1

MANAGING COMPENSATION

IN EMPLOYED PHYSICIAN

GROUPS Jeff Moffatt, CPA/ABV/CITP, CVA

Manager – Healthcare Valuation and Strategy

One American Square, Suite 2200

Indianapolis, IN 46282

317.275.7405

jmoffatt@blueandco.com

2

Disclaimer

This presentation has been designed to provide illustrative information with respect to

the subject matter covered. The presentation itself, and views expressed within, do not

establish standards or authoritative guidance within the practice area, nor do they

represent the professional opinions or positions that the presenters would take in an

actual assignment. The material was prepared by the presenters and has not been

considered or acted upon by regulatory or technical committees within the industry and

does not represent an official opinion of any such group or individual. It is provided with

the understanding that the presenters have prepared such material for educational

purposes and such presenters are not engaged in rendering any legal, accounting, or

other professional service.

Further, the views presented within this presentation are fact/circumstance sensitive,

and are subject to different interpretation under various circumstances. If legal advice or

other expert assistance is required, the services of a competent professional person

should be sought. The presenters make no representations, warranties, or guarantees

about, and assume no responsibility for, the content or application of the material

contained herein and expressly disclaim all liability for any damages arising out of the

use of, reference to, or reliance on such material.

3

Initiatives Most Influential in Physician

Compensation Structure

Karen Minich-Pourshadi. “Physician Compensation: Shifting Incentives.” HealthLeaders Intelligence, HealthLeaders Media, October 2011.

4

Setting Physician Compensation

DELIVERY SYSTEM

REIMBURSEMENT

METHODOLOGY

5

Federal Regulations and Guidelines

• Stark law

• Physician referrals under Medicare and Medicaid

• Anti-kickback statute

• Payment for referrals

• Anyone engaging in business with a federal

healthcare program

• Civil monetary penalties

6

Two “Standards” of Value

Commercially Reasonable

Hypothetical willing buyer and

willing seller

Price current in any recognized

market at the time of the transaction

Conforms to common

practices for dealers in the

type of asset/agreement

Fair Market Value

7

Commercially Reasonable…

8

Commercially Reasonable – Stark

• In the usual manner on any recognized market;

• At the price current in any recognized market at the

time of the transaction; or

• Otherwise in conformity with reasonable commercial

practices among dealers in the type of

asset/agreement/service, etc. that was the subject of

the transaction.

9

Factors to Consider

• Practice staff • Medical specialty

• Skill set

• Performance

• Years in practice

• Practice location • Geographic location

• Metropolitan versus rural

• Market conditions • Competitive environment

• Under served area

• Saturated

10

Example: Benchmarking

Compensation – Family Practitioner

Example physician data

• Solo family practitioner

• In practice for 35 years

• Consistent annual revenues of approximately $500,000

• Historical owner’s compensation between $150,000 and $180,000

Survey says…

11

Sources Of Benchmark Data: The

Usual Suspects…

Salary.com

“Salary.com is a leading

provider of on-demand human

resources software that helps

businesses and individuals

manage pay and performance.”

www.salary.com/aboutus/Facts.asp

12

Healthcare Industry Benchmark Data

Medical Group Management

Association (MGMA)

MGMA surveys have been recognized both within the healthcare industry and by the federal government as one of the acceptable resources to be used in determining the fair market value of physician compensation and are frequently used to benchmark healthcare organizations operational performance.

13

Healthcare Industry Benchmark Data

Sullivan, Cotter and

Associates

(Sullivan)

Sullivan also publishes survey

data summarizing physician

compensation and production

information and is an

additional authoritative source

of healthcare industry

benchmark data.

14

Healthcare Industry Benchmark Data

American Medical Group Association

(AMGA)

The American Medical Group Association (AMGA) represents medical groups and organized systems of care, providing research, benchmarking and other advocacy services. The AMGA publishes various reports and surveys that allow medical groups to benchmark their performance against other groups on both a national and regional level.

15

Healthcare Industry Benchmark Data

Hospital and Healthcare

Compensation Service (HHCS)

Hospital & Healthcare Compensation

Service (HHCS) specializes in

healthcare salary and benefits

research. As a publisher of annual

salary & benefits reports, HHCS

conducts an extensive program of

ongoing compensation research in

areas of healthcare such as

hospitals, physician practices,

nursing homes, etc.

16

Healthcare Industry Benchmark Data

Other medical specialty groups

• American Academy of Family Practitioners

• American College of Cardiology

• American Academy of Orthopedic Surgeons

Other industry associations

• American Medical Association

• MGMA state chapters

• Healthcare Finance Management Association (HFMA)

17

Historical Physician Compensation

• Good starting point for what the market will support

• Adjusted to match compensation as defined by

benchmark source

• Per instructions to the MGMA survey questionnaire: • Total compensation: State the amount reported as direct compensation on a

W2, 1099, or K1 (for partnerships) plus all voluntary salary reductions such as

401(k), 403(b), Section 125 Tax Savings Plan, and Medical Savings Plan. The

amount reported should include salary, bonus and/or incentive payments,

research stipends, honoraria, and distribution of profits.

• Do not include: The dollar value of expense reimbursements, fringe benefits

paid by the medical practice such as retirement plan contributions, life and

health insurance, automobile allowances, or any employer contributions to a

401(k), 403(b), or Keogh Plan.

18

Primary Considerations

Setting physician compensation is a benchmarking exercise

• Historical compensation

• Productivity

• Charges

• Collections for professional charges

• wRVUs

Other forms of compensation

• Medical directorship

• On-call pay

• Ancillary income

• Ambulatory Surgery Center (ASC), imaging, etc.

Potential employment arrangements must be considered in

compensation projections

• Fair market value requirement

• Test for “commercial reasonableness”

19

Example: Benchmarking Compensation –

Family Practitioner

Example physician data

• Solo family practitioner

• In practice for 35 years

• Consistent annual revenues of approximately $500,000

• Historical compensation between $150,000 and $180,000

Benchmark compensation data

Initial conclusion Physician compensation set based upon the average of the median data,

$180,000…but we need to take a longer look at this.

20

Volume and Complexity of Services

Provided

• Higher volumes = greater production

• Measured using the Centers for Medicare and Medicaid Services (CMS) Resource Based Relative Value Scale (RBRVS)

• Unit of measure = Relative Value Units (RVUs)

• Removes effects that payor contracts, payor mix, accounts receivable management, bad debt, etc. have on collections

• Allows apples-to-apples comparison

of productivity

• Complex services receive a greater

weight

21

Current Procedural Terminology (CPT)

Codes

• Issued by the American Medical Association • Subset of the Healthcare Common Procedural Coding System

(HCPCS)

• Referred to as HCPCS Level I

• Five digit codes • Two character modifiers

• Grouped by type • Medicine = 9xxxx

• Surgery = 1xxxx-6xxxx

• Radiology = 7xxxx

• Subject to change

22

Billing / CPT Code Utilization Reports

• Often generated by a

medical billing system

• May be produced

through a component

of an Electronic

Medical Records

(EMR) system

23

Relative Value Units (RVUs)

• Primarily used as a

component of the

Medicare reimbursement

formula

• Assigned by CMS

• Also used as a proxy for

determining physician

productivity

24

• Malpractice Relative Value Unit (mpRVU)

• Practice Expense Relative Value Unit (peRVU)

• Work Relative Value Unit (wRVU)

• Designed to reflect the work effort and intensity required of the

physician in providing the service

Relative Value Unit Components

25

Obtain CPT code reports on a per

physician basis

• Annual summary

• Consider looking at multiple years

• Apply PFS data to CPT code

summary

• Total results

Calculating wRVUs

26

Example: Benchmarking Compensation –

Family Practitioner

Example physician data

• Solo family practitioner

• In practice for 35 years

• Consistent annual revenues of approximately $500,000

• Historical physician compensation between $150,000 and $180,000

• Annual Work Relative Units production of approximately 6,500

27

Sample Annual wRVU Totals by Specialty

• Cardiology (non-invasive)

• 6,000 – 9,000

• Orthopedic surgery

• 7,000 – 10,000

• Family practice

• 4,000 – 5,000

• Gastroenterology

• 6,000 – 9,000

• General surgery

• 5,000 – 8,000

28

Coding and Documentation

Review of documentation of

medical services

• Evaluation of services provided

• Determines completeness of

billing for services provided

• Have all services provided

been billed for?

• Is documentation adequate

to bill for services?

• Requires specialized

knowledge

• Performed by a Certified

Professional Coder (CPC)

or similar

29

Based upon national Medicare data

• Evaluation and management codes

• New patient codes: 99201-99205

• Established patient codes: 99211-99215

• Consultation codes

• Discontinued by CMS January 1, 2010

• 99241-99245

• 99251-99255

Bell curve

• Source of bell curve data

• MGMA

• CMS

• Results of benchmarking

• Over-coding

• Under-coding

• Severity dependent

Benchmarking Coding Patterns

30

Example: Coding – Family Practice

31

Example: Coding – Family Practice

32

Example: Coding – Family Practice

33

OIG E&M Coding Study

34

OIG E&M Coding Study

35

Example: Benchmarking Compensation –

Family Practitioner

Conclusion

• Production seems to have outpaced compensation

• Historical compensation sets a precedent for benchmarked compensation

• Physician compensation set at $200,000

36

“Physician Alignment: Integration Over Independence”,

Health Leaders Media, September 2012

37

• Productivity based

• Gross charges

• Net receipts

• Work Relative Value Units (wRVUs)

• Management of bottom

line

• Staff management

• Operational management

• Financial management

• Quality

• Patient satisfaction scores

• On-time starts

• Turn-around time

Physician Compensation Modeling

Productivity Based Compensation

• $34 per wRVU

• 40% of net receipts

• 25% of gross charges

Practice Management

• +/- 10% of practice operating budget

• Sharing of net profit of practice profits/loss

• > 95% outstanding patient satisfaction

• > 90% first patient seen on time Quality

Incentive Alignment

38

Incentive Baseline Target Weight $ @ Risk Earn Contribution

Quality of Care 20% $20,000

01. Measure A TBD TBD 10% $10,000 50% $5,000

02. Measure B TBD TBD 10% $10,000 50% $5,000

Operational Efficiency 20% $20,000

03. Measure C TBD TBD 10% $10,000 50% $5,000

04. Measure D TBD TBD 10% $10,000 50% $5,000

Market Expansion 20% $20,000

05. Measure E TBD TBD 10% $10,000 50% $5,000

06. Measure F TBD TBD 10% $10,000 50% $5,000

Financial Performance 20% $20,000

07. Measure G TBD TBD 10% $10,000 50% $5,000

08. Measure H TBD TBD 10% $10,000 50% $5,000

Alignment 20% $20,000

09. Measure I TBD TBD 10% $10,000 50% $5,000

10. Measure J TBD TBD 10% $10,000 50% $5,000

Total 100% $100,000 50% $50,000

Incentive Pool and Payments Example

39

Summary

• Stark and AKS

• Commercial reasonableness

• Physician benchmarking

• Ancillary services

• Non-production based compensation