It is a given that all hospitals have some sort of relationship with physicians.  However, the types of relationships, and how those relationships need to be managed has changed as the healthcare delivery and reimbursement systems have evolved.  Over the past 25 or so years, for any of a number of competitive reasons, hospitals and health system involvement in physician practices and activities has exponentially increased.  This involvement has run the gamut from providing opportunities for independent physicians to set up practice operations in hospital-owned buildings, to bringing physicians on to the hospital payroll as full-time employees, and just about every type of relationship or deal you might imagine in between.

Increasingly, hospital-physician relationships have fallen under Federal and State regulatory scrutiny, and as recent history has highlighted, many organizations have found themselves directly in the crosshairs of the regulators. The many rules that govern the hospital’s relations with physicians are highly complex and in some situations vague.  In this vague and ever changing regulatory landscape, even the most well-meaning organization can find itself running afoul of one or more of the regulations.  To make matters worse, as healthcare delivery and reimbursement systems have evolved, the rules, regulations, and perhaps more importantly, the interpretations of the regulations by the regulators have also evolved.

Hospital Boards have a special fiduciary responsibility to oversee the activities of hospital management, and this fiduciary responsibility extends to the oversight of the hospital’s relationships with its physicians. In this context, “oversight” means providing hospital executive management with policy direction and approval of activities aimed at carrying out the organization’s Mission and Vision.  “Oversight” does not mean direct involvement with decision making with respect to the operation or management of routine hospital programs, including physician programs. In keeping with the prime responsibility of protecting and supporting the Mission and Vision of the organization, the key concept for Boards and Board members to keep in mind is that their “oversight” activity is essentially a “what are we doing,” “why are we doing it” and “how did we do,” not a “how are we going to do it” discussion.

As we noted earlier, the healthcare delivery environment is highly regulated, and even the most well-meaning organization may find itself in “gray areas” relative to its physician relationships. There are, however, a few “bright line” and well established concepts that Boards should keep in mind:

First, the organization cannot compensate, reward or incentivize a physician based on the “Volume or Value” of his or her referrals to the organization;

Second, all compensation or payment in cash or kind must be Commercially Reasonable or at Fair Market Value regardless of the existence or absence of any referrals, and;

Third, there must be a demonstrable need for the clinical or administrative service that the physician is performing for the organization.

While the above concepts may seem fairly straight forward or obvious, in recent Federal whistleblower litigation, one or more of these issues was central to the complaint.  

So, just how can a smoothly operating Board manage the “oversight” process and effectively perform their fiduciary responsibilities without getting in the way of management?  A Board’s responsibilities can be seen as a “cascade,” with a feedback loop, where the strategic direction of the organization is set based on those activities that will best carry out the mandate of fulfilling the Mission and Vision that has been established by the Board.  The directions that have been set and articulated are memorialized in policies, which are, in turn, implemented through procedures established by the organization.  Finally, the results are periodically reported to the Board through the management and Board committee structure. 

At this juncture, it might be instructive to briefly introduce one of the tools that the Government has in its toolbox to encourage the Boards of not-for-profit hospitals and health systems to exercise effective oversight, the Intermediate Sanctions Regulations (IRC § 4958).  A number of years ago the only real enforcement tool the Internal Revenue Service had to use against not-for-profit organizations that abused their tax-exempt status was the threat of revoking their tax exempt status.  As a practical matter, the IRS was reluctant to use revocation of tax-exempt status against hospitals because the likely result, in many cases, would be to drive the hospital into bankruptcy. Consequently, the IRS petitioned Congress for a tool for them to use short of the “nuclear option” of status revocation.  Thus, came the idea of intermediate sanctions where excise taxes of 10% of the excess benefit transaction, up to $20,000 could be imposed against individuals including Board members, with responsibilities for oversight of the hospital’s operations who had knowledge of, or knowingly participated in, the excess benefit transaction.

While not all physicians are likely to fall under the Internal Revenue Service’s regulations concerning “Disqualified Persons” contained in the Intermediate Sanctions regulations, the general procedure for establishing the “rebuttable presumption of reasonableness” by documenting that services, payments or the compensation and compensation plan are “commercially reasonable” and “fair market value” will generally apply to other regulatory programs and can serve as a template for the Board in carrying out its oversight responsibilities. In many organizations the routine responsibilities for watching over and providing guidance to management’s operation of the hospital’s physician relationships are delegated to a Board-designated subcommittee.  Frequently, Committees such as the Compensation Committee or the Leadership Development Committee are delegated this responsibility. The responsible Committee directly interacts with management and then issues summary reports to the Board so that documentation of the Board’s oversight activities become part of the permanent record.

As a practical matter, most Boards establish procedures for dealing with routine physician matters, reserving their time and attention for only those exceptional issues that need their attention. Frequently, the policies and procedures which are normally reviewed annually and are generally structured to comply with the IRS Intermediate Sanctions procedures, establish the general physician compensation philosophy and create contract terms and thresholds on compensation or reimbursement that trigger external reviews by competent legal and compensation experts.  The annual review, through the designated committee, allows the organization to report to the Board that the organization’s physician compensation framework continues to comply with current regulatory guidance. During the course of the year only those potential relationships that are outside the established thresholds will require external review and individual reports to the Board through the appropriate committee.

In conclusion, experience has shown that organizations with a well thought out, managed and maintained physician relations compliance program have made a significant step towards mitigating the inherent risks associated with employing or contracting with physicians.  However, as risky as not having a working compliance review program is, the only thing more risky is having one and not using it effectively.

Douglas T. Cardinal, FACHE has over 35 years of hospital executive and healthcare consulting experience is the Practice Leader of Aon’s Healthcare Provider Consulting Practice and is located in Aon’s Atlanta Office.  He can be reached at