Fair market value and physician compensation: Key considerations and trends

The federal government continued to focus on relationships between hospitals and physicians in 2015, specifically the role referrals play in driving physician compensation. That trend is likely to continue this year, making it crucial for healthcare organizations to utilize the proper valuation techniques when calculating physician compensation.

Physician compensation was at the center of several high-profile cases settled in 2015. One notable settlement involved Fort Lauderdale, Fla.-based Broward Health. The health system agreed to pay the federal government $69.5 million to settle allegations it violated the False Claims Act by engaging in improper financial relationships with nine physicians. The whistle-blower in the case alleged the health system carefully tracked the value of physician referrals and pressured physicians to increase referral volume when they lagged.

Just one week after the Broward Health settlement was announced, Altamonte Springs, Fla.-based Adventist Health System inked a $118.7 million agreement to settle claims that the nonprofit health system paid bonuses to employed physicians based on a formula that improperly took into account the value of the physicians' referrals to Adventist hospitals.

These cases, and many others, contributed to the Department of Justice recovering $1.9 billion in fraud and false claims settlements and judgments from companies and individuals in the healthcare industry in the fiscal year that ended Sept. 30.

Although many fraud cases that center on physician compensation involve multiple complex allegations, valuation is typically a major focus in these lawsuits. When negotiating physician compensation arrangements, operators should exercise caution when defaulting to the use of median compensation rates, said Matthew J. Milliron, MBA, director in HealthCare Appraisers' Colorado practice, in a recent webinar hosted by Becker's Hospital Review.

Merriam-Webster defines "median" as, "The middle value in a series of values arranged from smallest to largest." With respect to survey data on physician compensation, this means half of physicians reported amounts less than the median value and half reported amounts higher than this value. Those involved in physician pay arrangements often have a skewed perspective and view the median as the floor in compensation negotiations. However, whether the median makes sense will vary depending on the facts and circumstances of the arrangement, according to Mr. Milliron. "No matter what anyone says the median is not the floor," he said, because half of physicians make less than the median.

The next common issue in determining compensation arises when organizations attempt to determine fair market value. Generally, any transaction between potential referral sources must be consistent with fair market value and commercially reasonable. Although no clear standard or threshold currently exists for determining fair market value, CMS and the courts have provided some guidance.

One case that provided guidance is U.S. ex. rel. Parikh v. Citizens Medical Center. That lawsuit was brought by three cardiologists who formerly practiced at Citizens Medical Center in Victoria, Texas. Among the allegations in the lawsuit, the physicians claimed the hospital provided improper financial incentives to its employed cardiologists. Although the employed cardiologists were compensated less than the national median for their specialty, that was not enough for the court to rule in favor of the defendant's motion to dismiss the plaintiff's allegations.

"Even if the cardiologists were making less than the national median salary for their profession, the allegations that they began making substantially more money once they were employed by Citizens is sufficient to allow an inference that they were receiving improper remuneration," said U.S. District Court Judge Gregg Costa.

The lawsuit was settled prior to trial, but the court's commentary can help guide physician compensation negotiations. The case shows instinctively defaulting to median rates may not be a safe bet. Although fair market value is a complicated topic, Mr. Milliron said the key question to ask when determining fair market value is, "What is this service worth to a hypothetical market participant absent any consideration of patient referrals?"

To learn more about median compensation and fair market value, view the full webinar by clicking here. Download the slides here. 

Note: View archived webinars by clicking here.

More articles on healthcare finance:

Tenet posts $140M net loss in 2015: 6 things to know
Highmark Health to slash physician reimbursement to contain ACA losses
UPMC gets financial boost from 20% spike in health plan membership

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