BY Adam Portacci, Weaver
Compensation arrangements for pathology services provided to hospital patients are uniquely driven by a complex interplay of compliance requirements and market conditions. Determining the fair market value (FMV) for these arrangements requires specialized analyses in the regulatory context.
In general, to meet certain exceptions under the physician self-referral laws (commonly referred to as Stark) from the Centers for Medicare & Medicaid Services (CMS) and certain safe harbors under the Anti-Kickback Statute (AKS) from the Office of Inspector General (OIG), these compensation arrangements must be consistent with fair market value (FMV). While parties look to legal counsel for structuring the arrangements, a specialized third-party valuator often helps with determining FMV of compensation.
Underlying complicating factors for hospital pathology arrangements include:
- Pathology and laboratory services cover two general patient categories:
- Medicare Part A (i.e., inpatient services) for which services are billed and reimbursed under diagnostic related groups (DRGs) versus unique codes for services
- Medicare Part B (i.e., outpatient and physician services) for which services are billed and reimbursed under Current Procedural Terminology (CPT®) codes
- Billing for pathology and laboratory services are based on different fee schedules:
- Certain pathology codes are billed according to the CMS Physician Fee Schedule (PFS) which may have a single rate or have separate rates with modifiers for the technical component (TC) and professional component (PC).
- All other clinical laboratory services are billed under the CMS Clinical Laboratory Fee Schedule (CLFS) which provides one rate intended to cover the technical component and the supervision and oversight provided by pathologists.
Common arrangements in the market include employment (i.e., W-2) of pathologists at a fixed salary with possible incentives and professional services agreements (PSAs) (i.e., 1099 contractor) with individual pathologists or groups. PSAs’ compensation structures vary in the market and are driven by which party is responsible for billing and collections.
For PSAs where the pathology provider is billing and collecting for its services, a hospital may pay a medical directorship on a fixed and/or variable basis related to the Part A services for which only the hospital is able to bill under diagnosis related groups (DRGs). The fair market value of this compensation should reflect the time and work requirements of pathologists, resources, complexity of tests and reasonable rates, among other considerations, related to this subset of services.
For PSAs where the pathology provider does not bill or collect for its services, a hospital may pay pathologists for Part B services (in addition to the Part A component above) using various structures. Those commonly observed include fixed fee, incentives for meeting quality and organizational goals at the department and hospital level or other variable fees in the form of a percentage of global reimbursement or synthetic fee-for-service. Additional considerations in determining the fair market value for this subset, particularly with variable fees, include payer mix and geography.
Percentage-based and synthetic fee-for-service arrangements intend to quantify the pathology professional component for supervision and oversight of the relevant clinical laboratory services. Recognizing CMS’ CLFS does not provide a separate technical and professional component, other benchmarks may be considered. In certain states (e.g., Florida, Illinois and California), Medicaid fee schedules provide separate PC and TC rates for clinical lab codes, and it is not uncommon for commercial payers to include a separate pathologist fee related to clinical lab codes.
Market dynamics further impacting hospital pathology arrangements include:
- Changes in fee schedules and reimbursement methodologies. For example, in its 2025 final rule, CMS delayed rate cuts for clinical lab services (subject to resume in 2026), reduced the conversion factor in the PFS affecting PCs, bundled certain services with lower utilization and implemented geographic adjustments. Moreover, the CLFS generally remains based on 2018 private payer data and CMS delayed collection of 2019 data until early 2026.
- In its 2025 final rule, CMS finalized standard times for clinical labor tasks aiming to streamline valuation of pathology services.
- Demand for laboratory and pathology services continues to grow but is underscored by a shortage of pathologists.
- The number of pathology subspecialists has now grown to over 50% of all pathologists, and testing within their subspecialties continues to grow.
Hospital pathology arrangements often include elements of remuneration or arrangements apart from compensation terms. Examples of these facts and circumstances may include office space provided by a hospital or support personnel (e.g., pathologists’ assistants) provided by a practice. Other arrangement attributes to consider include exclusivity and coverage, among others.
When determining the fair market value of pathology compensation in hospital arrangements for Stark/AKS compliance, it is critical to investigate the facts and circumstances including market dynamics affecting your specific arrangement. Unfortunately, a one-size-fits-all compensation model does not exist. Therefore, whether you are exploring a new arrangement or updating an existing one, parties must look at all aspects of contemplated compensation structures, individually and in aggregate, to ultimately determine whether the arrangement is consistent with fair market value. Moreover, as a general rule, these arrangements should be reviewed annually for fair market value and updated accordingly.