HFMA ANI 2008: Estimating Fair Market Value for physician pay

One of the more vexing problems hospitals and health systems face is figuring out how to pay physicians well enough without offering such high compensation that it might be considered a kickback for referrals. However, one session at HFMA ANI this year offered some detailed advice on how to make this determination in a way that can be justified easily to both doctors and regulators. The key is to use a couple of key data points--regional/national payment data and payment per work relative value unit (wRVU)--and see to it that your pay scale doesn't fall too far out of either norm. Otherwise, it may be difficult to defend your pay decisions, said Brad Vaudry, director with accounting and consulting firm RSM McGladrey Inc.

Whether you're offering physicians a standard employment agreement or signing a professional service contract with independent physician groups, you must be aware of whether the pay you're offering meets Fair Market Value (FMV) standards, Vaudry said. In the case of employment agreements, healthcare entities need to be aware of the total cash value of what they're offering, including not only cash compensation, but also extras like sign-on bonuses, loan forgiveness and employer contributions to benefit expenses. FMV is also important when managing professional service deals, noted Wayne Hartley, a manager with RSM McGladrey. Documentation of services delivered is critical in professional service arrangements, he notes. "Keep accurate time and payment records," Hartley said. "Otherwise, you may look up in a year and not know what you paid them for."

So, how do you determine if the payments you are making pass regulatory tests for FMV? RSM McGladrey, for its part, uses a two-pronged approach. On the one hand, they compare proposed compensation to national market data, and determine the percentile at which that compensation falls. Then, after the physician has been on staff for approximately a year, they estimate that physician's work RVU production and compare compensation per work RVU with national norms. The ideal situation is for percentile for cash compensation and the percentile ranking payment per wRVU to fall close together. For example, if a cardiologist's cash payment falls into the 89th percentile nationally, and with production of 11,000 wRVUs, falls into the 85th percentile, the hospital is probably on safe ground, Hartley said.

On the other hand, if a physician's cash compensation or payment per RVU puts their payment more than two standard deviations outside of the norm, then your facility may have an issue to address, Vaudry suggests. To make sure issues like this don't crop up accidentally, RSM McGladrey advises its hospital clients to review physician payment arrangements annually.