Mistakes to Avoid in Hospital-Based Physician Contracts

The number of hospital-based physician arrangements has changed and grown significantly over the past decades. Ten years ago, most hospitals contracted with radiology, emergency, anesthesia, and pathology groups. Now there are a growing number of hospitalists, intensivists, laborists, trauma surgery, and specialty hospitalists contracts. While these arrangements benefit patients, physicians and healthcare organizations, they are usually complex and require careful attention to payment and service requirements. 

Prior to the 1990s, private community physicians attended most hospital patients and hospitals only contracted for anesthesiology, radiology, pathology, neonatology, and emergency to ensure continuous coverage of basic hospital services. Over the next two decades, a transition in how physicians work in and out of hospitals occurred, with more contractual arrangements to care for specific populations of inpatients, including:

  • Internal medicine/general hospitalists
  • Pediatric hospitalists
  • Critical care
  • Pediatric intensivists
  • Trauma surgery
  • OB hospitalists/laborists
  • Orthopedic, surgical, neuro and other specialty hospitalists

Negotiating these contracts is challenging since hours of coverage, payer mix, service mix, average daily census, and quality initiatives are all relevant factors in establishing a fair price for the services. Scope of services may include administrative and directorship duties, emergency coverage as well as in-house physician requirements. Here are some of the most common mistakes we see health care leaders and physicians make when entering into these partnerships.

1. Paying for a service without objective assessments.

Not every hospital-based agreement needs a collection guarantee, stipend, or payments for call coverage. Determining if payments are commercially reasonable is a crucial first step that is not always straightforward. Market data like MD Ranger’s “Percent Paying Benchmarks” allow organizations to see who else reports paying for services, which is helpful to include in commercial reasonableness assessments. Establishing commercial reasonableness of a contract before determining how much to pay isn’t just a good idea: it’s a must.

2. Ignoring the economic value of exclusivity.

Does your hospital-based contract specify exclusivity? The OIG has determined that exclusivity has economic value in certain situations:

“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 hospital and the physicians”.1

Unfortunately, there is no generally accepted way to quantify the value of exclusivity, but three good approaches are:

  1. Have FMV documentation, either internal documentation or an external valuation, that specifically recognizes the value of exclusivity.
  2. Seek to negotiate a compensation level that is lower in the FMV range of market benchmarks. Note that market ranges inherently include the discount for exclusivity while some cost approach ranges may not incorporate the discount.
  3. Include a discount over the ‘estimated cost’ of the service in the 5-10% range to reflect the value of exclusivity.

3. Not specifying level of service.

Be specific in the contract language in regards to the service and staffing levels required by your facility to ensure both parties understand the scope of resource requirements. Vague and nonspecific terms in the contract can lead to understaffing, lack of backup coverage, lower quality service, poor patient satisfaction, and unhappy, stressed staff.

4. Stacking payments.

Stacking is a hot topic, as it can be easy to miss if contract negotiations and maintenance are not centralized. To avoid this problem, identify all the payments and contracts with each physician or group, especially medical directorship and other administrative positions. While one position can be within fair market value, when more positions and payments are added, the overall payment can become commercially unreasonable and/or above fair market value. Pay special attention to services such as “Nighthawk”, malpractice insurance, certified nurse assistants, or nurse practitioners the hospital reimburses a medical group, which can add up to compensation that exceeds FMV.

5. Ignoring physician collections.

Depending on the physician group and the payer mix, the amount physicians collect while providing the contracted services may drive whether the overall payment from a hospital contract and professional fee collections are above or below fair market value. It is the combined receipts that must go into determining whether hospital payments are above fair market value. On the other hand, a hospital may be ‘underpaying’ a physician group if collections are low or service requirements are greater than needed. A good example is asking an anesthesia group to staff more operating rooms than the volume or surgeries justifies.

6. Failing to determine and document FMV.

Market data benchmarks can help hospitals scope the value of hospital-based contracts, and, in many cases, market data can be sufficient to determine and document FMV. They can also help inform negotiations when hospital characteristics such as trauma status or number of births or surgery cases is a significant variable. Complex hospital-based agreements, particularly ones with little or no comparable market data available or ones on the higher end of the market ranges, may need more analysis and an independent FMV opinion.


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

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