can also be advantageous to physicians who may feel burdened by the administrative and management responsibilities of an independent practice or have reimbursement concerns.

• • Legal Issues Regarding Physician Employment. An employment relationship must be structured in a way that complies with federal laws such as the Physician Self-Referral Law or “Stark Law” (42 U.S.C. 1395nn) and the Anti-Kickback Statute (42 U.S.C. 1320a-7b). The Stark Law contains exceptions and the Anti-Kickback Statute contains safe-harbors that allow entities who may make or receive referrals for federal health care program business to hire physicians as employees or independent contractors. States may have their own self-referral laws and anti-kickback statutes as well as corporate practice of medicine laws that may prohibit certain entities from employing physicians.

• • Alternatives to Direct Employment. Even in states where corporate entities may employ a physician, a hospital may prefer to secure a physician’s services in other ways. A hospital could enter into a stock restriction agreement with the president or governing body of the physician practice. This model is known as the “Captive” or “Friendly PC Model” because medical practices are traditionally formed as professional corporations (PCs). Under this model, the licensed physicians retain control of the practice of medicine while the hospital has control of administrative and operational decisions. Another alternative is for the hospital to contract with the practice to provide management services of a particular department of the hospital. In this model, known as the Physician Enterprise Model, the physician remains an employee of the practice and the practice operates the hospital’s department. It is possible to structure each of these arrangements so that they comply with the Stark Law and Anti-Kickback Statute.

• • The Importance of a Third-Party Opinion. Regardless of how the hospital ultimately contracts with the physician or the practice, an independent third-party valuation of the agreement is essential. A good valuator will thoroughly examine the proposed compensation model, and any assets and liabilities being purchased, to determine the transaction’s fair market value and commercial reasonableness. From the valuator’s report the parties can determine the agreement’s regulatory risk and further negotiate the terms of the agreement.

• Drafting Tips. Before putting pen to paper, it is important for each party to understand how its goals align with the other party’s day-to-day activities. When drafting the employment agreement, the hospital and physician should develop a clear list of duties and responsibilities that address concepts such as scheduling expectations, clinical and administrative responsibilities, patient selection, fees, and provision of space and equipment. In order to avoid conflicts, the parties should come to an understanding on the physician’s autonomy. The agreement should address each party’s degree of control over clinical and administrative decision making and address if, and under what circumstance, the physician may practice medicine outside of the contract. The term of the agreement should be at least for one year in order to comply with the regulatory exceptions. For some agreements, the parties may wish to set a long initial term where there has been substantial investment to bring the physician into the community or they may wish to set a short term so that compensation and performance expectations are reassessed earlier. Termination rights for both parties should be clearly expressed and the parties should closely consider the timing of the triggers for termination. For example, the parties may wish to have the right to terminate the agreement if the other party is charged with a health care related offense rather than when the other party is convicted of an offense. Compensation is typically based on a base salary, a productivity model, or a combination of the two. The parties may incorporate compensation adjustments into the agreement for achieving certain quality, performance, or patient satisfaction goals or for failing to achieve certain productivity thresholds.