Medical Director Contract Considerations

Selecting a strong medical director to oversee a service, specialty, or program can advance the clinical agenda or provide a foundation to build clinical service lines. Key tasks may include clinical oversight, policy development, staff training, quality review, regulatory compliance, committee participation, protocol development, budgeting, and program development.

Choosing the best physician for the job is important for both the hospital and the program. When reviewing candidates, consider the physician’s training, technical expertise, experience, and relationships with physicians and community members. The roles, responsibilities and time commitment should be spelled out in a contract, as required by federal regulations.

Defining the Duties of a Medical Directorship

The job’s specific requirements must be carefully considered at the start of the agreement and with subsequent renewals. The job description should help achieve the organization’s clinical agenda, and each duty should be described as specifically as possible.

For example, if the job description states “physician will support community outreach”, consider being more specific:

Physician works with leadership to represent hospital at community events supporting heart health, including events hosted jointly with the American Heart Association and the hospital’s “Heart Healthy” program. Physician will be paid for time at event and travel time to and from the event.

Such clarifications will help avoid misunderstandings and conflicts.

When and How Much to Pay

Commercial Reasonableness

Before compensating a physician, you must determine if payment for the service is “commercially reasonable”. MD Ranger reports the percent of subscribers paying for a position, as well as the distribution of the number of paid positions by specialty. If the percent paying is low, it is particularly important to document why payment is necessary.

It is common to have two or more medical director positions in some specialties, such as cardiology, whereas in others it is rare.

Payment Methods

Most medical directorships pay by the hour, with the minimum and maximum number of hours per week, month, or year outlined in the contract. Some administrative or medical staff leadership positions, particularly roles like chief of staff, pay monthly or annual stipends without a defined hourly rate. It is typical to have contract language that allows for periods of high and low activity to account for vacations, holidays, JAHCO surveys, etc.

If a medical directorship is paid hourly, ensure that all components of the contract are compliant (hours, hourly rate, annual pay) and that actual payments are consistent with the signed contract. A low or reasonable hourly rate could mask an unreasonable number of hours worked, resulting in exceptionally high annual payments. If the physician’s hours vary significantly from benchmarks, review the job duties and determine if the scope is greater or less than a typical hospital. It may be reasonable to require more hours for a new program, a program undergoing review, or a center of excellence with a large referral program, significant outpatient components, or a large medical staff. In addition, if a physician has exceptional credentials such as a national recruitment for a large regional program, higher payments may be justified. Documentation of exceptional differences like these is essential to maintaining a strong compliance program.

Fair Market Value (FMV) Considerations

Most FMV experts suggest that payment rates below the 75th percentile of market rates are generally compliant, however many organizations choose to pay closer to the median, especially if they are not in an area with high cost of living or they are not a large tertiary medical center. If you must pay a rate above the 75th percentile, be sure to document the reasons why it is necessary and the steps taken to negotiate a lower rate. You may also consider obtaining a formal FMV analysis and opinion. If the hourly rate is compliant and the job duties are extensive, a higher annual rate may be justified.

Physician Qualifications

Some but not all directorships require a physician of a particular specialty. While the director of the cardiac cath lab needs to be a cardiologist, the director of EHR implementation or the chief of staff could be a physician of any specialty.

Specialty may or may not influence payment. Although it may seem logical that an orthopedic surgeon should be paid more than a pediatrician serving in the same role, most market data do not support a pay differential unless the directorship or leadership position significantly reduces the physician’s practice commitment and clinical income. This is often referred to as “opportunity cost”, and it is only relevant in some situations. An independent valuation may be advisable if payment rates exceed standard benchmarks for the particular position.

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Why Benchmarks Change

Market data is an efficient and cost effective way to structure a physician contracting compliance program, and is used by hundreds of hospitals across the country. Among the perks of using market data are consistency, accessibility, and flexibility.

As long as the database used to calculate payment benchmarks is both large and diverse, benchmarks typically remain stable from year to year. However, there are several factors that may change benchmarks from year to year, like a significant increase in the sample size or changes in the market. It is always important to document FMV compliance, even if benchmarks shift.

By understanding why benchmarks may change from year to year, you can prepare for these changes within your compliance plan. Having a process in place to deal with potentially challenging conversations will help facilitate the process.

Why Benchmarks Can Change:

Benchmarks can change from year to year, significant shifts are uncommon.
Overall, we have found that the average change for any benchmark, whether that be compensation or hours worked, at the 50th or 75th percentile is 5%. This 5% change in contracts can often be accounted for by:

  • General salary inflation and cost of living increases.
  • Shift in responsibilities for a physician role, whether that be increased or decreased responsibilities.
  • Change in hospital characteristics. For example, if a hospital adds more beds or moves from a level 3 trauma center to a level 2 trauma center, the burden of call is going to be more significant and likely will require a higher payment.
  • New counterparty in a contract.

It is also important to take into account that most contracts have 2-3 year terms. This means that contract values do not increase or decrease in a linear fashion, the contract value changes in steps up or down.

In some cases, adding one contract can change the benchmarks.
Even in large sample sizes, when contract values are clustered at multiple different values, sometimes adding one new contract can shift the benchmarks considerably. This is best illustrated by an example. If we have five contracts with values of $150, $150, $150, $1,000, and $2,000, the 75th percentile is calculated as $787.50, as seen below. MD Ranger would round this benchmark to $790. If we are evaluating a contract with the value of $650, it would fall below the 75th percentile in this case.

If we add a fourth contract with the value $150, then the 75th percentile drops to $575. Now, that same $650 contract is above the 75th percentile and could be considered risky.

Even in a large sample size, if the contract values are clustered, one new contract can shift the benchmarks.

Sample size.
A data set which has a larger, diverse sample size will be less volatile than a data set with a small sample size. Sometimes data sets can appear larger and more diverse than they actually are. For example, if the data are collected from physicians, it is important to look not only at the number of physicians included but how many medical groups are represented. Medical groups often negotiate a single payment rate with a hospital, thus making the data set less diverse than it seems.

If the data is collected from hospitals, make sure that there are data from at least five health systems and/or independent facilities included. Typically, dozens of individual physician contracts are included in a sample from this many hospitals. Since physicians from the same medical group may get paid the same rate, or a health system may have a policy to pay physicians the same amount for call coverage or medical direction, it's important to ensure a good sample of hospital corporations or systems in the data. The larger the data set, the more safeguards you have for ensuring high quality data.

Dealing with Changing Benchmarks:

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 when documentation becomes crucial. If you document the benchmark data and that the value of a contract was fair market value when the contract was signed, it is compliant until the contract expires. At this time, if the contract is still below the 75th or the 90th percentile, the payment rate may still be compliant. If the rate is now too high and you cannot negotiate it lower, consider documenting the value of the contract to the organization, general inflation rates, and the changes in the benchmark data.

Be strategic while setting payment rates.
Perhaps your organization has determined that rates at or below the 75th percentile is considered compliant. That doesn't mean that every contract signed should be at the 75th percentile. Allow some wiggle room by negotiating a rate between the 50th and 75th percentile. If rates fluctuate over time, you have some cushion before the rate becomes problematic. This is especially true if the service in question comes from a smaller data set, given that these rates are more likely to fluctuate.

Document why the situation is unique.
A high rate can be justified when the situation is unique. Maybe there are a limited number of physicians in a particular specialty in the area, there is a high burden for taking call, or the payer mix is unfavorable. These can all be legitimate reasons for high rates; after all, someone has to be at the 90th percentile in all benchmarks. However, all payment rates above the 90th percentile need thorough documentation.

Demonstrate the effort to negotiate the lowest possible rate.
Documenting conversations and efforts made to set a payment rate that is fair market value is essential. If you are unable to successfully lower the rate to an amount you are comfortable calling fair market value, take special care to document conversations. Note who met with whom, and explain the attempts made to negotiate lower rates.

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Contracting for Pediactric Services? Read This First.

Acutely ill children sometimes require a pediatric subspecialist. But because most pediatric subspecialists practice at tertiary medical centers and not the community hospital close to the family’s home, access to care can be a challenge.

Many community healthcare organizations address this need by contracting with a children’s hospital or academic medical center. Several specialty physician companies also provide pediatric physician services. Contracts may involve onsite hospitalists, telehealth consultations, emergency call coverage, diagnostic test interpretations, medical directorships, specialty clinics or services, or combinations of services for pediatrics, newborns, and high-risk deliveries.

When should organizations seek contractual inpatient pediatric services?

Hospitalization rates for children have plummeted in recent years, and like all primary care physicians, the number of community pediatricians managing inpatients has declined. At the same time, specialization in hospital medicine, including pediatrics, has emerged as an independent specialty.

For community hospitals with high emergency or obstetrical volume and who are far away from a children’s hospital or academic medical center, contracting for pediatric hospitalists or subspecialty back-up may be an option to place highly trained physicians in your facility. A partnership can enhance your hospital’s profile in the community, providing quality oversight and patient management when an independent practice may not be financially viable.

What does a pediatric hospitalist service provide?

Pediatric hospitalist duties often include a number of services, generally dependent on case volume at the community hospital. Services may include:

  • Attendance at deliveries
  • Rounds in the nursery
  • Emergency department call coverage for general pediatrics
  • Management of inpatient pediatric patients, sometimes including neonates in the nursery
  • Consultation on inpatient pediatric patients
  • Potential 24/7 in-house attending physicians and daily rounding

What are other contracted pediatric professional services?

We have seen a broad scope of contractual pediatric services among our subscribers, including:

  • Neonatology (most common)
  • Pediatric intensivist
  • Pediatric surgery
  • Cardiac surgery
  • Diagnostic test interpretations like echocardiography and EKG
  • Retinopathy of prematurity
  • Outreach clinics in developmental pediatrics, cardiology, transplant, high risk OB
  • Telemedicine consultations in:
    • Psychiatry
    • GI
    • Nephrology
    • Cardiology
    • Endocrinology

How does an organization determine if these partnerships make sense?

Contract scope varies from onsite staffing to telemedicine consultations to occasional clinics. These arrangements are very different in nature and often require a jointly developed business plan or analysis. However, important contract terms to discuss across nearly all services include:

  • Number and types of patients requiring services
  • Regulatory and medical staff bylaw requirements
  • Physician availability and depth of coverage
  • Number of hours on-site or on-call
  • Response times
  • On-site facilities to support the contracted physicians
  • Billing arrangements
  • Follow-up care arrangements for post-discharge or post-procedure/diagnosis

What are payment rates?

These contracts are compensated in a variety of ways. We see fixed monthly stipends, collection guarantees, fee-per-consults, and medical directorship payments.

It can be difficult to find pediatric subspecialty contract data. MD Ranger works with academic medical centers and children’s hospitals to collect this data, as well as community hospitals that have these partnerships. Given our growing subscriber base, we have pediatric benchmarks for pediatric hospitalists, pediatric surgery, PICU, perinatology, and retinopathy of prematurity. We advise our subscribers to use adult subspecialty rates when there is not a pediatric subspecialty benchmark available.

What are important considerations for negotiating contract rates?

When negotiating any physician contract, carefully analyze hours, hourly rates, and annual payment terms. Pediatric contracts often require additional consideration of qualifications of the parties, coverage demands versus billing opportunities, and overhead costs.

These contracts often blend professional services with administrative and coverage duties, hence analysis of collection potential, the cost of maintaining a clinical practice and back-up coverage may be relevant. With many academic medical centers, additional fees are sometimes part of the cost of physician services, such as ‘Dean’s taxes’, which are imposed on all revenue of the medical school as part of the overhead structure. These fees may or may not be negotiable.

As with other hospital-based physician services and services purchased from tertiary centers, the cost will vary by specialty, scope, and even individual physician. The community hospital should also discuss how it can use the contracting institution’s name in its public materials, and how the contracted physicians will interface with community physicians. Often continuing education, dedicated referral phone numbers, and timely correspondence with local physicians are essential to successful contracts.

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Does Geography Influence Physician Contract Rates?

Our subscribers frequently ask how much physician contracting rates vary by region. We often hear from providers who think their area is unique, with physician rates either higher or lower than national benchmarks. MD Ranger analyzes the impact of geography on rates across the entire database each year and runs custom reports for various subscribers several times a year to evaluate the issue.

The Evidence
With the growth of its customer base, MD Ranger has considerable geographic diversity, with hospital contracts from 30 states covering dozens of metropolitan, rural, and urban areas. To investigate the significance of location, we pool data from the 30,000+ physician contracts and supplement it with data from various state and federal agencies, including CMS cost report data, Bureau of Labor Statistics (BLS) Occupational Employment Survey, and various BLS price indices. A multivariate approach models contract rates on hospital, contract, and market characteristics, using both linear and nonlinear techniques. After extensive testing of a variety of geographic clusters defined by MSA’s and combinations of MSA’s, along with urban/rural distinctions, MD Ranger data scientists found no statistically significant geographic variation. This is not to say that MD Ranger has not found characteristics that significantly influence rates. Trauma status, whether the hospital is urban or rural, and its size, measured by both number of beds and average daily census – all of these factors exhibit significant, and consistent, impact on rates.

Regional Variance: Not as Impactful as You'd Think
Craig Paxton, Ph.D., chief statistician and economist at MD Ranger, summarizes, “Based on dozens of analyses over five years of data, we conclude that geographic variation, if it is meaningful at all, is so only in markets smaller in size than MSA’s.”

What does this mean for executives negotiating physician contracts? While your competitor down the street may decide to compensate doctors above fair market value (FMV), according to government regulations, these payment rates should not affect your organization’s rates. It may be unfortunate that your biggest competitor is the hospital that pays above the 90th percentile, but it doesn’t mean if you join them in that practice that your rate can be deemed to be within FMV. In practical terms, this underscores the importance of identifying the appropriate range that is consistent with your hospital characteristics from a compliance standpoint. Because hospital attributes like bed size and trauma status matter more, the most relevant market data benchmarks for your organization should be from a sample of organizations most like your facility, regardless of regional geography. This is why MD Ranger Benchmarks provide data slices for bed size, ADC, trauma status, urban/rural location, and payer mix. If you find yourself in a competitive situation, you may need to engage an FMV consultant to evaluate other methods for documenting FMV, such as a cost method analysis, or identification of other market characteristics that are truly unique, such as a very small pool of physicians, extreme extenuating circumstances, etc.

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