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Is my employment arrangement compliant with the Stark law? A refresher on the key requirements of the Bona Fide Employment Exception

October 7, 2017

Reprinted with permission from the October 2017 issue of Pennsylvania Psychiatric Society © 2017. Further duplication without permission is prohibited. All rights reserved.

By Julia Coelho
PaPS General Counsel​

In the last decade, and more recently with the changes brought on by the Affordable Care Act, the number of physicians (including psychiatrists) opting out of independent practice and joining health systems has increased significantly. In addition to the many changes stemming from a shift from independent to hospital-based practice, physicians are subject to different rules when it comes to the manner in which their compensation is structured. This is because the Stark law has different requirements for remuneration paid to employed physicians, independent contractors or physicians who are members of a group practice.

As members of a group practice and provided that certain Stark exception requirements are satisfied, physicians may be paid a portion of the overall profits of the practice, including profits derived from ancillary services (such as clinical laboratory services and imaging services), given that the allocation of profits is not made in a manner that is “directly related to the volume or value” of the physician’s referrals of certain ancillary services. Payment of profit shares is not, however, permitted under Stark’s bona fide employment exception which is the exception that hospitals and health systems generally rely on for paying remuneration to employed physicians.

What are the rules governing the compensation of physicians employed by a hospital or health system?

  • First, there is a common misconception that hospital and physician must have a written employment agreement in order to comply with the Stark law. Although as a general rule we strongly encourage providers to enter into written employment agreements, this is not a mandatory requirement and oral employment agreements may comply with the Stark law if all of the elements of the Stark exception are satisfied.
  • Total compensation payable to the physician must be consistent with fair market value for the professional services. Notably, this is not a requirement under the Stark exception for compensation to group practice physicians.
  • The remuneration must be commercially reasonable and not determined in a manner that takes into account, directly or indirectly, the volume or value of any referrals.


  • While payment of productivity bonuses is permissible, the bonus must be based solely on personally performed services of the physician. In other words, services provided by other physicians or midlevel professionals must not be taken into consideration when establishing whether the physician is eligible to receive any bonus compensation, or to determine the amount of bonus to be paid. Conversely, group practices may pay physicians productivity bonuses that are based on personally performed services and services provided by other professionals that are “incident to” the physician’s personally performed services.