Penalizing Physicians for Causing Hospitals to Forego Payment

Hospital Industry Viewpoint

May 22, 2017

Hospitals often find it vexing that reimbursement is appropriate for a physician’s professional service, even when the physician fails to take certain steps that result in an inability to claim the hospital’s facility fee. At least as to employed physicians, there may be approaches a hospital can take to align physicians with the hospital employer.

Hospitals have long been at the mercy of physicians and the way they provide care as to whether the hospital will be paid for its services. When physicians were mostly members of a volunteer medical staff, there was little a hospital could do other than train physicians and hope that they would do the right thing. Now, however, the percentage of hospital- and health system-employed physicians is higher than ever and continues to grow. In light of these changing hospital-physician relationships, the question is this: Can a hospital take certain actions against its employed physicians to encourage compliance with payer rules so as to allow the hospital to get paid for its services as well?

For instance, documentation requirements are sometimes more stringent under Medicare Part A, pertaining to hospital payment, than they are for Part B reimbursement for professional services. Yet, employed physicians are often compensated on a “work RVU” pegged to Part B payments received, irrespective of whether the hospital’s Part A services are fully reimbursed. In an ideal world, hospitals would make physician compensation contingent on doing all that is necessary for both Part B and Part A payments to be received. Can that happen? The below answers this question from the perspective of the Stark law and employment law. As discussed below, the answer is a qualified yes.

Stark Law

The question under the Stark law is whether a reduction in a physician’s pay as a penalty for noncompliance with hospital documentation or practice rules still qualifies under the employment exception to the Stark law. This exception includes a requirement that physician compensation be consistent with fair market value. Thus, a financial penalty for conduct (or the lack thereof) that jeopardizes the hospital’s right to Part A payments cannot cause the physician’s compensation to fall below the fair market value of his or her services.

To address this concern, one option may be to allocate a portion of the physician’s performance bonus on adherence with the hospital’s documentation rules and/or clinical practice guidelines, or making compliance with these requirements a prerequisite to being eligible for a productivity bonus. This could include such activities as timely documentation, furnishing adequate physician supervision, or others. For example, if a physician is habitually late in completing documentation, or if the physician’s coding practices result in unacceptably high error rates, then he or she would not be eligible for all or a portion of the compensation allocated to compliance. This may not be enough to make the hospital whole for the failings of the physician if the conduct results in financial liability to the hospital. However, it may create a sufficient incentive for the physician to comply with the myriad requirements that could influence the ability of the hospital to bill for its services or the services of others.

Note that this situation stands on different footing from those where the physician’s conduct results in the professional fee not being payable. If the hospital learns that the work RVUs used to determine the physician’s compensation have been overstated, the hospital must rectify the error. Otherwise, it is very possible that the physician’s compensation would exceed fair market value as a result of being credited for work RVUs the physician did not produce.

Employment Law Concerns

It is also critical to consider potential employment law consequences when evaluating whether, and how, to impose financial penalties on physicians who fail to abide by various compliance requirements. As a starting point, it is imperative to have a consistent approach for physician discipline. Approaching discipline in an ad hoc fashion can result in significant liability under a litany of statutes. For example, failing to have a clear and consistent disciplinary policy can expose hospitals to significant liability under a number of nondiscrimination statutes. Because an ad hoc approach may result in different physicians receiving different discipline for the same infraction, a physician receiving harsher discipline could argue that he or she was treated more harshly due to race, gender, age, or other protected characteristic—not for violation of a compliance requirement. In addition, a structured, policy-driven approach to discipline may limit exposure under various whistleblower laws by helping prevent physicians from claiming that they were disciplined for compliance-related misconduct that could be framed as “protected” whistleblowing activity. 

Beyond adopting a structured approach to physician discipline that limits potential liability under nondiscrimination and whistleblower statutes, hospitals should take steps to ensure that any financial penalties imposed on physicians are consistent with various state wage and hour laws. Critically, some state laws may prohibit hospitals from making deductions from a physician’s salary. Similarly, many states have robust wage payment statutes that both impose double or treble damages on employers that improperly deny employees earned wages and entitle employees to any attorney fees spent recovering such earned wages. In both cases, a best practice to help reduce the risk of potential liability is to ensure that any financial penalties are clearly articulated in a physician’s employment contract and are deducted from a physician’s bonus or incentive compensation, not from a guaranteed base salary. Carefully drafting physicians’ employment contracts—and taking steps to ensure that potential financial penalties are plainly laid out in those contracts and are taken from incentive compensation—can significantly lower a hospital’s potential exposure under a broad array of state wage and hour laws.  

Best Practices

As noted above, hospitals can, with proper planning, take actions to reduce compensation for physicians who are causing the hospital to lose reimbursement. To do so, hospitals should do the following:

  • Create a policy that lays out in sufficient detail a methodical approach for determining when physician practices will result in a reduction in compensation, so as to ensure uniform sanctions across all physicians

  • Include compensation reduction measures as part of the physician’s bonus, rather than the physician’s base compensation, for clearly articulated, commercially reasonable purposes that lend themselves to ready quantification


Lincoln Bisbee
Al Shay

Edited by Andy Ruskin