Is Your Compensation Plan Stark Compliant?

By Deborah J. Robinson

With all the emphasis on scrutinizing "fair market value" for employed physicians by health care systems, private practice physicians may be tempted to overlook the fact that their own compensation plans need to be reviewed for compliance. A recent Settlement Agreement reached by the government with a private practice cardiology group is a good reminder that all practices need to review their compensation arrangements.

In August of 2014, the U.S. Department of Justice and the Office of Inspector General entered into a Settlement Agreement with a cardiology group, Cardiovascular Specialists d/b/a New York Health Center. This dispute concerned the Practice’s compensation plan that based compensation, in part, on the "value" of referrals for diagnostic cardiac testing which was not "personally performed." Particularly noteworthy is that although the requirements for eligibility to be a "group practice", and the restrictions and safe harbors regarding payment for revenue generated for designated health services ("DHS")[1] in group practices have been in existence since 1989, there had been no enforcement activity. That has changed.

Are You a "Group Practice"?

In order for physicians to be able to provide DHS to patients who are billed pursuant to Medicare and other federal health care payors, practices must be organized as a "Group Practice." Essentially, this means the following requirements must be met:

  1. The "Group" must be a single legal entity and must have at least 2 members.
  2. Each physician member must furnish substantially the full range of services provided by that physician through the Group Practice.
  3. Substantially all of the services must be billed under the name of the Group Practice, using its billing number.
  4. The overhead expenses and income distribution for the Group Practice must be fixed in advance.
  5. Members of the Group Practice must provide no less than 75% of the physician-patient encounters of the Group Practice.
  6. No physician can receive compensation based on the value or volume of DHS except pursuant to productivity or profit sharing arrangements consistent with the regulations.

Any physician may be compensated based on payment for personally performed services and services "incident to" those services. However, once a physician is providing professional services through a "Group Practice", the Group Practice can also provide in-office DHS services and distribute income through certain "indirect" methods to the extent that the Group Practice either adopts a "safe harbor" or otherwise can demonstrate a method that is "reasonable, objectively verifiable, and indirectly related to referral of DHS.

Distribution of Overall Profits

Compensation using an overall profits method involves the distribution of a pool of Group Practice DHS revenue. There is flexibility here because the Group Practice can create either a Group Pool using all DHS or separate pools (or PODS) comprised of 5 or more physicians in each POD. This allows a great deal of flexibility to create separate PODS, such as using divisions, separate geographic sites, or any other combination of at least 5 physicians.

The safe harbors for distribution from these pools are:

  1. Distribution per capita;
  2. Distribution for DHS is based on the same distribution methodology the Group uses for services that are not DHS;, or
  3. Revenues derived from designated health service (DHS) referrals which constituted less than 5% of the Group Practice’s total revenues, and the allocated portion of those revenues to each physician in the Group Practice constitutes 5% or less of his/her total compensation from the Group (rarely used).

Productivity-Based Methods

A compensation system can, in the alternative, include a productivity bonus which can involve all revenue or revenue derived solely from DHS. As in the distribution of profits, there are 3 safe harbors:

  1. The bonus formula is based on the physician’s total practice encounters or wRVUs, or
  2. The bonus formula is based on the allocation of the physician’s compensation attributable to services that are not DHS, or
  3. Revenues derived from DHS are less than 5% of the Group Practice’s total revenues, and the allocated portion of those revenues to each physician in the Group Practice constitutes 5% or less of his/her total compensation from the Group Practice (rarely applicable).

This short summary is meant to sensitize Group Practices to the need to identify: 1, whether the practice meets the definition of a Group Practice, and 2, whether the distribution of DHS revenue through the Group Practice’s compensation plan meets regulatory requirements. Compliance can be reach most easily through a "safe harbor". There is no one way that this needs to be accomplished and larger Group Practices have a great deal of flexibility in designing pools or PODS that reflect the diverse group of physicians, geographic locations, and even the productivity of its members.


[1] Designated Health Services ("DHS") include the following services: (i) clinical lab services; (ii) physical therapy, occupational therapy and outpatient speech and language pathology services; (iii) radiology and imaging services; (iv) radiation therapy services and supplies; (v) DME and supplies; (vi) parenteral and enteral nutrients, equipment and supplies; (vii) prosthetics, orthotics and prosthetic devices; (viii) home health services and supplies; (ix) outpatient prescription drugs; and (x) inpatient and outpatient hospital services.