Understanding the Stark Law Employment Exception for Physicians

When you build or join a new practice, your compensation structure can create legal risk under the Stark Law – even when your intent is legitimate.

Gardner Employment Law advises physicians and healthcare entities on Stark compliance. The following scenario shows how a routine employment arrangement can drift outside the employment exception and create significant exposure.

When Does the Stark Law Employment Exception Apply?

The employment exception applies when a physician works as a true employee, performs real services, earns fair market value compensation, avoids referral-based pay, and operates within a commercially reasonable arrangement.

We represented a physician who had just completed all of her training and landed a fabulous position.  She was recruited by a group of specialistx who had partnered with a hospital to launch a new specialty clinic. The hospital employed the physicians, funded the clinic, and handled billing for designated health services (DHS).

At first glance, the structure looked compliant. The physicians provided real clinical services and worked as employees.

But compensation changed the outcome.

The hospital tied a portion of physician pay to clinic revenue, which rose with referrals. That decision linked compensation to referral volume – and broke the rule.

That’s when the young, naive physician called our firm.   We were able only to obtain a payment plan for the penalties assessed.  It was a real learning experience for her

Why Do Physicians Get Tripped Up by Compensation Structures?

Physicians get tripped up because compensation formulas often blur the line between productivity and referrals.

The Stark Law allows productivity bonuses for work you personally perform. The law prohibits compensation tied to the revenue your referrals generate.

Many arrangements ignore that line. Here is how the distinction works:

Small drafting choices in compensation language can determine whether an arrangement complies—or violates the law.

How Can a Clinic Arrangement Trigger a Stark Violation?

A clinic arrangement triggers a Stark violation when compensation rises with referral-driven revenue.

Consider the sequence:

• A hospital hires physicians to staff a new clinic
• The clinic depends on internal referrals for DHS
• Revenue increases as physicians refer patients
• Physician compensation increases with that revenue

At that point, referrals and compensation move together.

That connection creates a prohibited financial relationship under Stark.

Intent does not fix the structure.

What Should Physicians Watch for When Structuring Employment?

Physicians should watch for compensation formulas, weak documentation, and business models that depend on referrals.

Look for these red flags:

• Compensation tied to overall revenue of the clinic instead of personal work
• No fair market value support
• Vague job duties with no clear services
• Financial models that collapse without referrals

Ask direct questions before you sign:

• Does my pay reflect my work – or does it also include my referrals to other departments or other providers?
• Can the employer show fair market value for work such as what I do?
• Would my job exist without referrals?

Clear answers protect you.

Bottom Line. 

The Stark Law employment exception allows internal referrals only when the structure meets strict requirements. Compensation drives compliance.

If your pay reflects your work, you likely stay within the law. If your pay tracks referral-driven revenue, you create risk. Physicians who address structure early can build compliant practices, especially by contract wording. Those who ignore it invite scrutiny that can disrupt the entire operation.