Four Myths That Can Adversely Affect Physician Compensation

August 5, 2011

Hospital/physician employment transactions are tough enough without having to deal with employment compensation "myths" ... Here is how to identify and overcome these myths.

Hospital/physician employment transactions are tough enough without having to deal with employment compensation "myths." Sadly, four common myths await the unwary and can cause a physician to receive less than fair market value (“FMV”) compensation. Here is how to identify and overcome these myths.

MYTH #1:A Physician Should Not Receive “Too Much” of an Increase in Compensation

Practitioners sometimes suggest that it is “risky” for a physician’s projected employment compensation to result in “too much” of an increase over that physician’s private practice compensation. There is no economic or regulatory basis for this assertion.

The process to determine FMV compensation for physician services does not involve the historical economics of any particular physician’s practice. FMV means the most likely rate of exchange between a hypothetical physician and a hypothetical employer. The FMV for competent physician services is the same whether a potential hire has just completed residency, worked in an unprofitable practice, or made twice the FMV compensation.

The Stark Law requirement that a physician employment arrangement must be “commercially reasonable” also does not involve any consideration of the change in compensation. In general, an arrangement is commercially reasonable if the employer requires the type of services of the physician to be hired. Commercial reasonableness does not involve/require the virtually impossible analysis of whether the employer could potentially pay less-than-FMV compensation to a specific potential hire.

An employer may lawfully pay physician compensation within the range of FMV - regardless of how that compensation level might be deemed to “compare” with the physician’s prior private practice compensation.

MYTH #2:Physician Compensation Must be “Adjusted” Based on Historical Practice Factors

Some appraisers incorrectly use a physician’s historical practice information to determine FMV productivity-based clinical compensation for that physician. These appraisers (correctly) use survey data to determine a range of FMV per-wRVU (work relative value unit) compensation but, for some reason, they then incorrectly “adjust” that range based on the particular physician’s relative historical productivity or collections.

This adjustment violates the valuation principle that requires appraisers to consider an exchange between hypothetical participants. The adjustment also simply does not make sense because there is no reason to contend that the payor mix, reimbursement rates, billing and collection methods, and other matters that affect a physician’s current net collections will continue or, in any event, would somehow affect the compensation rate the physician would require/accept from a different employer.

MYTH #3:Per-wRVU Compensation Pays in Part for “Lost” Ancillary Income

Some say that physicians considering employment should not worry about losing ancillary income (or not being paid full value for ancillary assets) because the lost ancillary income will be “included” in their employment compensation. Not true.

Each dollar of physician employment compensation must relate to identifiable services. There are several methods to measure and value the types of services physicians perform. None of those methods, however, seeks to replace “lost” ancillary income.

The lawful method for physicians to receive compensation for the “loss” of ancillary services is to receive a FMV price to sell the ancillary service assets.

MYTH #4:All Physician Employment Compensation Must be Tested by Per-wRVU Data

Some practitioners determine what they call an “effective per-wRVU rate” by aggregating all sources of physician employment compensation and dividing by the number of that physician’s wRVUs. These practitioners assert that medical director fees, quality bonus compensation, outreach compensation, etc., must be added to clinical compensation and then divided to obtain the “effective rate.” These practitioners then typically assert that the “overall compensation” is FMV only if this “effective per-wRVU rate” is less than a certain percentile (e.g., the 75th or 90th percentile) for per-wRVU compensation from applicable survey data.

Per-wRVU compensation survey data is useful solely to determine FMV compensation for clinical services. An applicable hourly rate, etc. is the method to determine FMV compensation for additional services. Dividing compensation for services that do not generate wRVUs by a physician’s wRVUs provides no relevant data point.

A physician considering employment should identify each type of service in the employment agreement and ensure that the proper method is applied to determine FMV compensation for that service.

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