4 Common Mistakes in Determining Fair Market Value for Physician Compensation

4 Common Mistakes in Determining Fair Market Value for Physician Compensation
Written by Jonathan Helm, AVA, Manager, VMG Health
Becker’s Hospital Review, September 14, 2011

The following article is written by Jonathan Helm, AVA, manager for VMG Health.

 

Industry regulations require healthcare organizations to pay fair market value (FMV) compensation to physicians for their services.[1] Due to the lack of a published set of standards that define a process to establish FMV for physician compensation, misconceptions of what determines and substantiates FMV are common in the market. The following provides a list of four common mistakes that VMG Health, a healthcare valuation firm and my company, has observed.

 

1. 90th percentile of survey data cannot be FMV. Conservative physician employers may cap total compensation paid through an employment agreement at the 90th percentile of reported survey data. This, however, does not mean that physician compensation at or in excess of the 90th percentile cannot be FMV. Metrics such as services provided, experience, total hours worked and production levels must be collectively considered. If a physician’s hours and/or productivity are in excess of the 90th percentile of reported data, it may be reasonable and within FMV to pay compensation levels above the 90th percentile.

 

2. Relying on median survey data to establish FMV. Median compensation indicates that one-half of the respondents earned less than this rate. With this in mind, it may not be appropriate to rely on compensation at the median as a basis for FMV unless factors are present that support paying the physician a median rate. For example, if a physician is unproductive, has a higher than average expense profile or works less than 40 hours per week, the median may not technically be FMV. This logic is magnified if the 75th percentile is selected as a sole basis for FMV. Some factors to consider when choosing a FMV compensation percentile include productivity (i.e., charges, professional collections, work RVUs, encounters), payor mix, practice overhead, historical compensation, experience and hours worked.

 

3. Misapplying reported compensation per work RVU data. Productivity-based compensation models based on a dollar per work RVU are prevalent in the market. Often employers assume that if a physician’s work RVU volume falls at a certain percentile, then the compensation per work RVU should be consistent with that percentile. This can easily turn into a total compensation payment that is well outside of a FMV range. For example, assume an employed electrophysiologist generates 21,330 work RVUs annually (MGMA 90th percentile[2]) and is paid $64.12 per work RVU (MGMA 90th percentile). This results in annual compensation paid of $1.37 million, which is 62 percent greater than the reported MGMA 90th percentile compensation for electrophysiologists ($844,141). The issue is clear: The physician in this example would be earning much more than the 90th percentile for productivity that is only consistent with the 90th percentile.


4. Relying on one survey establishes FMV. Physician employers may develop an internal compensation plan that relies solely on one published survey. It is important to note there is regulatory guidance suggesting other sources should also be considered. Specifically, Stark law recommends that multiple, objective surveys are considered when determining the FMV of physician compensation:

“Reference to multiple, objective, independently published salary surveys remains a prudent practice for evaluating fair market value.” [3]


Based on this guidance, the sole reliance on one survey alone may be scrutinized by healthcare regulators and may not provide sufficient support to determine FMV.

 

Jonathan Helm is a manager in professional service agreements division of VMG Health, a national health care transaction and advisory firm in Dallas. He may be reached by e-mail at jonathanh@vmghealth.com .


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