The current crisis in malpractice insurance seriously impacts both hospitals and physicians. Hospitals are faced with steadily rising premium increases but for many hospitals this crisis may also result in heightened problems related to physician recruitment and retention. Those facilities already experiencing difficulties in recruiting specialists may now find it impossible to continue to operate critical departments and services. In Nevada and Mississippi, for example, local communities have been confronted with the potential closure of emergency departments and trauma units as a result of a threatened physician exodus due to escalating premiums.

Given the serious potential consequences of this crisis, hospitals are seeking options for assisting local physicians. Various alternatives are under consideration and the following offers a partial list of such options:


  • malpractice subsidies paid directly to the physician or their insurance carrier;
  • risk retention groups;
  • captive insurers;
  • employment (and direct payment of premiums); and
  • stand-alone coverage for physicians obtained through the hospital's carrier (sometimes referred to as channeling).

Any assistance offered by a hospital to a referring physician entails possible legal risk and careful analysis is necessary before proceeding. Such assistance raises potential concerns under the Stark and Anti-Kickback laws. Also, tax exempt hospitals must consider whether such assistance constitutes private insurement or would otherwise result in the imposition of intermediate sanctions.

The Stark Law prohibits a physician from referring Medicare and Medicaid patients for certain types of services to an entity with which the physician has a "financial relationship." A malpractice subsidy or other assistance would obviously be a form of financial assistance thereby invoking potential application of this law. Fortunately, a number of exceptions exist and several have potential application. The exceptions that may be useful in this regard include those for indirect compensation arrangements, employment relationships, payments by a physician for items or services, fair market value payments, personal service arrangements, and physician recruitment. The application of these exceptions is fact specific and each situation must be thoroughly analyzed to ensure compliance. Detailed requirements must be met in order for the exception to apply. More important, the reader is cautioned that the application of Stark exceptions to malpractice insurance assistance is a "gray" area and, accordingly, absolute certainty may be difficult to attain.

The Anti-Kickback Law broadly prohibits the payment of remuneration in return for the referral of Medicare or Medicaid patients. Malpractice insurance assistance could be considered "remuneration" and if the assistance is intended to induce referrals, prosecution under the Anti-Kickback Law is possible. Fortunately, exceptions called safe harbors exist that exempt arrangements that otherwise might violate the law. The safe harbors that have the greatest potential applicability to malpractice insurance assistance include those for employment, personal services, physician recruitment, and obstetrical malpractice subsidies. The obstetrical subsidy safe harbor provides protection only for payments to or on behalf of a physician related to the physician's insurance coverage for obstetrical cases. It is not a general exception for malpractice subsidies. In addition, it is limited to those geographic areas that are considered to be substantially unserved. While this safe harbor has limited direct application, it does provide support for similar situations involving other specialties that may be in short supply.

It is important to note that failure to obtain safe harbor protection does not automatically mean the Anti-Kickback Law has been violated. Such a conclusion can only be reached after a detailed analysis of all the pertinent facts and circumstances of a particular situation. In cases where a documented recruitment or retention problem exists, legitimate rationales may be advanced in support of malpractice insurance assistance. In such cases it is advisable for the parties to satisfy as many requirements of the safe harbor as possible. Seeking an advisory opinion may be worth considering in order to receive greater comfort.

Tax exempt hospitals should also ensure that their malpractice assistance efforts do not run afoul of IRS principles. Documentation of community need is a good first step. Also, the reasonableness of the amount of assistance provided shall be documented. Finally, it is recommended that a tax exempt hospital follow the procedures for obtaining the rebutable presumption outlined in the IRS' intermediate sanctions regulation. This will necessitate broad action on the matter.

The current malpractice crisis may have a severe impact on hospitals that are already confronted with serious physician recruitment or retention problems. Creative approaches may be the only means of assuring community access to much needed services. However, such approaches must consider the complex maze of laws, regulations and exceptions in order to avoid undue legal risk.

This article was published in the November 21, 2002, Hospital News.