4 Tips on Reducing the Frustrations of the FMV Process for Physician Service Agreements

As hospital and health system executives continue to be flooded with physician alignment opportunities, one recurring compliance topic is present in nearly every physician service agreement: fair market value compensation. Mandated by industry regulations, FMV compensation remains an unavoidable element of a PSA that can easily develop into a source of frustration and misunderstanding for both the hospital and the physician. This article provides a few suggestions that can minimize the negative impacts of the FMV process during the negotiation of a PSA.

1. If a valuation expert cannot be involved early in the process, then structure a reasonable compensation offer. Circumstances may prevent the involvement of a valuation expert early in the negotiations. In this situation, the best course of action is to develop a compensation offer that is reasonable and supportable. Here are a few valuation guidelines to consider:

  • Compensation for clinical services should be correlated to physician productivity. For example, if a physician's professional collections are equal to the median, then a reasonable compensation rate for these services is the median.
  • Compensation per work relative value unit is inversely correlated to work RVU volume. MGMA tells us that the higher a physician's work RVU volume, the lower the compensation rate per work RVU. Therefore, if a physician's work RVU volume is at the 90th percentile, a compensation rate per work RVU at the 90th percentile should not be selected.
  • Be wary of developing a compensation proposal based solely on offers made by local, competing hospitals. Stark law provides guidance regarding the use of market data that reflects referral relationships. Although a local offer from a competing hospital might be considered, from a valuation standpoint it should not be the sole basis to support FMV compensation.
  • When determining compensation for physician administrative services ensure that the compensation survey data matches the services being provided. Stark law guidance indicates that clinical compensation may not be an appropriate proxy for physician administrative services. Other sources of data (i.e., published medical director compensation surveys) should be considered.

2. Obtain an independent FMV opinion early in the negotiation process. This step will be essential for higher risk PSAs as there is typically a lot at stake for the hospital from both a political and regulatory perspective. Few things can bring a deal to a screeching halt faster than reducing PSA compensation because it cannot be supported as FMV. It is vital at the onset of a negotiation to determine if a FMV opinion is needed and then to obtain one from a reputable firm. The FMV opinion will set the "ceiling" of dollars that can be paid for the physician's services.  Importantly, it will prevent the communication of potentially unrealistic compensation terms to the physician.

As with any PSA, the terms may evolve throughout the negotiations. By having a valuation expert involved early in the process, the FMV opinion can be promptly updated to match the most current terms of the PSA.

3. Have the valuation expert communicate with the physician throughout the FMV process. As with any relationship, trust is a critical factor for success. Permitting the valuation expert meet with the physician, thoroughly explain the valuation process, and keep the physician involved in the process of data collection and analysis provides a level of transparency. It communicates to the physician that the hospital's intentions are to pay a compensation rate that is reasonable, compliant and fair. This also offers the physician an open platform to discuss any unique aspects of his/her practice and to ensure that those aspects are understood and addressed in the valuation.

4. Don't forget that compensation can be paid for multiple physician services within a single PSA. Bundling (or stacking) services within a PSA is prevalent in the market. Bundled services often include (but are not limited to) clinical services, medical directorships, call coverage, and quality improvement. To meet regulatory compliance requirements, a FMV opinion is usually obtained for each service. As a last step, it is prudent to evaluate the reasonableness of the total package of services. An example of a potentially unreasonable arrangement would be the following:

  • PSA between a hospital and one primary care physician
  • Clinical services will be 55 hours per week, 52 weeks per year
  • Medical directorship services will be 25 hours per week, 52 weeks per year
  • Call coverage services will be 365 days per year

The scheduled clinical and medical director hours combined with the call coverage requirements are well above industry norms for one physician and this schedule is likely not sustainable over the term of a typical PSA. Although an extreme example, this illustrates the importance of reviewing the entire bundle of services within a PSA. A seasoned valuation expert will be able to identify potentially unreasonable stacking of services within an arrangement.

Unfortunately, no magic formula exists to guarantee a smooth negotiation process. However, with a bit of additional planning and the assistance of an experienced valuation expert, you can dramatically reduce the frustrations of the FMV process for all parties involved.

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.

More Articles Featuring VMG Health:

Factors Driving Hospital Valuation: Q&A with Colin McDermott of VMG Health
4 Common Mistakes in Determining Fair Market Value for Physician Compensation

To Bundle or Not to Bundle?

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