Pay Attention to the Commercial Reasonableness Standard in Hospital-Physician Alignment Strategies

The $345 million settlement last December between Community Health Network (CHN) and the U.S. Department of Justice underscores the importance of legally sound physician-hospital alignment strategies. Such partnerships, ranging from direct physician employment to joint ventures, can easily violate the Anti-Kickback Statute and the Stark Law, which govern physician compensation and prohibit financial incentives for referrals. CHN’s case, involving the employment and compensation of specialist physicians under arrangements that allegedly prioritized securing referrals over compliance with fair market value compensation guidelines, highlights the dangers of navigating these legal waters without careful planning.

Despite CHN’s reliance on an independent valuation to determine fair compensation, their approach—particularly their compensation at levels above the 75th percentile and incentives tied to referrals—was found to violate Stark Law provisions because, overall, the transaction was not deemed “commercially reasonable.” This settlement serves as a potent reminder that healthcare systems must ensure their physician compensation structures are both legally compliant and substantiated by genuine commercial reasons, beyond the pursuit of referrals, to avoid substantial legal and financial repercussions. 

Arrangements in which a hospital pays physicians so much that the transaction causes the hospital to operate at a loss with respect to professional collections year-over-year, raises significant commercial reasonableness questions.  While hospitals have better access to the data needed to assess commercial reasonableness in a physician transaction, physicians should consider asking the hospital to establish the commercial reasonableness of a proposed venture, and not simply focus on fair market value.