Blog January 3, 2024
Phantom Equity in Healthcare: A Detailed Legal Analysis


In the evolving healthcare landscape, the concept of phantom equity emerges as an innovative approach to compensation and incentivization, offering an in-depth examination of phantom equity, focusing on its structure, applications, and legal considerations within the healthcare sector.


The Concept of Phantom Equity

Phantom equity, also known as virtual or shadow stock, represents a contractual agreement granting financial benefits akin to equity without actual share transfer. In the healthcare sector, where maintaining control and decision-making is crucial, phantom equity offers a way to reward key employees or partners without diluting ownership. This approach is increasingly relevant in the healthcare industry, particularly for small to medium-sized businesses like private clinics, biotech startups, or research firms. The benefits under such plans typically correlate with the company’s performance or stock value1.


Advantages in Healthcare

Alignment of Interests: Phantom equity ensures congruence between employee incentives and the organization’s success, crucial for healthcare entities where decisions have profound impacts2.

Talent Retention and Recruitment: In the competitive healthcare sector, such equity plans are instrumental in attracting and retaining pivotal talent3.

Flexibility and Control: It allows organizations to retain control, critical in a sector where strategic choices significantly affect patient care and compliance with regulations4.

Tax Efficiency: While dependent on local tax laws, phantom equity can be structured to optimize tax benefits for both the entity and the recipients5.



Complexity: The creation and management of these plans are often complex, requiring careful consideration of valuation and structure6.

Legal and Regulatory Compliance: These plans must comply with various employment and securities laws, varying across jurisdictions7.

Potential for Conflict: Misunderstandings about value or payout timings can lead to conflicts among stakeholders8.


Applications in Healthcare Transactions

Phantom equity plays a role in several healthcare transactions:


M&A: In mergers and acquisitions, it is used to incentivize key employees of the acquired company9.

Scenario: A large hospital group is acquiring a smaller, specialized clinic. The clinic has key employees, like top surgeons and research heads, whose expertise and knowledge are critical for the continued success of the clinic post-acquisition.



Application of Phantom Equity: To ensure these key employees remain motivated and committed after the acquisition, the hospital group offers them phantom equity. This phantom equity is tied to specific performance metrics or the overall financial success of the clinic post-acquisition. It ensures that these employees have a vested interest in the continued success of the clinic, aligning their goals with those of the hospital group. The phantom equity plan might include clauses that provide for a payout after a certain number of years, ensuring employee retention over a critical period.


Joint Ventures: It aligns interests in collaborations without complicating the ownership structure10.

Scenario: Two healthcare companies, one specializing in pharmaceuticals and the other in biotechnology, decide to collaborate on developing a new drug. Both companies want to ensure that the teams involved fully commit to the project’s success.



Application of Phantom Equity: They set up a joint venture entity for this specific project. Instead of offering actual equity in their respective companies, they offer phantom equity in the joint venture entity to the key team members working on the project. This phantom equity is linked to the success of the drug development project, such as meeting development milestones, successful clinical trial results, or the eventual revenue generated by the drug. This approach motivates the team members to work towards the project’s success without complicating the equity structure of either parent company.


Startups: A method for conserving cash while incentivizing contributions to the company’s growth11.

Scenario: A healthcare startup focusing on innovative medical imaging technology is rapidly growing and needs to retain its talented team of engineers, developers, and medical experts. The startup isn’t yet profitable and is cautious about spending cash reserves.



Application of Phantom Equity: The startup offers phantom equity to its key employees. This equity is linked to various future success metrics, such as achieving technology development milestones, securing patents, or future funding rounds. This strategy allows the startup to conserve cash while providing its employees a potentially lucrative future payout. Phantom equity incentivizes employees to contribute to the company’s growth and success, aligning their interests with the startup’s long-term objectives.


In each of these scenarios, phantom equity offers a unique solution to align interests, motivate key personnel, and facilitate collaboration while maintaining the flexibility and control essential in the healthcare sector.


Compliance Considerations

Phantom equity, while a useful tool in healthcare transactions, must be carefully structured to comply with various federal and state regulations. Three significant laws in the United States that impact arrangements involving healthcare entities are the Eliminating Kickbacks in Recovery Act (EKRA), the Anti-Kickback Statute (AKS), and the Stark Law. These laws are designed to prevent fraud and abuse in healthcare by prohibiting certain financial arrangements and incentives that could influence patient care decisions. Strategies for compliance include ensuring compensation aligns with fair market value, drafting clear written agreements, and seeking legal counsel experienced in healthcare law12.


Eliminating Kickbacks in Recovery Act (EKRA)

Overview: EKRA is a federal law that prohibits kickbacks related to laboratory, recovery home, and clinical treatment facility services covered by any health care benefit program, not just those covered by the federal government.


Phantom Equity Concerns: When structuring phantom equity agreements in businesses related to these services, it is crucial to ensure that the compensation does not constitute an illegal kickback. This means the phantom equity rewards should not be directly tied to the volume or value of referrals or business generated by any healthcare benefit program.


Anti-Kickback Statute (AKS)

Overview: AKS is a criminal statute that prohibits the exchange (or offer to exchange), of anything of value, in an effort to induce or reward the referral of federal healthcare program business.


Phantom Equity Concerns: In the context of phantom equity, compliance with AKS requires ensuring that any compensation or rewards do not incentivize or reward the referral of patients or services that are paid for by federal healthcare programs. The volume or value of such referrals or services should not influence the structure of the phantom equity arrangement.


Stark Law (Physician Self-Referral Law)

Overview: Stark Law prohibits physicians from referring patients to receive “designated health services” payable by Medicare or Medicaid from entities with which the physician, or an immediate family member, has a financial relationship unless an exception applies.


Phantom Equity Concerns: For healthcare entities offering phantom equity to physicians, it is critical to ensure that the arrangement does not violate Stark Law. This means the terms of the phantom equity should not be related to the volume or value of referrals made by the physician. The arrangement should be structured to comply with one of the Stark Law exceptions, such as the bona fide employment relationship exception.


Key Compliance Strategies

While phantom equity can be a valuable tool in healthcare transactions, navigating the complexities of EKRA, AKS, and Stark Law is essential to avoid significant legal and financial penalties. Proper structuring and legal oversight are key to ensuring that these arrangements are compliant.


Fair Market Value Compensation: Ensure that all phantom equity compensation is consistent with fair market value for the services provided, and not determined in a way that takes into account the volume or value of any referrals or other business generated.


Written Agreements: Structuring the phantom equity arrangements in a clear, written agreement that outlines the terms, conditions, and basis for the compensation.


Legal Review: It’s crucial to have these agreements and plans reviewed by legal counsel experienced in healthcare law to ensure compliance with EKRA, AKS, Stark Law, and other relevant regulations.




Phantom equity stands as a vital tool in healthcare transactions, offering a balance between incentivization and control. Its effectiveness, however, is contingent upon meticulous planning, transparent communication, and strict adherence to legal and regulatory standards. As the healthcare industry continues to evolve, the strategic application of phantom equity is expected to grow, providing innovative solutions for compensation and partnership challenges.




1. “Understanding Phantom Stock and SARs”, Journal of Accountancy.

2. Harvard Business Review.

3. Forbes.

4. The National Law Review.

5. “Phantom Equity: Aligning Interests without Giving Up Equity”, Harvard Business Review.

6. Forbes.

7. The National Law Review.

8. “Phantom Equity in Healthcare Startups: A Strategic Tool”, Health Entrepreneurship and Innovation Journal.

9. “Understanding Phantom Stock and SARs”, Journal of Accountancy.

10. Harvard Business Review.

11. Forbes.

12. The National Law Review.