Analyzing compensation-at-fair-market-value

Medical Group Strategy Council

Tomi Ogundimu

Consultant

202-568-7382

[email protected]

Randy Gott

Senior Vice President, Southwind

615-794-5169

[email protected]

Translating Regulatory Standards for Medical Group-Physician Financial Arrangements

Analyzing Compensation at

Fair Market Value

2445 M Street NW | Washington DC 20037 | P 202.266.5600 | F 202.266.5700 | advisory.com

© 2012 THE ADVISORY BOARD COMPANY 2 ADVISORY.COM


Table of Contents

Introduction ................................................................................................................................................ 4

An Increasing Mandate .......................................................................................................................... 4

No Standard Method to Determine Fair Market Value—It Is About Facts and Circumstances ................ 4

Essential Steps in Fair Market Valuation ................................................................................................. 6

Applications of a Principled Compensation Assessment ....................................................................... 9

Exhibit A: Medical Directorship Time Log ............................................................................................. 12


Introduction

An Increasing Mandate

Across the past few years, hospitals and health systems have worked hard to secure a tightly integrated physician

base, continuing and strengthening the trend of physician employment nationwide. Advisory Board research suggests

that by March 2014, physicians will account for over 75% of new hires by hospitals.

The trend toward tighter alignment raises questions about how hospitals and medical groups can share financial

responsibility without jeopardizing independence in clinical decision-making. Federal and state regulators have

responded by introducing legislation requiring, among other things, that physician compensation be commercially

reasonable and at fair market value; however, regulatory guidance for meeting these valuation standards is limited.

Given the regulatory constraints of physician-hospital relationships, medical group leaders must understand fair

market value standards and boundaries for physician compensation. The Medical Group Strategy Council has

identified five imperatives for structuring physician compensation packages compliant with fair market value in a high-

growth environment. This report outlines these key lessons and profiles three organizations’ experiences in

compliance and compensation structuring.

No Standard Method to Determine Fair Market Value

There are three main laws that regulate fair market valuations in physician compensation arrangements: the Stark

Law, the anti-kickback statute, and IRS guidelines. All three require that physician compensation not exceed fair

market value thresholds, but none provides significant guidance on assessing fair market value.

Stark Law: As it relates to compensation for employed physicians, the Stark Law’s “bona fide employment

exception” requires that compensation be consistent with fair market value, without directly or indirectly

accounting for the volume or value of referrals. Furthermore, the law explicitly requires compensation to be

commercially reasonable even if no referrals were made to the employer.

At its core, the Stark Law requires that any financial relationship between a health care provider organization and

a physician not exceed fair market value under any circumstances. Violations of the Stark Law can lead to strict

liabilities for both the medical group and the employed physician, including:

Denial of payment from Medicare and/or Medicaid

Refunding to Medicare and/or Medicaid all payments received in violation of the law

Civil monetary penalties up to $100,000 if it is concluded that a compensation agreement hinged primarily

on guaranteed referrals

Exclusion from Medicare and Medicaid programs

Federal Anti-Kickback Statute: The statute is broader than Stark, and prohibits any portion of physician

compensation from being tied to “referring, ordering, recommending, or arranging for items or services that may

be covered under a federal or state health care program, including Medicare and Medicaid.” It requires aggregate

compensation to be set in advance, commercially reasonable, and consistent with fair market value. Like the

Stark Law, the Federal Anti-Kickback Statute prohibits compensation agreements from considering the volume or

value of referrals.

IRS Guidelines and Principles: The IRS generally requires that compensation from a 501(c)(3) not-for-profit

organization to a physician not exceed fair market value. If compensation is found to be above fair market value,

the IRS could remove the organization’s tax exempt status and/or penalize the organization using excise taxes.

Most of the confusion around fair market value exists because there are no published legal standards or formulas for

physician compensation valuations. CMS has acknowledged that every valuation will depend on the nature of the


transaction, its location, and other applicable factors.1 In fact, the Stark Law explicitly permits the use of any

commercially reasonable methodology that is appropriate under the circumstances.2 Ultimately, fair market value does

not have a single definition. As a result, organizations must consider the facts and circumstances at hand to assess

fair market value appropriately.

Regulators are on the lookout for those that abuse valuation standards and will evaluate the appropriateness of the

valuation methodology. Every organization can take key steps to proactively inoculate themselves from regulatory

scrutiny of physician compensation. The following pages contain the essential steps and considerations for

organizations looking to determine fair market value.3

1 72 Fed. Reg. 51015

2 73 Fed. Reg. 48739

3 69 Fed. Reg. 16107


Essential Steps in Fair Market Valuation

Deconstructing Total Compensation

A common misconception of fair market valuation is that employment contracts will not violate the Stark Law as long

as the total amount of compensation meets commercial reasonableness and fair market value thresholds. However,

physician employment agreements are multi-dimensional, so how one defines total compensation is the key factor in

determining fair market value. The value of total compensation includes not only base salary, but additional financial

incentives including (but not limited to):

• Educational loan repayment

• Signing bonuses

• Retention bonuses

In addition to the base salary and additional cash compensation detailed above, many physicians are compensated

for responsibilities beyond traditional clinical duties. These additional duties—such as call coverage and medical

directorships—typically are compensated separately from overall compensation, and thus, payments for these extra

responsibilities must be evaluated for fair market value separately, based on the nature, frequency, and scope of

services provided.

For an employment or recruitment package that includes a variety of incentives and/or payment for multiple services,

each incentive or payment should be evaluated based on market data as well as the facts and circumstances of the

situation. It may be wise to benchmark total compensation and its various components data for which can be sourced

from a variety of surveys (see Figure I-A).

Figure I-A. Example Market-Based Surveys for Benchmarking Physician Compensation

Physician Service Associated Market Survey

Medical Directorships Medical Group Management Association, Medical Directorship and On-Call Compensation Survey

Physician Executives ACPE/Cejka Search Physician Executive Compensation Survey

Call Payment

Sullivan Cotter and Associates, Physician On Call Survey Report

Medical Group Management Association, Medical Directorship and On-Call Compensation Survey

Total Compensation

Medical Group Management Association, Physician Compensation and Production Survey

American Medical Group Association, Medical Group Compensation and Financial Survey

Sullivan Cotter and Associates, Physician Compensation and Productivity Survey

Investigating Fair Market Value Standards beyond Market Data

Many executives use only market-based surveys to structuring compensation commensurately. Although survey data

is a good starting point to benchmark a range of acceptable payment, using only surveys as a reference point can

threaten efforts to achieve fair market value. For example, many market-based surveys lack a longitudinal

assessment of compensation. In some specialties, compensation fluctuates significantly year-to-year, and as such, it

may be best to use multiple years of survey data to negate disparities. Sourcing comparative data from a single

survey can give the appearance of “cherry picking” information to justify the fair market value of a particular situation;

using multiple surveys concurrently can help avoid this. Another common misconception about survey data that raises


a challenge is the notion that any compensation at or greater than the 75th percentile of a particular survey by

definition exceeds fair market value. To the contrary, sometimes compensation at a higher level is necessary,

appropriate, and compliant with valuation standards. The appropriateness of compensation above the 75th percentile

varies on a by case; in determining whether a particular physician merits payment above the 75th percentile,

organizations should consider the following factors:

• Years of experience

• Current or historical income

• Value to the medical group, health system, and community

• Special skills, expertise, or training

• Presence of similarly skilled physicians in the market

• Demand for the specialty

• Physician’s training needs

Valuation experts strongly advocate considering and documenting these and other factors to ensure a robust analysis

of fair market value, and simultaneously offer competitive compensation.

Matching Compensation to Services Provided

As a rule of thumb, compensation should directly reflect a physician’s productivity. By decoupling the two, an

organization is raising a red flag that can easily attract regulatory scrutiny. If a physician compensated above the 75th

percentile is less productive than the typical physician receiving this compensation, the fundamental premise of fair

market value is challenged. Low physician productivity should result in lower pay; accordingly, when compensation is

tied to productivity, the highest-paid physicians have a clear rationale for their differential compensation.

Physician compensation need not reflect productivity at a one-to-one ratio, but the correlation should be clear and

direct. The extent of the correlation between productivity and compensation should account for the unique

circumstances of the practice or medical group in question.

Authenticating Fair Market Valuation with Principled Documentation

Absent clear guidelines from any of the regulatory agencies about what constitutes fair market value, organizations

can inoculate themselves against future liability by extensively documenting their compensation methodology and

decisions. Progressive institutions include a comprehensive analysis of each compensation agreement that

demonstrates an understanding of fair market value relative to the specifics of the agreement. As evidence of a

thorough assessment, organizations should describe the data considered in the analysis, the applied methodology or

approach, and any pertinent circumstances used to determine the amount of compensation.

Gathering relevant data and documentation early in compensation discussions smoothes negotiations and minimizes

liability. Some examples of relevant information needed are:

• Multiple years of data on the physician’s historical income;

• Historical productivity data if available;

• The physician curriculum vitae (CV) to demonstrate unique qualifications or skills included in the valuation;

• Other relevant information, e.g. recruitment records, recent physician needs assessment, etc.

Even after a compensation agreement is signed, organizations should continue to document details of the physician’s

compensation. Physicians are often paid an hourly rate for administrative services or call pay. Executives should

ensure that physicians with responsibilities that are in addition to their clinical duties, track and document their hours

worked. Many medical directors are required to document the time spent on administrative duties in the form of a time

sheet (see Exhibit A), which serves as evidence that payment is consistent with the contract terms.


This information not only serves as documentation, but as described in the Stark Law, it is vital in ensuring a robust

analysis of the relevant facts and circumstances of each fair market deliberation. Furthermore, the law acknowledges

that the level of necessary documentation will vary depending on the specifics of each case.4 This provides health

care organizations some degree of flexibility in their approach to fair market valuation and supports each case with

documentation to the extent they feel is necessary.

Engaging Independent Auditors Early in the Process

The use of independent auditors or valuation experts is not required by law. However, whether by an outside counsel

or an internal employee, all organizations should conduct an independent evaluation early in the process. Some

compensation arrangements are more straightforward than others; progressive organizations identify those

negotiations most at-risk and work to assessing fair market value early on, often with the help of outside parties.

CMS has indicated that valuation methods developed internally may receive more intensive scrutiny because they are

susceptible to manipulation.5 Outside advisors can raise red flags and be a bellwether to gauge compliance in

financial arrangements. Addressing any discovered red flags to achieve fair market value thresholds is more

manageable early on in the negotiation process. Healthcare executives should not wait until the agreement is signed

to enlist additional support in evaluating the fair market value or reasonableness of an arrangement.

4 66 Fed Reg. 856

5 66 Fed. Reg. 944-46


Applications of a Principled Compensation Assessment

The case studies presented in this section illustrate how three institutions used fair market value principles to structure

compensation packages for contracted and employed physicians.

Incorporating Competitive Dynamics, Retention in Compensation Calculations

Pseudonym Sumlin Health, a standalone hospital in the rural Midwest, employs 20 physicians, both primary care and

specialists. Only one of Sumlin’s employed physicians is a general surgeon, and that physician also is the only

general surgeon in the system’s community.

The hospital has frequently faced challenges recruiting and retaining general surgeons. Two years ago, Sumlin

successfully recruited a full time general surgeon willing to provide call services around-the-clock. During the most

recent round of contract negotiations, the surgeon requested $750,000 in total compensation, which is well in excess

of the 75th percentile for general surgery according to market-based survey data.

Although the surgeon’s requested compensation appeared to exceed fair market value at first glance, the executives

at Sumlin wisely did not immediately reject it. Instead, in light of the unique circumstances of the surgeon’s

employment, the committee assessed each aspect of the surgeon’s requested compensation individually—base pay

for typical clinical services, and additional payment for call coverage.

Compensation Assessment Protocol at Sumlin Health

1. Measured productivity, compared to benchmark data. In terms of wRVUs and gross professional charges,

the surgeon’s documented productivity was higher than his peers, exceeding the 75th percentile in reported

market data.

2. Ensured clinical base pay was consistent with productivity. Given the circumstances of Sumlin’s

situation, their difficulty with retaining a surgeon, and critical community need, base pay was set at the 75th

percentile of market data. Setting this amount at the 75th percentile not only ensured that base pay was

aligned with the surgeon’s productivity level, but reflects that the amount is representative of what other

systems would pay a full time general surgeon under similar circumstances.

3. Independently valued call coverage, compensated days in excess of reasonable expectations. In

Sumlin’s employment contracts, specialists are typically required to provide call coverage per month on a

rotating basis with other physicians in their specialty. As the only general surgeon in the community, the

physician agreed to provide call coverage at all times. Sumlin structured remuneration for his availability at a

daily rate for being on call—an amount set between the median and the 75th

percentile of market data for

general surgery—for each day of call coverage in a month in excess of a minimum required number of days.

Sumlin Health used market survey data, enhanced by situation-specific qualitative information, to determine fair

market value. Sumlin’s leaders successfully structured a competitive compensation package that retained the general

surgeon for the next three years.

Accounting for Duties beyond Typical Responsibilities

Pseudonymed Tressel Medical Center is a large health system in the South. Tressel employs five full-time trauma

surgeons. One of those physicians, a 20-year veteran, volunteered to serve as the medical director for trauma

services, and assumed other responsibilities beyond the requirements of his position, including:

• Providing call coverage in excess of the required number of days per month

• Performing certain general surgery cases when not on call or covering trauma surgery

The surgeon was paid a base salary for his full-time responsibilities commensurate with compensation to the other

four trauma surgeons in the group. Separately, the surgeon was paid for his additional clinical duties, including the


medical directorship. Leaders at Tressel Health System ensured that he was paid at fair market value by taking the

following actions:

1. Separately determined compensation for each job responsibility. Medical group leaders individually

assessed each component of compensation—base salary, an hourly rate for the directorship, payment for

excess call coverage, and productivity-based compensation for general surgery cases—by identifying a range

of payment benchmarks using survey data specific to each component. Because of the surgeon’s experience,

payment for each component was set above the 50th percentile—but below the 75

th—of benchmark data.

When available, multiple data sources were used in benchmarking each component. This ensured that

benchmarks were an appropriate reflection of the market.

2. Documented important considerations to support the valuation process. The surgeon’s employment

agreement outlined his responsibilities for each position. Because the physician was paid an hourly rate for

the medical directorship, he was required to submit a monthly time sheet. Also outlined in the employment

agreement was the expectation that time sheets would be regularly audited and the physician’s performance

would be annually reviewed.

3. Assessed the value of the aggregate compensation package, accounting for situation-specific facts.

Although Tressel structured each component at fair market value, the surgeon’s expected annual

compensation exceeded the 75th percentile of survey data for trauma surgery. Tressel considered the

following facts in the assessment:

a. The trauma surgeon works the same number of shifts as the other employed trauma surgeons;

b. With his additional clinical and administrative duties, the surgeon ultimately works more than full-time;

c. His 20 years of experience; and

d. His documented historical income.

Given these circumstances, executives concluded that total compensation was within the boundaries of fair market

and commercially reasonable standards. While the surgeon’s compensation was relatively high, it was justified given

the documented all the facts and circumstances.

Seeking Expert Guidance to Build a Complex Package

Like many medical groups, pseudonymed Alvera Physicians had a strategic growth imperative. The 60-physician

medical group—located in the South—wanted to recruit seven physicians who were finishing their residency training.

The physicians were receiving many offers for employment, so they requested a multi-component recruitment

package that included:

• Base salary

• Incentive compensation

• Signing bonus

• Relocation stipend

• Education debt forgiven over time

Alvera Physicians’ recruitment policy permitted compensation using the above recruiting incentives. All of the

components of the recruitment packages for the residents would have a direct financial benefit to them, making it

essential that total compensation be commercially reasonable. Alvera wanted to remain competitive by offering the

comprehensive recruitment package without violating regulatory requirements. To create competitive but reasonable

compensation, leaders brought in an independent expert to conduct an objective assessment of fair market calue.

Working with the physicians and their outside counsel, leaders at Alvera accomplished two things:

1. Created a methodology for structuring a multifaceted recruitment package to be included in the

recruitment policy. The package included:


A reasonable base income for each specialty with an incentive based on individual physician

productivity;

A standard signing bonus and relocation allowance;

Partial educational debt forgiveness, based on what was reasonable for each physician;

A minimum employment agreement of two years, and up to three years, depending on individual

physician circumstances.

2. Tailored every package to each physician’s specialty, experience, and individual circumstances. E.g.

the cardiologist was given a larger base pay than the pediatrician; however compensation was determined

using the same methodology for both physicians.

Alvera was able to successfully recruit the seven physicians through employment and all parties felt comfortable with

the terms of the agreements. By engaging outside counsel early on, the fair market value assessment was robust and

well documented.

Learn More

Southwind has deep expertise in understanding fair market value standards and boundaries for physician compensation.

Partnering with health systems to provide the guidance needed to meet regulatory constraints, Southwind evaluates

multiple arrangements including employed physician compensation, medical directorship stipends, payment for call and

guarantee amounts. Renowned expert Randy Gott, Senior Vice President, has more than 20 years of experience and

leads these services for Southwind.

Southwind Key Competencies

Physician Practice Management

• Long-term management for the physician enterprise

• Interim management ideal for driving meaningful improvement efforts

• Deep-dive assessment to identify and quantify improvement opportunities

• Executive recruiting for the physician enterprise

Practice Performance Improvement

• Experts in patient flow, revenue cycle, and IT

• Patient experience improvement through patient and provider satisfaction surveys

• Financial data consolidation, reporting, and benchmarking

• Start-to-finish physician compensation redesign

Mergers & Acquisitions

• Thorough pre-acquisition due diligence

• Negotiating deal terms to reach a definitive agreement

• Post-transaction transition assistance

Value-Based Care Programs

• Clinical integration and accountable care

• Patient-centered medical homes

• Clinical transformation

• Bundled payments

• Co-management

Medical Staff Planning

• Strategic community/ physician needs assessment

• Determining fair market value and reasonableness of compensation

• Recruitment policies for a high-performing medical staff

Hospital Performance Management

• Subject matter experts in clinical operations, strategy, and financial improvement

• Achieving required margins at government rates

• Coordination of care across the continuum

• Capacity optimization

• Navigating strategic imperatives

For more information on Southwind, please visit us at advisory.com/Southwind.

http://www.advisory.com/Experts/Randy-Gott

http://www.advisory.com/Southwind


Exhibit A: Medical Directorship Time Log

Name of Physician: __________________

Dates of Service: to

Date of Service Description of Services Provided (in detail) Hours

Total Hours:

I, _________________, certify that the above listed times for services provided are true and accurate.

__________________________________________________________

Signature of Physician Date

__________________________________________________________

Signature of _______________ Date

Documents

Analyzing compensation-at-fair-market-value