A federal court’s November 13 ruling demonstrates that a hospital’s compensation of physicians can violate the Stark Law’s prohibition against paying for Medicare referrals, even when the physicians are the hospital’s own employees and their payment pool is distributed in proportion to their personally-performed services.

The case, United States et al. v. Halifax Hospital Medical Center et al., Case No. 6:09-cv-Orl-31TBS, Fla. Middle Dist., arose when a whistleblower filed a qui tam action alleging that the hospital’s compensation of its six employed medical oncologists violated the Stark Law because it rewarded the physicians for their referrals of Medicare patients to the hospital. The federal government agreed to intervene.

The basic charge was that the compensation arrangements violated Stark because they contained a bonus component that varied on the basis of the physicians’ Medicare referrals to the hospital. The arrangement required the hospital to pay each physician, as a bonus, an “equitable portion” of a total incentive pool equal to 15% of the “operating margin” for the hospital’s medical oncology program. The pool included not only the physicians’ billings for the professional services they personally performed, but also the fees earned by the hospital for the physicians’ referrals to the hospital. However, the pool was divided between the physicians in proportion to each physician’s personal share of all six oncologists’ total professional service billings.

The hospital’s defense was that the arrangement satisfied the “bona fide employment” exception to the Stark Law. The hospital also pointed to a legal opinion it had received, which concluded (somewhat tepidly) that there was a “reasonable” argument that the bonuses complied with Stark. The court ruled against the hospital and gave the government summary judgment on the issue.

Under the court’s analysis, Stark’s employment exception “is itself subject to an exception” and the arrangement fell into that exception to the exception. The court was pointing to the element of the employment exception that states that the compensation of an employee cannot be determined in a manner that takes into account, directly or indirectly, the volume or value of the employee’s Medicare referrals to the employer. In this case, the court ruled, the physicians’ individual bonuses varied on the basis of referrals because their net bonus was based on operating margin of the entire oncology program—including fees for hospital services—and that margin would be improved by the physicians’ referrals in addition to the services that they themselves personally performed: the more referrals, the more operating margin, the bigger bonus. Each physician’s portion of the pool was based on his or her own services, but the size of the overall pool, and therefore of his or her bonus, was determined in part on the basis of hospital referrals.

The Halifax case resembles another court’s recent decision in U.S. v. Tuomey Healthcare System, which awarded $237 million against that health system for offering bonuses to part-time employed physicians that hinged in part on cash collections for outpatient procedures. In Tuomey as in Halifax, the courts ruled that the facility fee corresponding to a physician’s personally-performed professional service constitutes a “referral” within the meaning of Stark.

The first lesson of Halifax is that in negotiating and drafting physician employment arrangements, hospitals should be careful not to determine any part of the physicians’ pay—whether directly or indirectly—on hospital facility fee revenue resulting from the physicians’ referrals. It’s no longer enough to simply cap total compensation or compare it to industry surveys; employers need to pay attention to the structure of the compensation formula to ensure compliance with Stark.

The second lesson is really more of a reminder: when it comes to Stark, an experienced lawyer can help you interpret the law, but reliance on the lawyer’s opinion is not going to help you if a court ultimately decides that you’ve violated Stark. Stark is a strict liability statute, and following a lawyer’s advice is no defense.