How to navigate indirect compensation relationships

Few areas of the final Stark II regulations are as vexing as the indirect compensation requirements. When it comes to assessing the indirect compensation relationship, health care attorney Sandy Teplitzky of Ober Kaler in Baltimore says providers should anticipate that, if there is a physician and an entity, there is an indirect compensation relationship. "Save yourself the time of analyzing the details of that relationship," he asserts. "Just look at whether the components of that relationship constitute fair-market value."

The indirect compensation arrangement has three elements, Teplitzky explains. The first component is an unbroken chain of relationships between the physician and the entity providing this service. That chain can include compensation relationships as well as ownership relationships.

If a physician has a direct contract with the hospital to provide medical services, that is a direct financial relationship, Teplitzky says. Under the final regulations published in January, however, if the contract is between the hospital and doctor’s physician corporation (PC) rather than the doctor, it is an indirect compensation relationship. Finally, if the hospital has a contract between itself and the group practice rather than the individual doctors, it also is considered an indirect compensation relationship.

Teplitzky says HHS reportedly is giving serious consideration to amending that definition so that if that the physician is the only physician in the corporation, it would constitute a direct compensation relationship. "In other words, if the doctor is in a solo PC and the contract is with the PC, it would be treated as a direct relationship, not an indirect relationship," he explains.

Second, the compensation does not vary by the volume or value of referrals by physician. "With respect to this element, what the government says is that if the closest relationship to the physician is an ownership relationship, ignore it," Teplitzky says. Providers then should move one step closer to the entity providing the designated service and look at that relationship. If it is a compensation relationship, that is the one you analyze, but if it is another ownership interest, move to the next level. "Walk your way down the line until you get to a compensation relationship," he explains.

The third element is that the provider of designated health services is aware of the fact that compensation to the physician varies by the volume or value of physician referrals. If providers determine there is an indirect compensation relationship, there is an exception that offers considerable relief, Teplitzky adds.

The exception generally applies if compensation is at fair-market value without taking into account the volume or value of referrals. "It need not be set in advance," he adds. Every other exception involving payment for services, such as a physician service agreement or a lease of space, was fixed in advance.

That means per-service or per-use arrangements are acceptable under the indirect compensation relationship, where they would not be acceptable under the personal service exception or the fair-market value exception, he says. But percentage arrangements are not acceptable.

As much as this area of Stark causes distress, he concludes, providers must try to figure out whether they have an indirect relationship or not and then look to the exception that actually provides an additional benefit.