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It is critical to obtain and maintain appropriate documentation that a physician's compensation arrangement meets both the thresholds of being at fair market value and commercially reasonable in order to withstand federal scrutiny.
In his 1982 book The Sodai Transformation of American Medicine, Paul Starr asserted that at the turn of the century the medical profession was relatively free from government regulation. The profession had its control over its organization, standards of practice, and the markets in which it operated. More recently, Starr wrote, the rise of the "corporate practice of medicine" has led to "[ejmployers and the government becoming] critical intermediaries in the system because of their financial role, and they are using their power to reorient the system."1
During the 1990s, this change was manifested by hospitals employing primary care physicians and acquiring private practices in response to the emergence and perceived threat of managed care and the gatekeeping function. Recently, the growth of hospital employment of physicians has been accelerating. However, the focus is now on employing physician specialists as a key business strategy2 for hospitals to coordinate care; moreover, physician practices must now alleviate the significant financial pressures they are encountering due to rising costs, reimbursement pressures, and the changing lifestyle choices of a newer generation of physicians who have different work-life priorities.3 At the same time, there has been parallel growth in the number of hospitals compensating physicians for their performance of administrative functions at hospitals, such as in medical directorships and administrative and executive management positions, and a growing trend of compensating physicians for coverage and call agreements.4
Corresponding with hospital employment of physicians, there has been an increase in regulatory scrutiny related to the legal permissibility of these arrangements under the federal fraud and abuse laws as they relate to transactions between healthcare providers. Of note, physician compensation arrangements are scrutinized under both the valuation standard of fair market value (FMV), as well as the related threshold of "commercial reasonableness."5 While FMV looks to the "range of dollars" paid for a product or service, the threshold of commercial reasonableness looks to the reasonableness of the business arrangement generally.6 These are distinct thresholds; for example, a compensation arrangement may be simultaneously at FMV and be determined to...