Jonathan E. Martin (jonathanmartin@umm.edu) is Compliance Manager, University of Maryland Physician Network in Baltimore.
As a former plaintiff’s personal injury attorney, I was always focused on getting my client the maximum amount of recovery for their particular case. I had knowledge regarding the potential value of the case; however, it was always my intent to recover above and beyond that perceived value. This was to ensure a happy client and to build future business.
As a compliance professional, I learned on day one that “value” in the healthcare universe had a much different meaning. Specifically, compensation for physicians was centered on the concept of fair market value (FMV). What is FMV? To define FMV between the two business communities (non-healthcare and healthcare) is to find that there is not much difference in the actual wording.
Case in point, FMV in the non-healthcare realm is the price, expressed in terms of cash equivalent, between a knowledgeable buyer and seller that facilitates the exchange of property/services, without any compulsion to do so.[1]
However, the Stark Law (also known as the federal self-referral statute) has defined FMV as “…the value in arm’s-length transactions, consistent with general market value…”[2] “General market value” is further defined as the compensation for services resulting from sincere bargaining between well-informed parties.[3]
The difference between the non-healthcare and healthcare FMV concepts emerges through the presence of two federal statutes. FMV to the healthcare professional transforms under the aforementioned Stark Law and the Anti-Kickback Statute (AKS). These statutes offer protections from prosecution (criminal and civil) and monetary fines, but only if compensation paid to a physician is set at FMV. It is important to also know that FMV is a range of compensation and not a single, specific salary point.
Under these two statutes, setting compensation within FMV becomes a necessity. FMV is the amount of compensation that would result if two skilled negotiators, who know exactly what compensation range the physician falls into, entered into a room and were not allowed to leave until they made the fairest possible deal for both sides. FMV is the amount of compensation that both sides to any physician agreement should work together to identify.
Determining fair market value
How do you know if the compensation you are offering is fair in the specific market in which the physician or group will be working?
Methodology
With the determined need to land within FMV, a critical piece to arrive within the correct compensation range is to use the right methodology. There are three generally accepted methodologies when seeking the value of a service: the market approach, the cost approach, and the income approach.[4]
The market approach is a general way of valuing a business, ownership interest, or asset by comparing it to similar subjects that have been recently sold. What have other physicians been paid that are similarly situated to the physician we are looking to employ?
The cost approach determines the value of a business, ownership interest, or asset by identifying the cost of replacing that future service capability. What would it cost to find another physician to replace the current physician we already have?
The income approach determines the value of an item by estimating the economic benefit that will be received from the investment. In other words, what is the anticipated economic benefit to contracting with this physician or physician group?
Of the three approaches, the market approach is generally accepted as the best methodology to determine the FMV compensation range of a physician or physician group.
Benchmarking data
Access to benchmarking data will help you determine where your compensation level stands within the market. Data is available from many sources, with two familiar names being Sullivan Cotter and Associates, Inc. (SCA), and Medical Group Management Association (MGMA).
SCA is an independent consulting firm that specializes in executive, physician and employee compensation. MGMA is an association for professionals in the medical field that also specializes in compiling compensation data. Both MGMA and SCA annually release a physician compensation survey report based on salary data collected from the previous year. The data focuses on physician compensation levels and productivity, and the reports are available in the fall of each year.[5] ,[6]
The survey reports contain compensation levels for a wide-ranging selection of medical specialties, from allergy/immunology to urology, and cover clinical and non-clinical (administrative) services. The physician compensation amounts are provided on a percentile basis, starting at the 10% (lowest compensated) to the 90% (highest compensated). Productivity amounts are provided in the same percentile format, but as total work relative value units (wRVUs). A wRVU reflects the level of time, skill, effort, and training required of a physician during an encounter/service.
Once you have the data, using it to determine the FMV compensation range for a physician is the next challenge. This can be done by analyzing the physician’s background and the primary service market. Generally speaking, a higher compensated physician will have some combination of the following: five or more years of experience, board certified/extra formal training, bi-lingual, previous chief or chair experience, peer-reviewed medical publications, and clinical research studies. Board certification is voluntary; however, it is widely accepted to reflect a physician’s expertise in a particular specialty.
The primary service market can also affect the FMV compensation level in the following manner: size of market, whether it is designated as a medically underserved area or a health professionals shortage area, and/or designated as an area of shortage of a particular specialty. For example, if there is a shortage of a particular specialty, then you may be justified in paying a higher compensation level to secure their services.
Valuation firms
Yet another method to determine FMV is to engage an independent valuation firm. With the need to demonstrate why a level of compensation is FMV, the need for valuation services is greater than ever. Although the government does not require independent valuations, they do impart more value to an external independent verification versus an internal valuation method.[7] Independent valuators, for example, have no financial interest in the agreements that they are reviewing.
Valuation firms will provide a detailed written report that will express their opinion as to whether the proposed compensation is consistent with FMV. The reports will detail the exact methods of review they used, the factors analyzed (e.g., the physician’s historical production levels), and the benchmarks the proposed compensation were compared against. The independent reports may generally be relied upon for two to three years.
Documentation
The final step in the FMV process is to document how you arrived at your compensation. Why is this physician being compensated more than another physician? Is it because of their experience, specialty shortage in that market, board certification, salary data, or historical productivity level? Whom did you consult with? Take the time to memorialize how you arrived at your figure. It is important to save the path taken, in case you ever need to justify the compensation level at a later date.
Conclusion
Many components are used to determine FMV compensation. It can be time consuming, and laborious. Whether you choose to pore over the salary surveys yourself, or ask an outside valuation firm for their opinion. It is exceedingly essential to any compliance program that a consistent process is in place to identify the applicable FMV range and that the method is documented.
Takeaways
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Fair market value (FMV) becomes a requirement under the Stark Law and Anti-Kickback Statute.
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The market approach is generally accepted as the best methodology to determining a FMV compensation range for a physician/group.
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Benchmarking data, physician background, and primary service market will all influence the FMV compensation range.
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Always maintain documentation as to how you reached the final compensation level.
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It is essential to have a consistent process for determining the FMV compensation range.