The Truth About “Fair Market Value” and Stark Law: Lessons From Top Physician Contract Attorney Michael Johnson

One of the most frequent questions we hear from physicians is to explain "Fair Market Value" or FMV and what it means in the context of physician contract negotiations. So we reached out to friend of Offcall and physician employment attorney Michael Johnson, who runs a leading physician employment law firms and is an expert on employment contracts and negotiations, in order to break down FMV and explain how it might be getting used by your employer to hold you back. Michael was previously a guest on our podcast How I Doctor and is also a frequent guest contributor.

In the post, Michael discusses the importance of having accurate benchmarking data of your own, and not simply relying on your employer's calculations, as you approach your contract negotiation. With that in mind, be sure to sign up for Offcall to receive your own personal benchmarks.

If you’ve been told that you can’t get a raise because of Stark Law, you’re not alone. In our law practice Michael Johnson Legal, physicians often come to us frustrated because their employer cited Stark Law as the reason they cannot approve a salary increase or bonus request.

Are they being truthful, or just hiding behind something that sounds technical and intimidating?

The answer is it depends on whether you’re asking for a market-reasonable increase in pay for the work you will perform, or if you’re asking to be paid for something else. For example, if you asked for a $40K signing bonus instead of a $20K signing bonus, this is more likely a negotiation tactic. If the data suggested the median compensation per work RVU rate is $60 in your specialty, geographic region, and practice setting, but the employer paid $50, and you asked them to increase it – again, this is likely a negotiation tactic.

However, are you a private practice physician asking the hospital to provide you a free PA in return for continuing to operate in their facility and referring your patients? Yeah, this is likely a problem. If you’re employed by a hospital and requesting a Medical Directorship stipend, but you will not be doing anything for it? Yeah, they are probably right. These may run the risk of violating Stark Law by accepting payments for referrals.

Let’s unpack what Stark Law actually says — and how it intersects with Fair Market Value, Physician Salary Negotiation, and your ability to advocate for better compensation.

Stark Law, Anti-Kickback Statute, and Physician Compensation

The Stark Law and the federal Anti-Kickback Statute shape how hospitals and large employers are allowed to structure physician compensation. These laws are designed to prevent financial incentives from interfering with patient care or leading to over-utilization of medical services.

Stark Law is a civil federal statute that applies when a physician refers a Medicare or Medicaid patient for “designated health services” (DHS) to an entity with which they have a financial relationship. Stark Law is implicated in nearly all employed physician contracts and essentially all hospital or large group practice contracts.

To stay compliant, physician compensation plans must meet three key requirements:

• Fair Market Value (FMV): The compensation must be consistent with what similar physicians are paid for similar work.
• Commercial Reasonableness: The arrangement must make business sense overall.
• No Volume or Value of Referrals: Compensation can’t be tied to the number of referrals the physician sends to the employer.

In our experience, most mature healthcare employers avoid clear violations of the third rule. Where we see most negotiation friction is around FMV and commercial reasonableness.

What is Fair Market Value (FMV) in Physician Contracts?

There is no singular mathematical formula, despite what employers may suggest. Fair Market Value is defined in the federal regulations as:

“The value in an arm's-length transaction, consistent with the general market value of the subject transaction.”

‘General market value’ means what would be paid in a deal between well-informed parties who are not in a position to generate business for each other. Commercial reasonableness requires a legitimate business purpose of the parties to the arrangement and is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty. Importantly, turning a profit on the deal is not a requirement.

You’re probably thinking what I’m thinking – clear as mud. This word salad set of definitions is not purely objective.

In practice, most large hospital systems use outside valuation experts to evaluate general market value and use them as a guide (maybe also a negotiation tool?) to set their rates within a specialty. These experts usually start with national or regional physician compensation survey data and layer in qualitative factors like specialty demand, call burden, practice setting, and geography. That compensation data is often expensive, not physician-transparent, and heavily influenced by employer-reported figures. Most contracts also include language that allows employers to change your compensation in the future based on internal reports you’ll likely never see.

This is one of the many reasons why the work that Offcall is doing is so valuable for physicians!

Have you ever hired someone to appraise your home for sale or to obtain a mortgage? If so, you’ll know there is some wiggle room. While the valuation should consider comps and must be sensical, it’s not a pure mathematical equation. FMV is kind of like this.

We've occasionally been allowed to review an employer’s FMV valuation report. When we have leverage, we ask. Unfortunately, requesting this as an individual physician without support can be a red flag to employers. That’s where experienced legal counsel can help.

The Myth of the 75th Percentile Compensation Cap

Many physician contracts include language that says if your total compensation exceeds the 75th percentile of the employer’s valuation report, your salary or bonus structure will be capped or restructured. This sounds like a compliance safeguard, but it’s often misused.

Some employers falsely believe that paying a physician more than the 75th percentile automatically violates Stark Law, or that being under the 75th percentile is a ‘safe harbor’ and they need not worry. Both of these assumptions are incorrect. In fact, CMS clarified in 2020 that there is no presumption of FMV or commercial reasonableness at any specific percentile. [CMS Guidance, 2020 pg. 215.]

Being paid well for a demanding job isn’t inherently a problem. Being paid in a way that doesn’t align with your duties, regardless of the dollar amount, is the issue.

Here’s an example:

• You earn a base salary of $300,000.
• You’re expected to produce 6,000 wRVUs.
• Your bonus is $50/wRVU over that threshold.
• Your contract caps total comp at $400,000 (i.e., 8,000 wRVUs).

If you generate 8,500 wRVUs (2,500 over your threshold and 500 over your cap), you should earn $125,000 in bonus. But under this clause, your total compensation is capped, and you’re effectively doing some work for free despite being paid a FMV appropriate rate for your hard work.

This is very problematic for overall physician compensation. We need 25% of physicians to be earning in the top 25%, just like we need great neighborhood comps when we go to sell our house. If physicians aren’t allowed to exceed the average, then the averages themselves decline. A rising tide lifts all boats. Your salary negotiation affects more than just you. Physicians earning across the compensation spectrum can help improve the overall comps by avoiding or negotiating unfair compensation plans.

8 Physician Salary Negotiation Tips When Stark Law Is Cited

If your employer denies a raise or bonus citing Stark Law, here are options to consider:

1. Timing: You’ll have more leverage after proving your value and securing competing offers. If you're early in your role, this may not be the time to push hard.

2. Check the Nature of Your Ask: Are you asking for more money to do more work in a way that’s market-appropriate? Or, are you asking to be paid for something unrelated to your duties (e.g., a stipend without responsibilities)? The former is likely negotiable. The latter might trigger Stark Law concerns.

3. Get the Data: Use tools like Offcall to benchmark physician salary data by specialty, volume, setting, and geography. Compensation trends shift often, so stay current. Consider a compensation consult with a lawyer experienced in Stark Law and physician contracts.

4. Ask for Their Analysis: You could ask the employer for their analysis on why this request is outside of FMV, and what information they used to arrive at this conclusion. Requesting their internal compensation valuation reports would be wonderful, but it could also be a big turnoff.

5. Joint Efforts: Discussing compensation with coworkers is legally protected. A joint request from all physicians in your department may have more weight. Be prepared for potential political fallout, as employers are often reluctant to engage in these conversations. Physicians working in unison is not great for them.

6. Pause, For Now: You could conclude that this employer is simply telling you no and using their blanket excuse to deny raises. Don’t take it personal. Employers of physicians, particularly in large hospital systems and academic centers, simply want to pay you as little as possible. If you’re not ready to leave, it might not be the right time to push further.

7. Interview elsewhere: You may find that other employers are willing to pay what you’re worth. Recruitment budgets are often more generous than retention budgets, and employers might not reward long-term loyalty. In fact, having a competing offer in hand might help your employer reconsider their FMV analysis.

8. Put Exit on the Table: We believe employers are most likely to meet your request when they know you’re ready to walk. If you pursue this path, be prepared to follow through. Healthcare is an extremely competitive business that sometimes requires a bit of hardball. If you’re considering this, you need to be prepared to follow through!

Final Thoughts: Don’t DIY Stark Law Strategy

Stark Law is complex, but it shouldn’t be used as a blanket excuse to underpay hardworking physicians.

If you’re negotiating salary or restructuring your compensation, don’t go it alone. Don’t crowdsource your strategy from friends, attendings, or Reddit threads. ChatGPT can’t read your contract in a holistic and integrated way, is unfamiliar with physician compensation, and lacks negotiation skills. This is where experienced legal guidance pays for itself.

Whether it’s with our firm or another lawyer experienced in this space, get someone in your corner who knows the terrain. The stakes are too high and the excuses too common to be unprepared.

Learn more about Michael Johnson's firm Michael Johnson Legal here.