Valuation of physician employment contracts: Q&A with VMG Health's Jonathan Helm

Hospitals and health systems are increasingly employing physicians, which makes it vital for healthcare organizations to understand valuations of physician employment contracts.

Jonathan Helm, a certified valuation analyst and senior manager at VMG Health, discusses the different approaches to professional services valuations; policies for ensuring physicians are being compensated at fair market value; and best practices for hospitals to employ to protect themselves and employed physicians from legal problems associated with compensation arrangements.

Question: What are the different approaches for professional services valuations, and which type(s) would be used in a physician employment contract?

 Jonathan Helm: Since much of the published literature in the valuation community focuses on business appraisals, valuation analysts usually start with basic approaches and adapt them to the specific service agreement being valued. The three generally accepted approaches are market, cost and income.

For physician employment contracts, the valuation analyst's task is to assess fair market value compensation, and all three approaches may be considered. 

Under the market approach, the valuation analyst must consider available, independently published market compensation and productivity surveys1 to establish reasonable compensation.

Generally, the market approach identifies a compensation conclusion that is aligned with the physician's productivity. For example, if a physician's productivity approximates the 75th percentile, the market approach calculates a compensation rate that corresponds with the 75th percentile of market compensation for that physician's specialty.

Under the cost approach, the valuation analyst may consider the costs incurred to recruit a comparable physician into the local market. This approach may be useful when a physician is relocating into a new market and historical productivity information is not readily available.

Under the income approach, the valuation analyst may consider a physician's relevant revenues and expenses through a practice income statement.  

Once all approaches have been performed, the valuation analyst must determine which approach or blend of approaches should be relied upon based on the facts and circumstances of the arrangement.

Q: How can hospitals ensure physicians are being compensated at fair market value and they are not violating the Stark Law and the Anti-Kickback Statute? 

JH: To ensure legal compliance, valuation analysts must make sure their approaches to valuation do not conflict with the regulatory definition of fair market value and other regulatory guidance.

The Stark Law cautions that the fair market value of administrative services may be different than the fair market value of clinical services. As such, it is imperative valuation analysts understand the survey data used and ensure it reasonably matches the services provided. For example, using clinical compensation data to establish the fair market value for medical directorship services may present problems.

The Stark Law also cautions that data used in determining fair market value should not be tainted with referral relationships. For example, valuation analysts should avoid using the compensation rate paid to a physician by a local, competing hospital as the sole basis for fair market value. Rather, the valuation analyst should consider multiple objective sources of compensation information.

In addition, specific-buyer attributes should not be considered in the valuation analysis. Including value attributes the hospital brings to the arrangement may indicate synergistic value rather than fair market value. For instance, a hospital employer may have higher overall commercial reimbursement rates than a small to mid-size independent physician practice.

Q: What are some best practices for hospitals and health systems to employ to protect themselves and employed physicians from legal problems associated with compensation agreements?

 JH: Prior to establishing fair market value compensation, it is imperative hospitals first verify the proposed arrangement is commercially reasonable and serves a legitimate business purpose. It is also important to have legal counsel review and approve the structure of the contract.

Although having all compensation arrangements reviewed by an independent valuation expert is ideal, it is certainly not the most cost-effective solution, which has led many hospitals to establish internal mechanisms and controls for assessing compensation.

If a hospital chooses to internally assess physician compensation, it is important for the hospital to rely upon a conservative internal benchmark and engage a third party valuation firm if compensation falls outside of the established benchmark.

Another option for hospitals is to employ a valuation analyst to work internally. However, the valuation may appear to be biased and could be scrutinized, since it was not developed by an independent third party.

With the rapid growth in physician alignment strategies, it is important for hospitals to implement an efficient and consistent internal methodology for determining physician compensation. However, ensuring there is a legitimate business need for the arrangement and the contractual terms pass legal muster are equally important. 

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Commonly used surveys include the MGMA Physician Compensation and Production Survey, the AMGA Medical Group Compensation and Financial Survey, and the Sullivan Cotter & Associates Physician Compensation and Productivity Survey Report.

More Articles on Physician Contracts:

5 Key Provisions in a Successful Physician Employment Contract 
Physicians the Latest Healthcare Workers to be Hit With Layoffs 
Hospital-Physician Economic Alignment: What it Entails & Why its Important 

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