How fair is fair market value when it comes to physician compensation?

Evolving market forces have created a new set of compliance standards for physician compensation arrangements. And since more than half of practicing physicians are “… now employed by hospitals or integrated delivery systems …,” according to an article in the New England Journal of Medicine1, the issue is more complex than it once was.

Compensation for physicians who practice in independent groups has traditionally been defined as the cash that remains after expenses are paid. Physicians employed by hospitals or integrated delivery systems (IDSs) generally earn W-2 compensation based on work RVU production, quality measurements, patient satisfaction and other criteria.

Hospitals or IDSs that employ physicians and their staff members should be aware of and concerned about features of the Stark Law,2 Medicare Anti-Kickback Statute and Federal regulation 26 C.F.R. Section 53.4958-6, which includes a rebuttable presumption that a transaction does not produce an excess benefit. I will share some business considerations related to fair market value for physician compensation for clinical services, but I want to emphasize that this should not be considered legal advice.

In Revenue Ruling 59-60, the Internal Revenue Service describes fair market value as the negotiated agreement to terms between a willing buyer and a willing seller under conditions of no duress and where each party has full knowledge of relevant facts. Although this ruling is the accepted commercial definition of fair market value, it does not constitute an adequate test of the fair market value for the compensation of physicians employed by hospitals or IDSs.

Federal regulation Section 53.4958-6, which applies to tax-exempt organizations, establishes a “rebuttable presumption that a transaction is not an excess benefit transaction,” and is considered the definitive standard for reasonableness or fairness of physician compensation arrangements. There are no definitive and incontrovertible formulae to tell us when compensation is or is not reasonable or represents fair market value. Although a determination of reasonableness or fair market value for these purposes depends on all of the relevant facts and circumstances, reasonable compensation is generally defined as the level of compensation that is consistent with the amount that would be paid by like organizations for like services under like circumstances.  

Federal regulation Section 53.4958-6 identifies the following conditions under which physician compensation would be reasonable and represent fair market value:

1. The compensation arrangement or the terms of the property transfer are approved in advance by an authorized body of the organization … composed entirely of individuals who do not have a conflict of interest … with respect to the compensation arrangement.
2. The authorized body obtained and relied on appropriate data as to comparability prior to making its determinations.
3. The authorized body adequately documented the basis for its determination.

The Stark regulations note that compensation arrangements between a physician and hospital or IDS cannot be influenced by the actual or anticipated volume or value of referrals by one party to the other. In other words, the hospital cannot directly or indirectly compensate a physician for his or her ability to admit or refer patients to the hospital. The Medicare Anti-Kickback Statute3 has a similar prohibition and requires that an arrangement is “consistent with fair market value in arms-length transactions and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid or other Federal health care programs.”

Negotiations over compensation arrangements always involve legitimate self interest. A seller of services attempts to obtain as much compensation as possible, while the buyer attempts to obtain the service at the lowest possible cost.

However, because of the compliance and regulatory environment, the matter is never that simple. In future articles, I will share some examples of fair market value tests of compensation arrangements for physicians who provide clinical services and examine compensation for medical directorships and on-call pay. Stay tuned.

Notes:

1. New England Journal of Medicine, May 12, 2011
2. mgma.org/stark  
3. cms.gov/Outreach-and-Education/Medicare-Learning-Network-MLN/MLNProducts/downloads/Fraud_and_Abuse.pdf

MGMA is working with several clients to develop customized educational offerings for physicians in medical groups, hospitals and health networks that address all of the issues outlined here. Learn more about how the MGMA Health Care Consulting Group can help you.