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Negotiating Physician Compensation Contracts



By David H. Glusman CPA, DABFA, CFS, Cr.FA, CFF


A paradoxical trend is developing within the medical profession.

Historically, professional opportunities for physicians were limited to private practice, or teaching and research positions. Today, a much wider range of opportunities is available in many different organizations – hospitals, health plans, pharmaceutical companies, medical management companies, consulting firms and medical device manufacturers. These positions include medical directorships, executive or non-executive administrative positions, staffing of inpatient and outpatient clinical programs, thought leader positions, and clinical consultant positions.

The paradox that is unfolding is that there is a definitive trend toward narrowing or standardizing physician compensation arrangements. Standardization is being driven by the desire of hospitals to administratively simplify their relationships with physicians and by the common use of salary-based compensation arrangements in private companies, health plans, and pharmaceutical companies. In addition, today’s physicians are also interested in simply stated and calculated compensation plans.   

Federal regulations have a significant impact on the nature and specific terms in many physician compensation agreements.  The Stark regulations[1], which most physicians understand, limit compensation and other financial arrangements between physicians and other provider entities. They are intended to prevent compensation as an inducement for the referral of Medicare patients. Another set of federal regulations, the “intermediate sanctions” regulations from the Internal Revenue Service are intended to prevent the “private inurement” or over compensation of individuals by non-profit organizations.  Still further, CMS compliance program regulations for hospitals and pharmaceutical companies are intended to prevent compensation that may lead to inappropriate or unnecessary services for patients. 

However, in spite of these complex external rules there are still opportunities for physicians to negotiate a fair and reasonable compensation arrangement. In fact, recent statements from CMS direct the parties of arrangements between providers to negotiate very specific terms that precisely are tailored to the situation at hand. Explicitly laying out the details of contractual relationships helps to ensure that some equity is achieved. 

In a recent advisory opinion CMS stated “the general rule of thumb is that any remuneration flowing between hospitals and physicians should be at fair market value for actual and necessary items furnished or services rendered based upon an arm’s-length transaction”[2].  


When it comes to compensation arrangements involving provider entities, the important items in this statement are “fair market value” and “actual and necessary items furnished or services rendered.” These two items are applicable to all compensation arrangements, as a matter of general principle.


There is no official definition of fair market value for the purposes of compensation contracts. For example, the IRS definition of fair market value focuses on property. The IRS says fair-market value is “the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.”[3]


In addition, there is no single official method to calculate fair-market value. In the absence of prescriptive methods, when compensation arrangements come under official scrutiny, the analyses of the arrangements are usually based upon the totality of facts and circumstances.


Let’s examine the core elements of a reasonable compensation arrangement. The incorporation of three key elements should satisfy many of the external regulations and also help to promote an effective working relationship between the parties. It needs to be clearly written, and it should  specifically describe 1.) the services to be performed, 2.) the method of compensation, and 3.) the amount to be compensated, which should be supported by a fair market value analysis.


Scope of Services


The scope of services covered by compensation agreements between physicians and other provider entities may be extremely varied. It may include direct patient care, administrative or supervisory responsibilities, or technical services and consultative services. The trend toward simplification of compensation arrangements has an implicit tendency to overlook this variability and its possible impact on the level of compensation. The first step in crafting a solid compensation agreement and the appropriate compensation amount/methodology is to document all of the responsibilities and services to be performed, and any related conditions that impact or more fully explain the delivery of those services.     


When a compensation arrangement covers part-time or intermittent services, the agreement should be very precise in identifying each service, its frequency, and any time or duration requirements. On-call arrangements serve as a good example of a common, part-time arrangement. In addition to basic details like an on-call schedule that spells out the frequency and hours of coverage, the agreement should include any additional responsibilities such as requirements for subsequent inpatient care or consultations, timely response to calls from the emergency department, responsibility for medical records completion, and cooperation with care management and quality initiatives or other hospital policies. In some cases the actual reporting of time consumed may be necessary and appropriate. These responsibilities have a direct bearing upon the work performed and upon compensation at fair market value levels.     


When a compensation arrangement covers a full-time position, there should be a position description that describes the scope of authority, tasks to be performed directly by the individual, reporting relationships, the required skills and experience, and any licensing or certification requirements. When agreements include a bonus, the performance requirements for awarding that bonus should be clearly stated.  


Unit of Compensation


The simplification of compensation arrangements has generally led to fewer options in the unit of compensation.  For full or part time positions, or for personal services contracts, annual, per diem or hourly rates are the most common units of compensation. Bonus and other contingency terms are being used less frequently, and when bonuses are involved, they must have a direct relationship to the effort or efficiency of the provider and not be related to referral for other services.


Compensation does not necessarily have to be limited to fixed rates. The unit of compensation should be consistent with the unit of work and the overall structure of the relationship. For example, in a recent CMS advisory opinion on the compensation arrangement between a hospital and its medical staff working together in a payer sponsored pay for performance program, the agency approved a variable bonus arrangement for the doctors. The bonus was tied to achieving a set of quality targets and each doctor’s portion is determined on a per capita basis. In a recent advisory opinion, the OIG signaled that incentive and variable forms of compensation can bed used if they are related to work performed, if they are clearly documented and if they do not encourage fraud or abuse.[4]


Fair Market Value  


The third core aspect of physician compensation arrangements involves a fair market value analysis. The fair market value amount of any compensation arrangement must be determined by an analysis that accurately reflects the entire arrangement. That analysis should also include multiple sources of data or analytical scenarios. A comprehensive analysis will results in a fair market value range for the compensation. The specific amount of compensation is then negotiated by the parties.


Benchmarks and other forms or sources of objective data are required for calculating fair market value. The most common benchmarks are physician salary surveys. There are a number of widely recognized salary surveys such as the Medical Group Management Association and the American Association of Medical Colleges surveys.  These surveys clearly document the variation of compensation across different specialties and variations within individual specialties.  For example, the MGMA survey includes compensation at the median, 25th, 75th and 90th percentile[5]. However, these surveys are limited to physicians working in specific settings; the MGMA survey covers physicians primarily in clinical practice[6] and the AAMC survey covers doctors in academic settings.   


Proprietary surveys of physicians in other positions such as executive positions in hospitals and health systems are available from consulting firms. 


Objective data can include data from public sources, such as tax returns[7], and it can include data developed specifically for the situation at hand, such as through telephone surveys. 


Another form of benchmark that has been used is historical compensation data; however, these data may not reflect the scope of services or other factors that are necessary to derive reasonable current compensation amounts. The primary value of historical data may be limited to serving as a comparative reference point for the reasonableness of current compensation levels. 


As mentioned previously, when compensation arrangements come under scrutiny, the specific facts and circumstances of the situation are important elements in assessing if the terms reflect fair market value.  Compensation must be directly related to the specific services that are performed and it must also incorporate any special circumstances that add to the complexity or difficulty in arranging for the services. For example, higher compensation may be justified when there are severe shortages of physicians in a particular specialty. Or it may be appropriate when special skills are required or when special conditions must be met.  


The determination of fair market value compensation should be based upon multiple analyses or comparisons. For example, the compensation for on-call coverage in the emergency department may involve an analysis of the costs of the hospital recruiting and employing full-time physicians, or it may include an analysis of hiring locum tenens physicians through a staffing agency. These analyses would be used to help establish the fair market value range of compensation, from which a specific compensation amount is negotiated.


A fair market value analysis should also include a narrative that explains the rational for any special circumstances that affect the compensation. For example, if a medical director or other position requires a specific specialty, there should be documentation of the specialty knowledge or skills that are necessary to fulfill the responsibilities of the position. 


With the proper focus on each of these areas, compensation agreements can only succeed at meeting the needs of all parties. There is an old adage that “the devil is in the details.” However, when it comes to negotiating compensation arrangements in the health care industry, the adage should be “the opportunity is in the details.”


David Glusman CPA, DABFA, CFS, Cr.FA, CFF is a principal at Margolis & Company P.C. located in Bala Cynwyd, PA. He has 38 years of experience in offering public accounting and consulting to the healthcare industry. He has been recognized as a national expert on physician and hospital related billing and managerial issues, including fraud and abuse, physician compensation models and information systems organization. David can be reached at dglusman@marg.com.

[1] Stark refers in this piece to the combination of anti-kickback and anti-self referral regulations promulgated by Congress and CMS.

[2] 42 C.F.R. § 411.351 (2006).

[3] Revenue Ruling 59-60.

[4] OIG Advisory Opinion No. 08-16, October 7, 2008..

[5] In many circumstances, MGMA data (when purchased) can be calculated on deciles, as well.

[6] MGMA also provides some data on academic facilities and provides many other benchmarks for productivity.

[7] Most not for profit institutions are required to make their annual Form 990 available which will list certain categories of highly paid officers and/or employees.  Such dada may be useful in evaluating FMV compensation.

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