The Right Stuff: Physician

The Right Stuff:Physician Compensation FMVand How to Control It

Presented by: Tammy R. Walsh

• “I’ve never seen a compensation plan quite like that one. . .”

• “Wow, that proposed compensation is off the charts!! I sure hope the doctor’s production is too.”

• “Hmmmm, we might have to get creative with our analysis to fit that quality compensation into a FMV range.”

• “We did that back in the 1990’s and can do it again.”

• “Sure, I can give a commercial reasonableness opinion, too, it’s the same as FMV.”

• “So, you want to pay $2000/day for call coverage because that is what the doctors said their colleagues made in another state?”

• “Well, it doesn’t really matter, all compensation is the same.”

• “You told them you would pay them what they are making in their practice today.”

Have you ever heard any of these?

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Discussion Agenda

• Compensation Law Overview

• Classification Issues

• Employed Medical Staff

• On-Call Coverage

• Managing FMV Risk

• Call to Action

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IRS Definition of Fair Market Value

• Defining factors of fair market value (FMV)• IRS Revenue Ruling 59-60 (1959)

o “The price at which the property would change hands between a willing buyer & a willing seller when the former is not under any compulsion to buy & the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts”

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Stark Definition of FMV

• Defining factors of fair market value (FMV)• Stark regulations

o “The fair market price is the price at which bona fide sales have been consummated for assets of like type, quality & quantity in a particular market at the time of acquisition” (420 CFR 411.351)

o “The methodology must exclude valuations where the parties to the transactions are at arm’s length but in a position to refer to one another” (69 F.R. 16053)

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Establishing FMV

1. Determine and Document FMV Requirements, including Jurisdictional Exceptions (per policies & procedures)

2. Identify Parties to Agreement3. Document Purpose of Arrangement4. Identify Method of Compensation5. Consider and Select Valuation Methodology6. Evaluate Transaction from the Perspective of Each Party7. Reconcile FMV Findings8. Provide Conclusion of FMV Range of Compensation

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Scrutinizing a FMV Analysis

• As a compliance rule, compensation should be commensurate with work effort for the type and scope of work to be performed.

• Key regulatory tenets of physician compensation include:• Stacking: a physician can only be paid for one thing at a time• Existence: payments must only be for work actually performed• Necessary: the work performed must be a needed service or

otherwise rational in light of the organization’s mission, etc.• One-Person Test: the sum payments for each individual service

need to be reasonable when considering all in aggregate • Commercially Reasonable: the business arrangement makes

sense in the absence of a referral relationship, including consideration of partner selection & business rationale

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Physician Compensation Issues

• Potential Problem Areas:• Paying “full-time” compensation for part-time work• Paying compensation in excess of what physician

made in private practice• Providing excessive non-cash benefits – parking,

meals, internet for private use, below-market rent, etc.• Paying for on-call and/or medical director services

when no services are expected and/or provided• Paying compensation that results in a loss to the

hospital/system

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Other Key Contract Provisions

• Required qualifications

• Exact services to be provided

• Exact time commitment

• Location of services

• Term and Termination Rights

• Insurance and Indemnification

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Employed Medical Staff Members

• Employment contract needs to address:• Effect of termination of employment on medical staff

membership• Effect of termination of medical staff

membership/clinical privileges on employment

• Key considerations:• Specialty of physician• Reasons for termination• Needs of hospital/system

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Physician On-Call Coverage• Any arrangement should comply with OIG Advisory

Opinions 07-10, 09-05 and 12-15 to the maximum extent possible

• Compensation paid must be consistent with fair market value and commercially reasonable

• Must have written agreement if payment is to a physician classified as an independent contractor

• Can’t pay for on-call coverage otherwise required by the Medical Staff Bylaws

• Selection of on-call participants can’t be based upon the actual or anticipated referral of business

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Commercial Reasonableness

• Defining factors of commercial reasonableness (CR)• CMS

o “An arrangement will be considered ‘commercially reasonable’ in the absence of referrals if the arrangement would make commercial sense if entered into by a reasonable entity of similar type & size & a reasonable physician of similar scope & specialty, even if there were no potential designated health services referrals”

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• Defining factors of commercial reasonableness (CR)• Office of Inspector General

o “In order to meet the threshold of commercial reasonableness, compensation arrangements with physicians should be ‘reasonable & necessary’”

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Methodology

• Partner Selection

• Business Rationale

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Partner Selection

• What is historical relationship between parties & the current state?

o What is the proposed contract arrangement?

• Do services require a physician &, if so, is a certain specialty needed?

• Does other training, education or experience need to be considered?

• Are any of services already covered by existing arrangements?• For current arrangements, are services provided at appropriate

scope & amount?

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Partner Selection

• Is provider available for all required duties?• Is provider willing to perform required duties?

o Provide history of provider’s commitment to provide quality care

• What credentials are required to provide services to facility(s)?

• What qualifications does provider bring as a partner & how does this make partner capable of performing duties of arrangement?

• Do any impactful contractual restrictions exist, e.g., noncompete?

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Business Rationale

• Are services clearly outlined & defined?• Are services necessary to buyer or required by

regulations?• What is scope & time requirements of services &

are they reasonable?• Do services further strategic purpose of buyer?

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Business Rationale

• Have alternative arrangements with other parties been considered that may be able to deliver contemplated services?o Are there existing capabilities that can be used in lieu of

proposed arrangement?o Can existing managerial efforts cover services of

arrangement?• Are services profitable, without consideration of value of

referrals?• Do services meet specific, identified community need?• What is overall financial impact of arrangement &

services provided?

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Examples that MAY NOT be CR

• Two medical directors over a department when only one is needed.

• Paying the physician for questionable consulting services.

• Renting a piece of equipment full-time when only used once a month (assuming rental for one day is less than full-time rental).

• Purchase of physician’s medical office building with no intention to use building.

• Large net losses to the hospital.

• Rate may be FMV, but fail CR test.19

So what’s the difference?

Fair Market Value Commercial Reasonableness

Community Need

Supply & Demand

Value for Services

Value for Services to Organization

Opportunity Cost

Financial Cost

Strategic Fit

Parties (Hypothetical)

Parties (Specific)

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Commercial Reasonableness vs FMV

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Why Benchmarking Works

Specifics

• Rural Hospital in West Texas

• 25 beds

• Employs providers for 3 clinics

• Call coverage

• Only provider in town

• 2 of 3 clinics has RHC status

• Outsources Physician Employment Services

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Provider Name Specialty Historical Level Historical Percentile Ranking

25th Percentile Median 75th Percentile 90th Percentile

Isaac Sosa, M.D. Internal Medicine: General 255,667 51P 208,401 252,456 317,556 427,915 Cheryl Rabe, FNP NP: Family Medicine (without OB) 147,003 99P 90,582 101,125 115,322 135,465 Andrea Barrett, M.D. Orthopedic Surgery: General 607,000 58P 450,578 556,279 716,637 950,251 Jack Conoley, M.D. Orthopedic Surgery: General 657,000 66P 450,578 556,279 716,637 950,251 Sandra Boenig, D.O. Surgery: General 622,000 87P 322,072 401,583 513,832 644,946 James Kelly, M.D. Family Medicine (without OB) 174,090 22P 199,004 238,175 304,810 389,164

Market Data

Compensation

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Isaac Sosa, M.D. Internal Medicine: General 3,509 22P 3,958 5,053 6,244 7,731 Cheryl Rabe, FNP NP: Family Medicine (without OB) 6,562 121P 2,681 3,465 4,275 5,022 Andrea Barrett, M.D. Orthopedic Surgery: General 5,617 21P 6,596 8,772 11,202 13,939 Jack Conoley, M.D. Orthopedic Surgery: General 8,736 50P 6,596 8,772 11,202 13,939 Sandra Boenig, D.O. Surgery: General 6,911 44P 5,288 7,392 9,730 11,957 James Kelly, M.D. Family Medicine (without OB) 1,747 11P 4,143 5,112 6,202 7,520

Market Data

Productivity

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Isaac Sosa, M.D. Internal Medicine: General 249,157 20P 308,763 407,439 533,638 668,065 Cheryl Rabe, FNP NP: Family Medicine (without OB) 499,473 109P 161,347 230,317 301,204 389,940 Andrea Barrett, M.D. Orthopedic Surgery: General 327,506 17P 473,695 635,817 798,045 1,032,755 Jack Conoley, M.D. Orthopedic Surgery: General 590,538 43P 473,695 635,817 798,045 1,032,755 Sandra Boenig, D.O. Surgery: General 351,039 28P 331,901 486,941 628,573 820,365 James Kelly, M.D. Family Medicine (without OB) 29,201 2P 316,703 411,779 531,911 677,746

Market Data (1)

Collections

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Provider Name Specialty Historical Level

Historical Percentile Ranking


Isaac Sosa, M.D. Internal Medicine: General 72.86$ 91P 44$ 51$ 61$ 72$ Cheryl Rabe, FNP NP: Family Medicine (without OB) 22.40$ 22P 25 29 37 51 Andrea Barrett, M.D. Orthopedic Surgery: General 108.07$ 107P 58 68 80 93 Jack Conoley, M.D. Orthopedic Surgery: General 75.20$ 65P 58 68 80 93 Sandra Boenig, D.O. Surgery: General 90.00$ 96P 47 57 68 84 James Kelly, M.D. Family Medicine (without OB) 99.64$ 135P 41 47 56 67

Market Data

Comp/wRVU

Comparison

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Provider Name Specialty Collections Ranking

wRVU Ranking Compensation Ranking

Compensation to Collection Variant

Over 15PP

Compensation to Work RVU Variant Over 15PP

Isaac Sosa, M.D. Internal Medicine: General 20P 22P 51P YES YESCheryl Rabe, FNP NP: Family Medicine (without OB) 109P 121P 99P NO YESAndrea Barrett, M.D. Orthopedic Surgery: General 17P 21P 58P YES YESJack Conoley, M.D. Orthopedic Surgery: General 43P 50P 66P YES YESSandra Boenig, D.O. Surgery: General 28P 44P 87P YES YESJames Kelly, M.D. Family Medicine (without OB) 2P 11P 22P YES NO

NO

NO

Common Mistakes

• Including mid-level provider productivity

• Benchmarking total RVUs to reporting wRVUs

• Benchmarking total collections to reporting professional collections

• Inverse relationship exists between wRVU volume and compensation per wRVU

• Paying a highly productive physician the 75th or 90th

percentile compensation per wRVU may result in compensation outside of FMV

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Let’s see an example . . .

MGMA Physician Compensation and Production Survey

Compensation per Work RVU25th Median 75th 90th

Compensation per work RVU - General Surgery $47 $57 $68 $84Times: Physician's Annual Work RVU Volume (equal to MGMA 90th) 11,957 Equals: Annual Physician Compensation $1,004,388

Physician Compensation25th Median 75th 90th

Total Compensation - General Surgery $322,072 $401,583 $513,832 $644,946 Annual Physician Compensation is more than 155% of 90th percentile!!! $1,004,388

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• Solo practitioner – General Surgery

• No in-office ancillaries or mid-level providers

• Hospital employer proposed MGMA 90th percentile compensation per work RVU

• Annual work RVU should be at 90th which is 11,957

Overall Summary of Concerns

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• Productivity incentives are not based on median thresholds

• Average productivity warrants average compensation

• Stacking – do total dollars and hours make sense (call pay days in a year)

• Double counting wRVUs when on call for the incentive bonus – compensating twice

• Contract organization was making decisions without authority or sign off by the leadership of the organization

• Bonus structure for “chart completion”

• NO contract for outside organization, 3.5% applied to every dollar (call, bonus, malpractice, etc)

What is different for APPs?

• Not a thing . . .

• FMV and CR regulations apply to all Providers

• Benchmarking available

• Utilize survey data for total compensation to be equitable and sustainable

• Mirror your physician contracts

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Managing FMV Risk

Risk? What Risk? Nothing to See Here

• Common self-assessments of risk regarding physician contract relationships:• “We get an FMV opinion for all compensation over

the 75th percentile, we’ve got it covered.”• “We have a contract management system that

keeps us on track.”• “We’re too small to carry much risk, we’ve only got

12 employed physicians.”• “We engaged the best attorneys.”

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Debunking Compliance Myths - #1

• Ordering a FMV Study for compensation in excess of the 75th

percentile is an effective risk management tool.

• Don’t Be Too Sure• Ex 1: 8th year PCP: Compensation @ 70th percentile,

productivity @ 20th percentile [disproportionality]• Ex 2: 8th year PCP: Compensation @ 70th percentile of MGMA

compensation productivity @ 70th percentile. Also receives a $30,000 medical directorship. Also receives a $30,000 for mid-level supervision. Also paid $500 per night for ER coverage. [aggregate/stacked compensation]

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• Utilization of a contract management system effectively manages physician contract compliance.

• Don’t Be Too Sure• A well-utilized contract management system is an important component

of a risk management strategy, not a substitute for one.• A contract management program:

• Cannot verify completeness• Cannot verify existence/occurrence of events with contractual

significance.• Cannot test accuracy with respect to attribution, valuation, or

allocation.

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• Small size in terms of physician relationships means a small risk profile.

• Don’t Be Too Sure• Smaller facilities are often in situations where physicians can extract

extremely favorable deal terms due to supply/demand constraints. This actually increases risk, especially to the extent compensation is posted to a publicly available Form 990.

• Recent Settlements indicate no free pass for smaller facilities:• Memorial Hospital, Freemont, OH -$8.5M Settlement• Marion General Hospital, Marion, OH – $1.2M Settlement• Cayuga Medical Center, Cayuga, NY – $3.6M Settlement • Etc., Etc., Etc. – refer to DOJ’s Stark Self Disclosure Summary

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• Utilizing high quality legal counsel effectively manages compliance risk.

• Don’t Be Too Sure• Outside counsel has little to no role in quality control or assurance

regarding verification of data used in underlying transactions, such as:

• Verifying services are actually rendered

• Inputs for compensation calculations are accurately generated

• Calculations accurately reflect contract terms

• Outside counsel is not typically engaged to review risk from the current transactions to numerous other transactions over the past five years

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Tax Risks● Inurement● Reporting

Fair Market Value Risks● Aggregate Overpayments● Calculation Overpayments● Attribution Overpayments● Stacked Payments● Referral Payments● Payments from Ancillaries● Departure from Contract Terms● Incorrect Standard of Value

Physician FMV Risk Areas

• Employment Contracts• Joint Ventures• Loan Agreements• Guarantees• Professional Services Arrangements

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• Leased Employees• Co-Management Arrangements• Medical Directorships• On-Call Agreements• Rental Agreements

Specific Risk Areas:

FMV Risk – Avoiding Surprises

• Compensation plans cannot deliver on management’s nor provider expectations without a robust control environment to monitor the physician contracting & payment process.

• Due to the complex nature of physician contractual compensation, large payments are made based on “by-hand” calculations however, this isn’t where the biggest errors are usually found.

• Hospitals need a comprehensive policy control process related to physician compensation payments to maintain an appropriate control environment – the key to avoiding unpleasant surprises.

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FMV Risk - Policy & Control Procedures

• The policy control process (“PCP”) for physician compensation should give detailed consideration to:• Contract detail verification process• Productivity input process (e.g. verifying wRVU levels)• Work effort documentation procedures (shift, hourly time

& administrative input verification processes)• Quality & outcomes measures verification process• Compensation & bonus accuracy verification process• Financial reporting & accrual verification process

• The PCP should be tailored to fit each hospital’s risk profile

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Internal FMV Compliance – Valuation Methodology Memo

• The strongest internal FMV compliance approach is formal protocol for evaluating compensation terms aka an “internal valuation methodology memo”

• Based on standardized treatment of common deal terms, a uniform evaluation of FMV can be applied

• For arrangements that don’t fit the internal pricing model, the methodology will describe an exceptions protocol to trigger additional approval and/or outside review

• An entity-specific methodology & accompanying Excel-model to rapidly process evaluations can be tailored to fit the risk profile of the hospital

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• Compliance approach integrated with common oversight

• Routine risk assessments• Integration with Internal Audit

• System of policies and procedures

• Technical oversight on data elements

• Reconciliation to contract terms and other contract administration

• Data extraction and application

• Development and retention of documentation

• Operational approvals

• Continuous data analytics• Ongoing risk scoring

• Outside opinions• Stacking analysis• Compensation committee• Rebuttable presumption of

reason

• Reference surveys• Market data benchmarking

• Formal approach:Documenting specific policy, standards and approvals

• Multi-disciplinary deal assessment and documentation

(Compliance and Legal departments)

• Operation and business development deal assessment

Internal Controls

Fair Market Value


Skills

/ C

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sRisk Management – Internal Skillsets

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Call to Action

Steps to Enhancing Physician Arrangement Compliance – Board Level

• Establish standards and procedures for all physician transactions

• Keep a catalogue of all physician transactions to include contract and consideration of fair market value / commercial reasonableness

• Regularly assess each arrangement for risk

• Create an internal auditing and monitoring program

• Regular oversight of physician compensation calculations

• Choose a frequency to review all physician contracts based on risk profile of each

• Periodically assess the effectiveness of the compliance program

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• Appropriate oversight and approvals (Operations)

• Adherence to contract terms and verification of the same (Finance)

• Processes for timely contract renewals (HR/legal)

• Compensation / fee setting processes and related management approvals (Finance)

• Verification and periodic testing of WRVU calculations and other productivity inputs to calculation models (Finance / Internal Audit)

Management’s FMV Risk Management Internal Controls Objectives (1/2)

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• Restrictions and close review of credit for designated ancillary services in compensation arrangements (Compliance / Finance)

• Reconciliation and review of allocations of productivity credit regarding mid-level providers services (Operations)

• Use of internal valuation methodology memos to consistently establish and approve FMV (Compliance / Finance)

Management’s FMV Risk Management Internal Controls Objectives (2/2)

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Sound familiar?

Questions?

Thank You!Tammy R. Walsh

(469) [email protected]

Documents

The Right Stuff: Physician