Federal Regulations and the Risk to Physicians

Recent actions by the OIG make it clear that they are investigating physicians as well as hospitals when they suspect a physician contract violates Stark, Anti-Kickback, or False Claims Act regulations. The OIG published a Fraud Alert, which warns physicians that they could take on personal risk under the Anti-Kickback Statute for noncompliant compensation arrangements. This debunks the common misconception that the government only prosecutes hospitals for noncompliant contracts.

From a business standpoint, if physicians are not employed by the hospital, the IRS considers them to be independent businesses that enter into contracts with hospitals. Much like when you sign a contract with a contractor to remodel your house, there are negotiations on price—you want the cheapest price for the highest quality work and the contractor wants the most money, but also wants to be hired for the job. However, when you hire the contractor to do the remodel, the government does not have anything to say about how much you pay the contractor. In the hospital business, they do because the government has a vested interest in the hospital either as a payer (Medicare, Medicaid), as the grantor of a tax exemption, and a protector of consumers from kickbacks, price-fixing, and inurement.

Although most health care executives understand FMV restrictions imposed by the Stark regulations, Anti-Kickback statutes and False Claims Act, many physicians do not. Hence it is often important to come to a negotiation armed with market data to support or help structure a discussion on payment rates as well as other regulatory requirements such as prohibitions on payments tied to volume, signed agreements set in advance, and limitations on contract length.

The OIG advisory “encourages physicians to carefully consider the terms and conditions of medical directorships and other compensation arrangements before entering into them.”1 If the OIG finds that a physician is violating Stark or the Anti-Kickback Statute, the settlement and associated legal fees could have severe financial implications for the physician.

In 2014, 12 Texas physicians settled with the OIG for $50,000 to $195,000, or exclusion from Medicare, to resolve allegations that they entered into medical directorship agreements with Fairmont Diagnostic Center and Open MRI, Inc. The government alleges that these medical directorship payments took into account the volume or value of referrals.

An essential part of any negotiation should be educating the parties about the risks of noncompliance for both the facility and physicians as well as the behaviors that the OIG has targeted. Understanding the gravity – and reality – of these risks may help as you explain why you cannot pay whatever is asked—and why they can’t accept a payment that doesn’t meet the test of fair market value.

To read more about the topic, here are some helpful analyses:

1 http://www.fcaupdate.com/files/2015/06/Fraud_Alert_Physician_Compensation_06092015.pdf 2 https://oig.hhs.gov/fraud/enforcement/cmp/kickback.asp

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Five Can't Miss Physician Contracting Compliance Tips

These quick compliance tips are a great starting point for hospital and health system executives dealing with physician contracts for administrative, leadership, call coverage, and hospital-based services. These tips can help shape a new physician contracting compliance program or refine an existing program. Apply them to create a successful compliance program to help prevent Stark and AKS violations.

1) Establish a rigorous contract management process and assign staff to oversee day to day management of your physician contracts.

Contract management may be straightforward in terms of processes and best practices, but the trick is ensuring proper execution and consistent application of procedures. Every compliance program should be incorporating the following contract management elements:

  • Have a contract for all physician arrangements (even non-monetary arrangements)
  • Organize your contracts by date, party, and expense
  • Alert your team to expiring contracts well in advance of expiration
  • Establish a renewal process that includes:
    • Reviewing or updating a contract
    • Checking the rate against relevant benchmarks
    • Negotiation strategy
    • Necessary approvals
    • Strategic contract management

It is also important to identify and prevent the development of silos that mask overall payments to individual physicians or groups for similar services. Contract management teams should work across the organization as a true cross-functional team so that there is a comprehensive appreciation of contracting costs.

2) Create a document that defines your physician contract compliance program and your process for establishing FMV.

In this document, describe the procedures for screening physician contracts and, most importantly, the steps you will take to ensure and document compliance for all physician financial arrangements. Within the document, outline:

  • Accountable executive(s)
  • Day-to-day staff and their responsibilities
  • Strategic goals
  • FMV documentation process
  • When to seek outside review

3) Communicate your compliance process with stakeholders and employees who are involved.

Ensure that there is an accountable executive for the program, and that they have communicated the compliance process to anyone involved in physician contracts. Encourage transparency, and follow up on any concerns expressed by staff.

4) Determine how you'll establish and document FMV and commercial reasonableness for physician payment rates.

We recommend having a discussion to define what's best for your organization while considering cost, consistency, and efficiency. Research your options for published benchmarks, tools, and consultants, within the context of your organization's goals and budget objectives. After you've made a decision, document your approach and record the step-by-step process.


  • Cost, efficiency, and scope of data (services, hours, percent paying, tools)
  • What percent of hospitals are paying for comparable services?
  • How many and how complex are your contracts?
  • What are your corporate, compliance, and cost reduction objectives?

The three options for establishing FMV are:

  • Market Data
  • Internal or external proprietary formulas
  • Internal or external ad hoc FMV opinions (valuations)

Options to document compliance:

  • Written FMV opinions
  • Contract-specific benchmark comparisons (e.g. MD Ranger individual contract reports shown with market range and specific contract's rate)
  • Internal certification document with market data
  • Combination of the above

5) Analyze your contracts in aggregate to understand if you're overspending or consistently setting rates that are too high.

Use benchmarks to compare your organization's total expenditures to overall spending by peers. MD Ranger publishes data on total hospital spending annually by service for physician contracts and provides each of our subscribers with a report of their facilities' contracts and how they compare to our benchmarks.

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Addressing Outlier Physician Payments

Most physician payment rates fall within a reasonable market range. But in some cases, a payment rate may be well beyond the norm. These unusual payment rates, which can sometimes impact benchmark calculations, are outliers. Understanding how outliers affect market data and what to do if your contract falls outside market ranges is an important aspect of a physician contracting compliance program.

Evaluating Data Quality

The distribution of payment rates can reveal market trends or anomalies. If the distribution between benchmark quantiles is fairly concentrated, this could suggest that rates are consistent across markets and facility types. Even if quantile ranges are narrow, it doesn’t necessarily mean that there aren’t meaningful outliers within the sample; however these outliers are not affecting the benchmark values. Good examples are medical directorship hourly rates. If the majority of hourly rates of a cardiology medical directorship are $150 per hour, but there are several facilities that pay $250 per hour, the facilities that are paying more may be paying fair market value for the duties being performed, but they do not affect the benchmark values because they are accounting for the values above the 90th percentile.

If there is a wide distribution of rates, it could indicate several things. If the sample size isn’t large and the rates are widely distributed, it could indicate inadequate data. It could also represent contracts that are not comparable, either because scope of services varies or hospital characteristics are too different (e.g. rural versus trauma or academic medical center). If the sample size is adequate, variation could indicate real differences between individual circumstances or types of organizations.

Even within a large sample size, contracts over the 90th percentile sometimes represent special circumstances that justify higher pay rates. Examples might include highly specialized or nationally recognized physicians, a broader scope of service, and/or higher hours due to program start-ups etc. Most FMV experts consider payment rates under the 75th percentile to be reasonable, assuming adequate justification of the position and time spent. However, payment rates over that level are not by definition inappropriate, they just require particular documentation of the reasons why a higher payment is justified.

Defining “Outlier”

An outlier is a data point that is either much greater or smaller relative to the sample. Outliers can be influential in a small data set, but in a robust sample they rarely have an effect. For compensation data, particularly physician contract data, there are two types of outliers: those that do not compensate for a service (zero value) and those that represent either a very low or very high dollar value. MD Ranger addresses the “zero” data points by reporting the percent of subscribers who pay for a service instead of including zeros in the quantile calculations. This statistic can help facilities determine commercial reasonableness of a service. We advise first determining if payment is necessary, and if it is, then the benchmarks reflect the range of market payment rates. We also validate outliers with our subscribers to ensure there were no input errors with the survey process.

In large data sets like MD Ranger’s, an outlier will have little or no effect on the quantiles. For example, in a dataset with 50 data points where no provider represents more than 25% of the contracts, each data point holds only a 2% weight in the percentile calculation. The opposite is also true: in a small data set, each data point has a large effect on the percentile calculations and an outlier could greatly affect the percentiles. In small samples, the addition of a single data point at the high or low end of the market ranges can have a major impact on the benchmark ranges.

Here’s an example. If five different providers independently negotiate a rate of $150 per hour, then we would report all four percentile values as $150. If the data consisted of four values of $150 and one of $500, then we would report $150 for the 25th, 50th, and 75th percentiles, and $325 for the 90th percentile (325 is midway between 150 at 0.80 cumulative weight and 500 at 1.0). Here’s a graph showing the effect:

Graphical representation of quantiles when one contract is higher than all others.

Negotiating an “Atypical” Rate

Most physician payments are straightforward per diem or hourly rates. However, many organizations have a few contracts that exceed the comfort zone set by the compliance policy. Whether the complexity arises from market conditions, such as limited supply or burdensome call, the scope of services of the position in question, or the credentials and experience of a program director, your organization is responsible for finding an appropriate and fair payment rate.

After evaluating the sample size and variation of available market data, as well as the specific requirements of the contract, you may be able to determine if payment rates can or should be documented with market data. It could be the case that using another valuation method or engaging an expert who can objectively document the FMV for the particular situation is required.

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What's Ahead for Physician Emergency Call Coverage

Call coverage agreements comprise a staggering portion of many hospitals’ physician spending costs. How did we get here and what does the future hold for call coverage compensation?

While EMTALA (1986) did not immediately result in paying physicians for taking call, it contributed heavily to changing attitudes toward emergency coverage. When physicians graduated from medical school 30 years ago, many had the intention of building their own private practice. Taking emergency call coverage facilitated private practice growth, and was often a requirement of being on a medical staff.

Over time, however, fewer physicians are leaving medical school with the intention of building private practices. Today, most physicians are acutely aware of the increasing burden of the uninsured seen in emergency rooms. This burden has contributed to fewer physicians willing to take voluntary call, leaving hospitals no other choice but to pay physicians to take call coverage shifts in order to comply with EMTALA.

Over the past two decades, hospitals have gone from spending next to nothing on call coverage compensation to spending millions of dollars each year. Once a hospital starts to compensate one physician or one specialty, requests from other physicians or specialties often follow. It’s easy to see why total facility call coverage compensation amounts have ballooned in hospitals across the country in the past decade. The average hospital spends more than two and a half million dollars per year on coverage.

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