Fair Market Value Physician Compensation Fails

Determining fair market value (FMV) compensation in a healthcare setting generally requires the use of multiple, objective data points and an understanding of how to apply that information given the unique facts and circumstances of the subject arrangement relative to the overall market.

Understanding what the government considers as support for FMV, and what it does not, is critical to selecting and enacting policies and procedures for establishing FMV physician compensation.

Over the years, we have seen several flawed justifications represented as Stark Law compliant support for FMV payments to physicians. Below is a summary of a few that tend to resurface regularly.

Using “Contribution Margin” to Justify Physician Compensation

I have often heard the argument that a physician’s compensation is FMV simply based on the fact that the hospital is making money on its overall investment in the physician or physician practice. However, the concept of using a physician’s overall economic contribution to a hospital as a way of supporting compensation quickly runs afoul of the Stark Law’s prohibition of taking into account a physician’s “volume or value” of referrals. While it may make business sense to consider the total economic impact (i.e., referrals) that employing a physician may have on the hospital, using the total business generated netted against physician costs (namely compensation) should never be used as the basis for establishing or defending FMV compensation from a regulatory perspective.

Matching a Competitor’s Offer

Over the years, we have been asked several times to determine FMV in response to an offer from a competitor attempting to hire or exclusively contract with a hospital’s physician(s) or physician group. The question raised in these situations is usually along the lines of “Can’t we just match the competitor’s offer?”

The first thing to remember is that a single offer in the market, on its own, will never fully satisfy the definition of FMV as that term is used in the Stark Law. The Stark Law, at the very least, suggests the reliance on multiple data points. Additionally, an offer from a local competitor (or facility in another state for that matter) is most likely between current or future referral sources (another problem we will discuss below). A more practical concern is that often very little or nothing is known about the specific contract terms relative to the competitor’s offer. For example, are there additional services (that the physicians are not providing in their current contract) that factor into a higher offer? Are there certain (unknown) stipulations surrounding the offer that we are not privy to? Are there specific productivity requirements that must be met? Is productivity volume expected to be the same? There can be many questions like this surrounding the offer. The point is, these specifics are not known and are unlikely to be revealed, and therefore knowing if you are comparing apple to apples may be impossible.

Any time a physician brings you a competing offer for consideration, it’s imperative to consider all the relevant factors surrounding the current arrangement and the relevant market and be prepared to respond in a way that protects the hospital in the long term.

Using Survey Percentiles as “Safe Harbors”

Over the years, we have observed hospital executives and other advisors refer to and utilize certain survey percentiles as de facto “safe harbors.” For example, some systems may consider any arrangement at the Medical Group Management Association 75th percentile to be FMV. While it’s certainly true that many of these arrangements may actually be within FMV, it also leaves open a lot of uncertainty. Statistically speaking, if all arrangements are set at the 75th percentile, this would mean that all of your physicians are paid higher than 75% of those physicians responding to the survey. That alone, in my mind at least, would be cause for concern.

Similarly, I’ve seen median survey data used in the same way. While this may be a more “conservative” approach than using the 75th percentile, there is still no “safe harbor” survey percentile for FMV. To highlight this point, there has been at least one recent DOJ settlement related to physician compensation that was actually below the median and was argued to exceed FMV (see the 2015 Citizens Medical Center case).

Negotiating Your Way to FMV

I have often heard hospital leadership make reference to the fact that a financial arrangement with a physician or physician group is FMV because it is the result of an “arm’s length” negotiation with the physicians (in reality, a lot of times the “negotiation” was merely an accepted offer). However, in Kosenske v. Carlisle, the Court of Appeals found that negotiations between parties in a position to refer DHS do not yield fair market value, saying “as a legal matter, a negotiated agreement between interested parties does not ‘by definition’ reflect fair market value. To the contrary, the Stark Law is predicated on the recognition that, where one party is in a position to generate business for the other, negotiated agreements between such parties are often designed to disguise the payment of non-fair-market value compensation.” For this reason, reliance on a rate based solely under these circumstances, in and of itself, will likely not stand as support for FMV under government scrutiny.

Every physician compensation arrangement is unique. FMV needs to be determined on a case-by-case basis by analyzing the facts and circumstances surrounding every agreement to ensure your financial arrangements are compliant.