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The importance of understanding physician compensation

02/27/2015  |  By: Josh Brummett, CPA/ABV, CFF, Shareholder, Healthcare Valuation Services

As featured in the Nashville Business Journal.

Recent news from South Carolina demonstrates the high stakes that can be in play for health care companies when it comes to navigating the intricacies of physician compensation.

Tuomey Healthcare System in Sumter, S.C., announced that it is negotiating a merger with nearby Palmetto Health as a way to deal with the fallout from a federal judge's 2013 order that Tuomey pay $237 million in fines for violations of the Stark law and the False Claims Act, which prohibit payments for referrals. A jury found that doctors' compensation from Tuomey rewarded them for referring patients to the hospital, causing Medicare claims to be tainted.

The fines exceed Tuomey's annual revenues, and the hospital has said it might have to shut down if it is ultimately required to pay the fines. Tuomey's board concluded that the best solution was to partner with another health system, the hospital said.

With fierce competition in many areas for physicians, hospitals are feeling pressure to increase compensation packages at the same time as per-physician collections in many specialties have dropped. Compounding the problem, some hospitals are not devoting enough attention to assuring that the total value of their compensation packages meets the Stark law's requirement to be commercially reasonable and consistent with fair market value. It should be noted that the Stark law definition of fair market value is not necessarily the same as many other definitions, such as one provided by the IRS as applied outside the health care regulatory environment. Compensation out of line with these guides can be viewed as an attempt to "buy" referrals.

In the Tuomey case, the hospital originally had obtained an outside valuation, in the form of a three-page opinion letter, which said the compensation package was consistent with fair market value, but which provided little supporting documentation. Nor did it explain the methodology used to form the valuation opinion.

This points to the critical importance of engaging an outside valuation expert who is well versed in the health care industry and has significant experience with physician compensation arrangements to make sure that they comply with regulatory guidance from a valuation perspective. A key principle is to avoid consideration of the value or volume of referrals in establishing compensation arrangements with physicians.

This also points to the importance of educating and communicating with all parties to the negotiating process (hospitals and physicians) about the real constraints hospitals face in negotiating compensation and the importance of making sure the value of compensation packages is commercially reasonable and consistent with fair market value.