The Gatekeeping of Hospital Legal Teams: Resistance to Physician Independence Through Micro-Corporations

As the healthcare landscape evolves, many physicians are seeking alternative employment structures that offer more autonomy and financial flexibility. One common option is to transition from a traditional W-2 employee contract to an independent contractor or "employment lite" arrangement through a micro-corporation. However, many hospital employers, backed by their legal teams, often resist these transitions, citing complex legal and regulatory concerns.

In this blog post, we explore real-life feedback from a hospital legal department in response to an orthopedic surgeon’s proposal to move from W-2 employment to an independent contractor arrangement. While names and locations have been removed to protect the identity of the physician involved, this response offers insight into the resistance you may face from hospital employers when seeking such transitions. We'll also outline the key take-home messages for you to understand when negotiating with hospital legal departments.

Overview of the Legal Concerns: Stark Law, Anti-Kickback Statute, and False Claims Act

The legal response began by outlining the primary regulations that come into play when a physician seeks to move from W-2 employment to independent contractor status. These regulations include:

• Stark Law: The Physician Self-Referral Law prohibits physicians from referring patients for certain services payable by Medicare or Medicaid to entities with which they have a financial relationship, unless an exception applies (such as an employment relationship or a professional services agreement).

• Anti-Kickback Statute: This law criminalizes the exchange of "illegal remuneration" between hospitals and physicians, making it illegal to offer financial incentives that could influence patient referrals or service utilization.

• False Claims Act: Violations of either Stark Law or the Anti-Kickback Statute can trigger the False Claims Act, which carries steep monetary penalties and the potential for exclusion from Medicare and Medicaid programs.

• Federal Tax Law: Misclassifying an employee as an independent contractor can lead to penalties for the failure to pay required payroll taxes.

These regulations form the foundation of the hospital’s argument against the physician’s proposed independent contractor status, with the hospital’s attorney focusing on the concepts of fair market value and commercial reasonableness.

Key Take-Home Messages for Physicians

When negotiating with a hospital legal department about transitioning to independent contractor status, you are likely to encounter several recurring arguments based on regulatory concerns. Here are the main points physicians should be prepared for:

1. Fair Market Value Is a Major Sticking Point

One of the first concerns raised by the hospital attorney is whether the compensation proposed for the independent contractor arrangement aligns with fair market value. Hospitals often rely on MGMA (Medical Group Management Association) data to determine whether a physician’s compensation is fair relative to their production, typically measured in wRVUs (work relative value units).

The hospital’s legal team argued that “the regulatory agency will look at the entire amount of compensation paid from the healthcare facility to the physician,” including base compensation, bonuses, and benefits, to determine fair market value. The physician’s proposed arrangement would need to demonstrate that the total compensation is justified by the physician’s wRVU production. If compensation exceeds the 90th percentile without a corresponding increase in wRVU production, the hospital is likely to resist the agreement due to concerns about regulatory scrutiny.

2. Commercial Reasonableness Must Be Demonstrated

Even if compensation aligns with fair market value, the arrangement must also be commercially reasonable. Stark Law defines a commercially reasonable arrangement as one that “furthers a legitimate business purpose” of the parties involved and is “sensible” given the size, scope, and specialty of the parties.

In this case, the hospital attorney questioned whether the physician’s proposed hybrid arrangement—combining elements of both employment and independent contracting—would be commercially reasonable. The attorney noted that “a party with the expense usually has the revenue,” meaning the hospital could question the profitability of such an arrangement if the physician is generating income in other locations or entities not controlled by the hospital.

3. Compensation Structures Can Be Complicated

The physician’s proposed compensation structure in one of the options included a base salary combined with wRVU-based quarterly bonuses. The hospital’s legal team took issue with this structure, arguing that paying on a per-click basis could violate Stark Law because it blurs the line between employment and independent contracting.

Moreover, the attorney noted that if the physician’s compensation significantly exceeded MGMA benchmarks—especially if the physician’s wRVU production did not justify the higher pay—the agreement would likely face regulatory challenges. Hospitals will often resist compensation structures that tie payments to productivity metrics unless they can be clearly justified under Stark Law.

4. Call Pay and Ancillary Compensation Are Likely to Be Scrutinized

In addition to base compensation and wRVU bonuses, the physician’s proposal included compensation for call coverage and ancillary staff supervision. Here again, the hospital’s legal team raised red flags. For example, while the physician requested call pay after seven days of service, the hospital’s bylaws required 10 days before additional pay would be considered. This discrepancy prompted concern that the call pay would violate the hospital’s existing compensation guidelines and be viewed as excessive.

The attorney also questioned the compensation for supervising mid-level providers, noting that this type of compensation was not standard practice at the hospital. Hospitals may resist offering additional pay for supervisory roles unless such compensation is already part of their standard contracts.

5. Regulatory Compliance Takes Precedence Over Flexibility

Ultimately, the hospital’s legal team argued that regulatory compliance takes precedence over the physician’s desire for flexibility in their employment arrangement. Even if the physician’s proposal seemed financially beneficial to both parties, the attorney warned that “if a regulator looks at compensation to a physician from a healthcare facility, the production has to be present prior to the compensation or at least at the same time.”

In other words, the hospital’s primary concern is ensuring that the physician’s compensation is defensible under federal regulations, not necessarily whether the arrangement is optimal for the physician’s personal or financial goals.

Always remember that the hospital attorneys work for the client, the hospital, and not for you. That is why I highly suggest you avoid representing yourself in these legal debates. At SimpliMD, we have a legal network familiar with physicians working in micro-corporations as independent contractors. They know how to combat and respond to resistance from hospital attorneys. The key is having a legal representative who can speak their language and push back with equal force. If you are this position, I invite you to engage with SimpliMD and let me connect with you an experienced physician centric attorney.

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What Physicians Can Learn from This Case

For those of you seeking to transition to an independent contractor arrangement, this case offers several important lessons:

• Understand the Regulations: Physicians need to be well-versed in the regulations that govern physician compensation, including Stark Law, the Anti-Kickback Statute, and fair market value standards. Without this knowledge, it can be challenging to negotiate effectively with hospital legal teams. The best way to inexpensively obtain fair market value data is Contract Diagnostics Compensation Rx that costs less than $300.

• Be Prepared for Pushback: Hospital legal departments are likely to resist any arrangement that appears to deviate from the standard W-2 employment model, especially if the proposed compensation structure is complex or if it includes ancillary bonuses or call pay.

• Commercial Reasonableness Is Key: Even if the compensation aligns with fair market value, the arrangement must also be commercially reasonable. Physicians should be prepared to justify how their proposal meets this standard, particularly if they are proposing a hybrid model that combines elements of employment and independent contracting.

• Flexibility May Be Limited: Hospitals often prioritize regulatory compliance over flexibility in employment arrangements. Physicians should be prepared for limited negotiation room when it comes to compensation structures, ancillary bonuses, and call pay.

Conclusion: Breaking Through the Resistance

Transitioning from W-2 employment to an independent contractor or micro-corporation arrangement is possible, but it requires a deep understanding of the legal and regulatory landscape. You must be prepared for hospital legal teams to raise concerns about fair market value, commercial reasonableness, and regulatory compliance. By anticipating these objections and building a strong case for the proposed arrangement, you can increase their chances of breaking through the resistance and achieving greater autonomy in your independent practice.

For those considering this path, it’s crucial to partner with knowledgeable legal counsel who can navigate these complex negotiations. SimpliMD is here to provide guidance and support for physicians exploring micro-corporation models, helping you build the case for your independence while ensuring compliance with the law.

Take Back Control with SimpliMD

This story highlights the pervasive resistance physicians encounter when they attempt to break free from hospital-employed models. Yet, with the right strategies and support, doctors can successfully navigate these hurdles and gain more autonomy in their careers.

At SimpliMD, we’re here to guide you through the complexities of forming a micro-corporation and achieving the independence you deserve. Let me meet with you for a 1:1 business consultation to help guide you through the process for only $99, and this includes an annual membership that unlocks $2,500 worth of essential business tools designed for those of you seeking agency in their professional lives.

Our "Creating A Practice Without Walls" course teaches you everything you need to create a micro-corporation, giving you the knowledge to enter the marketplace as an independent contractor without falling prey to the common traps hospital legal teams use to gatekeep these opportunities.