Physician Compensation Stacking—Impact on Fair Market Value and Commercial Reasonableness

Hospitals and health systems must be cognizant of the risks associated with “compensation stacking”, a term used to describe the cumulative effect on fair market value and commercial reasonableness as a result of multiple, individual arrangements with a physician, or a single arrangement with multiple individual components.

As closer alignment between hospitals and physicians is pursued, multiple or multifaceted compensation arrangements are becoming the norm. In our work preparing fair market value and commercial reasonableness opinions, it is no longer uncommon to encounter an employment contract containing multiple components, such as:

  • clinical services
  • consulting and advisory services
  • participation on service line co-management committees
  • medical direction
  • on-call coverage
  • medical student/resident proctoring and mentoring
  • advanced practitioner oversight and collaboration, and
  • employed physician network leadership in a dyad management structure.

When evaluating for fair market value and commercial reasonableness, ensuring that each of the individual components is delineated and documented as fair market value on its own is not enough. The questions that hospitals and health systems need to be asking are:

  • Does the aggregate compensation from all these services fall within acceptable fair market value parameters?
  • Is the aggregate commercially reasonable?
  • Will the physician’s daily, weekly, monthly, and annual expectations pass the test against reasonableness and common sense?

In practical terms, can the physician be expected to produce 6,000 Work Relative Value Units (“wRVUs”) per year in order to justify a high clinical base as an internist, cover afterhours call at two facilities, provide 10 hours a week as medical director of the hospital’s urgent care program, oversee a nurse practitioner, and serve 4 to 6 hours a week as chair of the employed group’s advisory council chair?
If a reconciliation of required hours and common sense says “No” …unless he/she works 70 to 80 hours a week… perhaps there’s a problem. This problem, and the attention it will attract from auditors and compliance officials, is amplified when the compensation meets and exceeds the 75th and 90th percentiles in accepted industry benchmark data.
To mitigate organizational risk and to protect against compensation stacking, HSG recommends the following 7 steps:

  1. Formalize your organization’s fair market value process. Having a structured and formalized fair market value and commercial reasonableness process increases consistency in how arrangements are evaluated and approved.
  2. Centralize the contracting and physician transaction process. A central individual and/or governing body, such as a Physician Transaction Committee, can help to ensure that the totality of a physician’s arrangements or compensation components are considered…not just the individual compensation models. Multiple executives, managers, and service line leaders creating new contracts and adding new addendums to existing contracts can result in an undesirable situation — a situation in which no one is focused on the whole. Without focus on and oversight of the cumulative effect of individual contracts and addendums, the result can be a compliance nightmare.
  3. Implement base salary reductions, especially in situations of relatively high-base compensation and/or for services that are not rare or unique. Continuing to pay a high premium to a primary care physician after years of not meeting targets is difficult to justify and defend, much more so than it would be for a rare and highly skilled pediatric nephrologist at an academic medical center. Salary reductions help right-size clinical compensation, perhaps appropriately aligning and accounting for other services (i.e., administrative and medical director) that the physician might be providing.
  4. Value-based expectations should not be “gimme” goals and targets. Quality, efficiency, and patient experience expectations that truly require physician attention and effort have value to the organization and the patients served, and deserve compensation. Expectations that are easy and require little effort do not have much value. The effort required to deliver quality services can be considered and will help to justify the aggregate compensation.
  5. Document and pay accordingly. Document administrative, medical director, clinical and call services, and pay according to the documentation. Administrative and medical director compensation is normally based on an expectation of hours of service. Clinical compensation is normally exemplified by hours or days of expected availability, patient volume and/or wRVUs. Call coverage is frequently documented by a call schedule and/or call log.
  6. Consider overlap, necessity and duplication of services. Paying for dedicated call coverage to the same physician on the same day at two facilities is problematic, as is paying for a useless medical director position, or paying a high call rate with an activation fee to an employed physician who also gets bonuses based on wRVUs produced.
  7. Use common sense. If the daily, weekly and annual hours required to fulfill all the duties required don’t make sense in the real world, something is wrong and you need to fix it.

Consideration of all of these issues will help ensure compliance and control unnecessary costs within your physician enterprise.

If you have questions or we can otherwise be helpful regarding physician compensation and fair market value, please contact Neal Barker, Partner, at 502.814.1189 or nbarker@HSGadvisors.com.