Compensation Provisions in Physician - Hospital Employment Agreements: A Pot of Gold or Fool's Gold?

One of the most significant recent trends in the healthcare industry has been the increased migration of physicians from independent private practitioners to employees of hospitals. This trend is being driven by several factors: the decrease in reimbursement paid to physicians by Medicare and managed care organizations; increased overhead costs for physician practices; an increasingly complex regulatory environment; increasing malpractice insurance costs; and the requirement to convert to electronic medical records which requires a large upfront expenditure. According to a recent survey of more than 1,000 physicians balanced by age, gender, practice type and specialty conducted by the PWC Health Research Institute, 46% of the respondents were interested in pursuing hospital employment over the next two years. According to this survey, the top reason why the responding physicians said they want to become hospital employees is increased and consistent compensation. Thus, the compensation package that is part of a physician-hospital employment agreement is key to a successful alignment of the physician with the hospital.

Lurking in the background of any discussion of physician compensation in hospital employment arrangements is the federal Stark Law which prohibits a physician from referring a Medicare patient to a hospital for inpatient, outpatient, or ancillary services such as clinical laboratory or imaging, if he or she has a compensation arrangement with the hospital unless a Stark Law exception applies. One of those exceptions is for an employee if certain requirements are met including a written employment agreement and total compensation that is "fair market value" (as defined in the Stark Law). To protect themselves from a possible Stark Law violation, many hospitals benchmark their employed physicians' compensation by using one of the nationally recognized annual physician compensation surveys, and the physician's employment agreement will often cap the annual compensation by a reference to one of these surveys. However, caution must be used when allowing one of these surveys to determine a physician's maximum compensation. For example, the most recent Medical Group Management Association's annual physician compensation survey, the most frequently used survey, shows that the median compensation for all urologists is $372,455; the 75th percentile is $492,555; and the 90th percentile is $640,977. Further, this same survey shows that...