Finding the Best Market Range for FMV

Using market data to document fair market value for physician contracts can be a cost effective way to standardize compliance efforts. However, it still can be tricky to determine the most appropriate market range to use for an overall standard or when a variation is justified. Choice of benchmark may even be difficult for some contracts. Many providers adopt a single benchmark quantile as the standard. Nonetheless, there are times when a higher rate is justified or a job description doesn’t quite fit the available benchmarks.

Commercial Reasonableness

The first question to ask when paying for physician services is whether it is reasonable to make the payment. Are other providers paying for the service? Is the service needed and payment necessary? Not all services warrant payment. Compliance requires a determination of both commercial reasonableness and fair market value. To be compliant, it is first necessary to determine the need to pay, then to determine how much.

The IRS provides guidance on how to evaluate commercial reasonableness. According to the Internal Revenue Manual, §4233.27, specific factors to consider include:

  • Duties and responsibilities of the physician
  • Physician's background, experience, and knowledge of the particular engagement
  • Economic conditions of the marketplace

Other factors may include:

  • Does a physician have to perform the service or can a less costly person do it?
  • Is a specific specialty required for the position? Clearly the director of a dialysis center should be a nephrologist. But, does specialty matter for the Chief of Staff or chair of utilization management?
  • Do other facilities pay for the service or pay for multiple positions within a particular specialty?

Which service?

Finding an appropriate benchmark for some positions can be a challenge. MD Ranger has more than 300 physician contract benchmarks, yet we still regularly work with subscribers to find the most appropriate benchmarks for less common situations. Is a neurology directorship the same for accredited and non-accredited stroke programs? Can an adult subspecialty benchmark be used for pediatric subspecialties if no pediatric benchmarks are available?

Sometimes it helps to triangulate across multiple benchmarks. For example, for an adult congenital heart center medical director it could make sense to use the heart center, the cardiology, and the cardiovascular/cardiothoracic surgery benchmarks or number of hours, depending on the size and regional draw of the center. If the proposed contract rates fall below all of the selected benchmarks, documentation may be sufficient for compliance purposes.

How Close to the Percentile Should Rates Be?

Benchmarks can shift from year-to-year hence setting rates right at a maximum percentile can be risky. Shifts are generally small, especially with a large survey database, however you can take steps to mitigate the risk of having to reduce a contract at renewal because a benchmark declined.

Be strategic while setting payment rates.

Perhaps your organization has set its FMV standard at or below the 75th percentile. That doesn't mean every contract should be exactly at the 75th percentile. Different rates may be more appropriate for some positions or physicians. Allowing some wiggle room by negotiating rates between the 50th and 75th percentile anticipates rate fluctuations over time. This is especially recommended when the benchmark in question comes from a smaller data set since such rates are more likely to fluctuate.

If the contract was within fair market value when signed, and documentation exists, payment rates can remain as is until the contract expires.

This is why documentation is crucial. If you document that the contract rates were below a benchmark value when the contract was signed, it is compliant until the contract expires. Upon expiration, if the benchmarks are no longer valid, extra documentation will be needed. This may include written analysis of the value of the program, the particular credentials of the physician, the time spent fulfilling contract duties, inflation rates and comparisons to old and new benchmarks. This is one reason the government advises against ‘evergreen’ contracts and suggests contract terms of no more than two or three years.

All contracts should not be above average.

A higher rate may be justified for unique situations, but factors should be well documented. Relevant factors may include a limited number of physicians in a particular specialty, high call burden, unfavorable payer mix or, a program director who is one of the top specialists in the U.S. with documented credentials. These all can all be legitimate reasons for high rates; after all, someone has to be above the 90th percentile in all benchmarks. However, all payment rates above the 90th percentile need thorough documentation and they should be reserved for unusual situations, not the standard for all physician contracts at an organization.

Demonstrate efforts to negotiate the lowest possible rate.

Documenting the negotiation process and basis for rates is a compliance necessity. If you are unsuccessful in reaching agreement on a rate within your benchmark standard, take special care to document negotiations. Note who met with whom and explain the attempts to negotiate lower rates. In some situations, it may also be necessary to issue an RFP for the service to document that you were unable to procure the needed services for a lower rate.

Documentation is everything and some situations will require a formal valuation to validate the need for higher than “market” rates. A strong compliance program will build a process that depends on smart use of market data, intelligent and consistent analysis and documentation of exceptional situations.

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Multi-Campus Physician Contracts: Impact on Payment Rates and Time Requirements

With ever-shrinking margins and pressure to decrease costs, many hospitals and health systems seek the clinical and operational advantages that centralization creates. MD Ranger data strongly suggests the benefits of multi-facility physician contracts as an important strategy for controlling costs. Hospitals and health systems with more than one campus or facility can save money and streamline both physician emergency coverage and administrative services through multi-facility agreements.

Replacing single facility physician contracts with multi-facility arrangements can have positive, measurable impacts. Although payments to physicians whose duties span multiple facilities are higher than single facility contracts, they are less costly than separate, individual facility arrangements when the duties are assigned to a single physician. MD Ranger's subscriber-based comprehensive reporting system provides an unparalleled opportunity to evaluate the frequency and benefit of these types of arrangements, providing insight into the payment rates and time differentials of single versus multi-campus contracts. These data can be helpful in providing guidelines for documenting fair market value and commercial reasonableness for situations that, on the surface, appear to exceed common benchmarks.

MD Ranger subscribers include numerous multi-campus hospitals and multi-hospital health systems. These contracts include medical directorships and administrative services agreements that span two or more facilities, as well as call coverage arrangements when facilities are located close to one another.

Determining fair market value (FMV) for these types of multi-facility contracts can be a challenge. Most published benchmarks, and most physician contracts, are for a single hospital or campus. Our data demonstrate that although there is decidedly more work to cover multiple facilities, the amount of work (measured in number of hours and annual payment rates) is not proportionate to the number of facilities. Furthermore, multi-campus roles can be designed to streamline operations and reduce costs across the system. After analyzing the MD Ranger database and reviewing all multi-facility contracts, our statistical findings provide guidance that hospitals and health systems can use to determine appropriate compensation for coverage, medical directorships, and administrative service agreements that span two or more facilities.

Call Coverage Agreements
When two facilities in the same health system are physically nearby and when the emergency department volume is such that the call burden for one physician is not overwhelming, it is possible to have one physician covering both facilities. The physicians in the call panel must have medical staff privileges at all of the facilities. This can be financially advantageous, especially when contracting with specialties that are infrequently called. At times a named second call position is desirable to address infrequent conflicting demands. After analyzing the MD Ranger database, we have found that adding a second campus to one coverage position increases the cost of a single agreement by 26%. For example, if two hospitals are each paying $100 for coverage by two physicians and they decided to only have one physician cover both campuses, the appropriate rate would be $126, a 37% savings per campus.

Medical Directorships and Administrative Agreements
Medical directorships and administrative positions that span multiple facilities also save time and money. MD Ranger analysis found that although there is no significant difference in the hourly rates of pay for physicians with multi-facility positions, there is a significant difference in the number of hours required for multi-campus arrangements and in the annual payments. These findings apply to hospitals with more than one campus, whether as a distinct licensed facility or a single consolidated license with emergency departments on different campuses (note that for MD Ranger one campus is considered a facility with a separate emergency department within the MD Ranger database, regardless of license status). We have found that, on average, a single physician contract for the same services across two campuses costs 37% more than a single campus position. Each additional campus commands an average 10.7% increase in the number of hours up to five or more campuses.

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How Much is Granting Exclusivity Worth?

Most economists, as well as the OIG, believe that an exclusivity clause has economic value that should be considered in a valuation. When a hospital contracts with a hospital-based group to provide a service like pathology or anesthesiology, the opportunity to provide the service is often granted on an exclusive basis. This means that only the contracted group is authorized to provide the service to patients at that facility. Frequently this also means that the facility’s medical staff is “closed” to other physicians in that specialty.

When physicians with an exclusive contract seek payment for services, determining fair market value can be a challenge. In addition to volume, payer mix and scope of service considerations, it is important to consider the value of the “franchise” they have been granted.

The Value of Exclusivity

In general economic principles, as well as in those of business valuation, monopolies and therefore contract exclusivity have value--even in health care. In the case of physician contracts, the OIG has specifically noted that exclusivity has value:

Depending on the circumstances, an exclusive contract can have substantial value to the hospital-based physician or group, as well as to the hospital, that may well have nothing to do with the value or volume of business flowing between the hospitals and the physicians.1

Note the phrase “depending on the circumstances”; it signals the importance of documenting the basis for FMV determination, with particular consideration of the costs and benefits to both the hospital and the physician group of the exclusive relationship.  

What is Exclusivity Worth?

There is no consensus or official OIG guideline for determining the economic value of an exclusive physician agreement. Possible approaches to estimating and acknowledging the value of exclusivity for FMV documentation include:

  1. Negotiate a compensation level at a lower point in the market range than you might have if there were no exclusive rights to the service. Most market surveys for hospital-based specialties include contracts with exclusivity in their data. This is one of the advantages of the market approach to valuation over the cost approach. Employing a valuation assessment using the cost approach might not include the exclusive value of the arrangement; work with your valuation consultant or an expert to ensure that the exclusive nature of the contract is taken into proper consideration.
  2. Include a “rule-of-thumb” discount of perhaps 5-10% below a non-exclusive rate to specifically acknowledge and document the value in a quantitative way.

Documenting FMV of Exclusivity

In the contract’s FMV documentation, clearly state that consideration has been given to the economic value of the exclusivity provisions of the contract, even if a specific value is not cited. For compliance purposes, outline the process your organization took to consider the value of exclusivity in your documentation process.

Advantages and Disadvantages to Exclusive Agreements

Exclusive contracting for hospital-based services often has intrinsic value to a facility, including:

  1. establishing a single point of accountability for administrative and quality performance
  2. streamlining scheduling
  3. ensuring coverage for basic services
  4. improving continuity and quality of care

Exclusivity may also reduce a hospital's costs. Nonetheless, it is important to protect the facility from anti-trust challenges by physicians who may be excluded from practicing at the facility. Hence it is important to follow the guidance of legal counsel and adopt an appropriate decision-making process to close the medical staff and document of the process and FMV of the contract and all of its provisions. Furthermore, be familiar with your facility’s medical staff bylaws to ensure the proper process is followed if the intent is to close the medical staff for that specialty.

Before approaching a new or renewal negotiation for a hospital-based physician group, hospital administration, and medical staff leadership should meet to determine the need for exclusivity and the process for determining what exclusivity is worth.

1“OIG Supplemental Compliance Program Guidelines for Hospitals” Published in Federal Register Vol 70, No 19. Monday January 31, 2005

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Commercial Reasonableness: Critical Considerations for Physician Contracts

Before paying a physician for services, hospitals should ask whether it is reasonable to pay for such services. Not all coverage or administrative services warrant payment. To be compliant, it is first necessary to determine the need to pay, then to determine how much.

Determining if paying a physician is commercially reasonable can be challenging. This brief interview explores the definition of commercial reasonableness, approaches to making and documenting a determination, and how this differs from "fair market value".

What does "commercially reasonable" mean?
The Department of Health and Human services has defined the term as "a sensible, prudent business agreement, from the perspective of the particular parties involved, even in the absence of any potential referrals" (Medicare and Medicaid Programs; Physicians' Referrals to Health Care Entities with Which They Have Financial Relationships 63 FR 1700 (January 9, 1998)). In the preamble to the Stark interim final rule, Phase II, CMS noted that an arrangement "will be considered 'commercially reasonable' in the absence of referrals if the arrangement would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician (or family member or group practice) of similar scope and specialty, even if there were no potential DHS referrals." 69 FR 16093 (Mar. 26, 2004)

Both Stark and the Anti-Kickback Statutes prohibit compensating a physician with money or non-monetary gifts for referring patients to an organization with which the physician has a financial interest. Payments to physicians must remain completely unassociated with the business they bring to your organization. Thus, it is important that every payment you make is justified.

Simply put, commercially reasonable means that it is common business practice for an organization to pay for that particular physician service. A real-life example could be the question of general surgery call coverage. Is it commercially reasonable for your organization to pay for the service? 75% of MD Ranger subscriber hospitals report paying for general surgery coverage, so there is statistical evidence that many organizations compensate for the service. However, dermatology call coverage is another story. Only 1% of MD Ranger subscribers report payment for dermatology coverage. A less clear example is coverage for infectious disease, with only 11% reporting payment. To prove commercial reasonableness of payment for such a service may require extra documentation and research.

Why is being commercially reasonable important?
Despite the lack of a bright line, determining commercial reasonableness is important and should be a part of compliance documentation before a payment rate is considered. Assessing commercial reasonableness is the essential first step when considering a financial relationship with a physician. If it's not reasonable to pay for a particular service, it could be interpreted that your organization is paying the physician for referrals. The repercussions for having either a Stark or AKS violation are harsh. Stark law violations incur a civil penalty and fine, plus owing CMS what you collected under the arrangement with the physician. AKS violations are criminal offenses, and carry fines plus repayment of collections from involved physicians or groups.

How can you determine commercial reasonableness?
The IRS provides guidance on how to evaluate whether an agreement with a physician is commercially reasonable. According to the Internal Revenue Manual, § 4233.27, specific factors should be considered while determining commercial reasonableness:

  • duties and responsibilities of the physician
  • physician's background and experience, as well as knowledge of the business
  • economic conditions of the marketplace

You should also consider:

  • Does a physician have to perform the service, or can it be done by another clinician or professional?
  • Is it necessary to have a physician of a certain specialty in the position?
  • Is this a service that hospitals typically pay physicians to provide?

In addition to reviewing these questions, MD Ranger subscribers turn to our "Percent Paying Tables", which report the frequency of physician payments for over 150 physician services across MD Ranger hospital subscribers. When discussing whether or not to pay for a service, subscribers can access this data immediately and get a first impression of how common paying for the service is. We recommend using this number as a starting point in your physician negotiation process.

How is commercial reasonableness different from "fair market value"?
While fair market value is an "arm's length" negotiated fee for a physician service in the absence of referrals, commercial reasonableness addresses whether or not it is actually reasonable to pay for the service in the first place. A commercially reasonable service could have payment terms that exceed fair market value, and a fee that falls well within fair market value might not be commercially reasonable given certain market conditions. Here are some examples:

Hospital A wants to pay for a second medical director of its Cancer Center. The MD Ranger reports show that 22% of subscribers report paying for a medical director; however 100% of them only report paying for one position. If the second director is a co-director, and the sum of the hours and payments for both positions is with the range for a single director, payment would be reasonable. However, if both directors were paid at the same rate as a single position, and there were not unique, documented program and position requirements to justify a second position, the position and amounts paid may not be commercially reasonable.

Hospital B is asked to pay call coverage per diem rates for bariatric surgery. There are no reported contracts for such a service in MD Ranger; furthermore, as a non-elective service, the physician would be expected to cover his own patients. This would likely not meet a test for commercial reasonableness.

If something is negotiated at fair market value, is it commercially reasonable?
Not always. Just because a service has a fairly negotiated rate in the market, it doesn't necessarily follow that the service should be paid at your facility. One example is ophthalmology call coverage. Emergency needs are small and there are plenty of ophthalmologists in most communities, so payment for coverage is unusual. However, in some circumstances, such as an adverse payer mix or an especially complex trauma facility with large volumes or a lack of providers on the medical staff, it is necessary for a hospital to pay for coverage; hence, there is a market rate for the service. This is why MD Ranger encourages subscribers to always document commercial reasonableness along with the rate negotiated—even if your documentation is a brief summary paragraph identifying reasons that the service must be compensated, along with MD Ranger benchmark data. Another good example is hand surgery. A per diem for hand surgery that is within fair market value is at or under $800 (at the upper end of the spectrum). However, since only 14% pay for hand surgery coverage it's unlikely that you will need to pay for coverage for this service.

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