Question

What do you see as the pros and cons of obtaining fair market value analyses on the compensation paid to physicians, especially when the market rates are benchmarked against national standards? How could this information be used in negotiating rates with physicians?

Answer 1

Ans) Fair market value has no actual definition but the IRS states that it’s defined as “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”.

- Providers are being challenged more to createthat physician relationships are at fair market value.

- Physician competition arrangements must adhere with the fair market value and commercial reasonableness requirements of the Stark Law, Anti-Kickback Statute, and IRS private inurement regulations, especially given the growing levelof government enforcement.

Pros: Shared shavings- under shared savings or gainsharing arrangements, which is a hospital shares with physician’s savings from cost-savings initiatives, allocation of savings needs to be reasonable and consistent with current market arrangements.

Pros and cons: These salary models are essentially worry-free for young physicians, so they offer a sense of security. But without the bonus component, which is usually based on the group’s total earnings, they offer little long-term financial incentive if there is no “ownership track,” and may ultimately either discourage entrepreneurship or support minimum-effort work standards.

Equality/equal shares. This model, considered the easiest from an administrative standpoint, is based purely on economics: after expenses, the remaining revenues are allocated equally among the group’s physicians.

Pros and cons: On the plus side, this structure discourages over-utilization and doesn’t require complex mathematical formulas. The possible downsides are that the model presumes all physicians are equally skilled, equally productive, and most importantly perhaps, equally motivated to work in the group’s best financial interest. That means “high producers” have little long-term incentive and low producers may be allowed to ride on the financial coattails of the more productive physicians. Nonetheless, many single-specialty groups adopt this model on the premise that all services, even those for which reimbursements are lower, are valuable and necessary to a group seeking to operate a full-service practice.

Production- or productivity-based compensation. This model, with its myriad variations, can be fairly complicated. Essentially, physicians are paid a percentage of either billings or collections, or they are paid based on the resource-based relative value scale (RBRVS) units assigned to procedures or patient-visit types. The overhead costs of the practice — both fixed and variable — are allocated among the physicians.

Pros and cons: The possible advantage of this model is that it both encourages and rewards extra effort by individual physicians. In that also lies the potential downside: it can create a competitive intragroup environment that some physicians might not find appealing or that can deter citizenship. The productivity model and relative overhead allocation can also be difficult to manage administratively and politically. “Physicians need to understand their personal objectives. If they’re interested in a very collegial environment, they might not want to be in a group where each physician is paid on his or her own production, because that will be pretty competitive,” says Cornett.

Physicians should also determine whether their earnings in a productivity-based scheme will be based on their billings or on collections. If earnings are collections based, it behooves the physician to determine what percentage of billings the group typically collects, as well as how quickly — or slowly — reimbursement is received.

Patient mix also comes in to the picture in productivity-based compensation, so it’s advisable to inquire about relative percentages of commercially insured, Medicare/Medicaid insured, and uninsured patients seen in the practice, as well as how new patients are assigned. For example, a physician whose patient base consisted primarily of Medicare or Medicaid patients would earn less than a counterpart whose patient base was primarily commercially insured, as Medicare/Medicaid reimbursement tends to be the lower of the two.

Capitation or productivity plus capitation. The concept of capitation — prepaid health care premiums allocated to contracted provider groups for all coverage or specialty-services coverage of a defined enrollee population — became prevalent in the late 1980s and early 1990s. Capitation is still present in certain HMO-intensive markets, such as California, Minnesota, and the Northeast. Translated into a compensation model, capitation involves distribution of health plan payments among physicians in a nearly equal manner or based on some type of formula.

Pros and cons. On the plus side, capitation rewards groups, and in turn those groups’ individual physicians, who deliver cost-efficient, effective care. However, from an economic standpoint, capitation-based income is dependent on marketplace factors and a group’s negotiating prowess, which means that overall income levels may wax or wane from one year to the next. In addition, because global capitation contracts may entail providing all services to a group of patients, a high percentage of catastrophic diagnoses may negatively affect the group’s bottom line, and therefore individual physicians’ income levels.

On a final note, regardless of the compensation model in place at the hiring practice or entity, young physicians should calculate their living expenses and monthly personal budgets based on the compensation amount that is guaranteed. It’s not advisable to count on a year-end bonus, even if it looks likely, because unforeseen factors could affect whether the bonus actually materializes.