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When reviewing an employment agreement, physicians often focus on compensation, call coverage, and non-compete clauses . But buried in many contracts are representations and compliance provisions tied to the Stark Law – and misunderstanding them can create serious risk.
At Gardner Employment Law, we help doctors understand how federal laws intersect with their contracts and compensation models. Here is what you need to know.
What Are the Stark Laws and Why Should Physicians Care?
The Stark Law is a federal statute that prohibits a physician from referring Medicare or Medicaid patients for certain “designated health services” (DHS) to an entity with which the physician (or an immediate family member) has a financial relationship – unless a specific exception applies.
Designated Health Services include items such as:
- Clinical laboratory services
- Radiology and imaging
- Physical therapy
- Durable medical equipment
- Hospital inpatient and outpatient services
Stark is a strict liability statute. Whether you intended to violate the Stark Law does not matter. If a financial relationship exists and no exception applies, you can be held liable for a violation, even if you believed the arrangement was proper.
Why does this matter in your contract? Because many employment agreements include compensation structures, productivity bonuses, medical directorships, or ownership interests that must fit within a Stark exception.
How Do the Stark Laws Affect Physician Employment and Group Practices?
Stark is tied to financial relationships. Those relationships typically fall into two categories:
- Ownership or investment interests
- Compensation arrangements
Productivity-based compensation may be permitted, but it cannot be directly tied to the volume or value of referrals for designated health services. The payment of compensation or bonus cannot be based on how many patients you refer or the value of the treatment.
Knowing how contracts should be worded matters. Compensation formulas contained in employment or compensation contracts must be structured carefully to comply with federal requirements while still rewarding productivity.
A. Physicians in Group Practices or Professional Associations
If you are part of a physician-owned professional corporation or group practice, Stark can apply if you refer Medicare or Medicaid patients for designated health services to someone else working within that practice.
There are important exceptions that allow physician groups to operate lawfully, including:
- The group practice exception
- The in-office ancillary services exception
- The bona fide employment exception
B. Physicians Employed by Hospitals
Hospital employment arrangements also can implicate Stark when a physician is paid by the hospital and refers Medicare or Medicaid patients to other departments for designated health services (including inpatient and outpatient care). It depends on the actual arrangement or relationship between the physician and hospital.
Common arrangements that are suspect and may trigger liability under the Stark Law include:
- Employment agreements
- Medical directorships
- Co-management agreements
- Service contracts
Financial arrangements must meet an applicable exception – typically requiring fair market value compensation and commercial reasonableness.
If a hospital’s structure fails to satisfy an exception, you might be jeopardy for committing a violation of the statute.
Do the Stark Laws Have Anything to Do with the Corporate Practice of Medicine?
Physicians often confuse Stark with the Corporate Practice of Medicine (CPOM) doctrine. They are not the same.
The Stark Law is a federal statute focused on referrals and federal healthcare program reimbursement.
CPOM is a state-law doctrine that limits who may own or control a medical practice and is concerned with professional autonomy and clinical decision-making.
Stark Laws and CPOM can intersect operationally, especially when structuring employment and compensation models, but one does not derive from the other. Stark regulates referrals tied to federal reimbursement. CPOM regulates ownership and control under state law.
Understanding the difference is important when evaluating employment with hospitals, private equity-backed groups, or physician-owned entities.
What This Means
The Stark Law does not prohibit physicians from being employed, earning productivity bonuses, or participating in group practices. But it does require that financial relationships tied to Medicare and Medicaid referrals fit squarely within a regulatory exception.
If you have questions about a physician employment contract or compensation structure, we can help.