As a result of the current economic and regulatory environment, physician-hospital integration is on the rise, particularly physician recruitment and employment by hospitals. Given the numerous pitfalls associated with hospital-physician financial relationships, it is imperative that any compensation arrangement complies with the federal physician self-referral statute (commonly referred to as the Stark law).
One of the most well-know requirements of the Stark law is that the remuneration between a hospital and physician reflect fair market value. The use (or misuse) of compensation survey data, descriptions commonly used physician employment compensation models, and the use of the rebuttable presumption for establishing and maintaining fair market value for all physician-hospital compensation arrangements are all points that must be addresses.
Common Physician Compensation Survey Misconceptions
Physician compensation surveys are one useful tool for establishing fair market value physician compensation. However, the user of survey data must take care to avoid some common misconceptions often encountered regarding the use of various survey data benchmarks. While not an exhaustive list, the following addresses some of the more common misconceptions found in the marketplace.
“Anything below median (or 75th) percentile is FMV”
This statement is not possible from a statistical standpoint. Median, or 50th percentile, means that half of the respondents to a survey are above that point, while half are below. Thus, the physician paid at the median level is paid more than half of the responding physicians. The argument is even more difficult to support when using the upper quartile.
“If I produce at the 90th percentile, my compensation per WRVU (Work Relative Value Unit) incentive rate should be at the 90th percentile compensation per WRVU.”
The 90th percentile level of production is a level of productivity, while the 90th percentile compensation per WRVU is a ratio. Multiplying 90th percentile production by a 90th percentile ratio results in an exponential (and erroneous) increase to compensation. For example, multiplying the MGMA family practice southern region 90th percentile WRVUs of 7,521 by the 90th percentile compensation per WRVU of $61.84 results in compensation of $465,099; however, the 90th percentile compensation is $336,883, a difference of $128,216 or over 38 percent!
“Since I’m a high producer and have already covered my fixed overhead, I should be paid more per WRVU than a low producer.”
Survey data actually shows high producers generally earn less per WRVU than low producers. Higher WRVUs are generally a function of low production and high fixed compensation. MGMA compensation-per-WRVU plotters actually graphically support these phenomena.
“Employed physicians can be paid the same for taking ED call as physicians in private practice.”
On-call arrangements comprise payment for both availability and reimbursement for uncompensated care. When physicians in private practice cover ED call, they are often subjected to both, as they are generally uncompensated or under-compensated for ED visits and follow-up care. Employed physicians paid on salaries or based on encounters or WRVUs do not suffer the effects of uncompensated care and are therefore not subjected to the same level of burden as private practice physicians.
Physician Employment Compensation Models
As part of its development of a physician employment program, a hospital should establish a physician compensation model that can be used for compensating physician employees. One of the most common models used today is a model based on WRVUs. While other models exist and can be more appropriate in some situations, specialties or markets, WRVUs are often considered the market “best practice” for most physician compensation models. It is generally recommended that at least some portion (20-40 percent, for example) of overall compensation be left “at risk” (i.e., not guaranteed). Most compensation models consist of the following:
Base Compensation – base compensation represents an amount of guaranteed fixed compensation, not affected by physician productivity. Depending on the facts and circumstances, guaranteed base compensation may be offered during each year of the contract term, the first year of the term, for only certain, generally initial, years of the contract term, or not at all.
Production Incentive Compensation – production incentive compensation describes the method whereby incentive compensation based on WRVUs (or other appropriate conversion factor) is calculated. Usually a threshold is established (often once base compensation is reached) whereby incentive compensation begins to be earned.
Establishing a Rebuttable Presumption
Section 4958 of the Internal Revenue Code prohibits officers, directors, trustees and other persons (including physicians) exercising influence, described as “disqualified persons”, over a tax-exempt health care organization (TEHCO) from receiving “excess benefit” (i.e., private inurement) from the TEHCO. Having an approval process for setting a disqualified person’s compensation helps support the reasonableness of compensation. As such, Regulations 53.4958-6(a) through (c) provide a “rebuttable presumption” that a compensation arrangement with a disqualified person is reasonable, if the following three factors are present:
1. The compensation arrangement is approved in advance by an authorized body of the tax-exempt organization (e.g., by a board of directors or trustees or a special committee) composed entirely of individuals not having a conflict of interest with respect to the compensation arrangement (e.g., they will not personally benefit from a transaction or are not subordinates of the subject disqualified person).
2. The authorized body obtained and relied upon appropriate data as to the comparability prior to making a decision regarding compensation (comparable data may be based on industry surveys, documented compensation of persons holding similar positions in similar organizations, compensation valuations prepared by an independent consultant, or other comparable data).
3. The authorized body adequately documented the basis for its determination concurrently with making the decision regarding compensation.
Maintaining a checklist documenting that the hospital has performed the necessary procedures to establish compensation for each physician employment arrangement is an excellent means of confirming a rebuttable presumption. The checklist should be used as part of each contract negotiation and maintained within each individual physician’s employment file as permanent documentation as to the reasonableness of the physician’s compensation.
Rud Blumentritt, CPA/ABV, CVA, is a partner at HORNE LLP and works from the firm’s Baton Rouge, La., office. His primary focus is the valuation of health care entities and health care transactions and provides a variety of fair market value consulting services to health care systems, attorneys and physician groups. HORNE is ranked as a Top 5 firm on the Gulf Coast by Accounting Today and a top 100 firm in the nation.