When negotiating physician compensation issues, hospitals frequently rely upon the premise they must pay fair market value compensation in order to comply with the provisions of the Stark Act prohibiting referrals in exchange for compensation, and sometimes non-profit inurement issues.

Although the prohibitions are clear, determining what constitutes fair market value is often not.  Provisions allegedly enforcing fair market value by limiting compensation to the 75th percentile of some national study are clearly inapplicable; obviously, somebody is legitimately being paid in the top quartile. 

The issue is often not the amount of the compensation, but how it is determined.

The recent settlement by Indiana Health Network with DOJ, announced by DOJ in a Press Release on December 19, 2023 identifies some clear problems, or at least warning signs. 

  • A compensation system where bonuses were linked to referrals rather than productivity
  • Compensation that was allegedly double what was being earned by the physician in private practice prior to the recruitment
  • Allegedly falsifying or manipulating the data used by a consultant to determine fair market value

A lesson learned from this case is not new.  Intentional disregard and even manipulation of the process can lead to significantly liability; in this case–$345 million.