Hot Topics in Physician Compensation

CAROL CARDEN, CPA/ABV, ASA, CFE
ANGIE CALDWELL, CPA, MBA
Pershing Yoakley & Associates
May 18, 2016
Hot Topics in Physician
Compensation

Prepared for Kentucky Society of CPAs Page 1
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Agenda
Valuation Overview
Stacking Considerations
The Role of Quality Incentives
Affiliation Models
Population Health Initiatives

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Valuation Overview
2

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What is Value, Valuation, and
Compensation Valuation?
 What is value?
 The amount of money that something is worth. The price or cost of
something.1
 What is valuation?
 An independent, unbiased opinion to determine the worth of
products and services alike, that are or will be, provided or
received by a seller or buyer.
 Compensation Valuation
 An independent, unbiased opinion determining the worth of the
services provided to a willing buyer from a willing seller.
1 Merriam-Webster Dictionary

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Why are Compensation Valuations
Performed?
Hospital Needs Assessments
Medical Directorship Agreements
Educational Services Agreements
Supervision Agreements
On-Call Agreements
Employment Agreements
Consulting Agreements
Professional Clinical Services
Quality Incentive Programs
Recruitment Incentive Programs

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How Is Compensation Valued?
5-Step Approach
1. Identify background, relevant facts, and key
assumptions surrounding arrangement.
2. Utilize benchmark compensation surveys to analyze
the specific physician/hospital relationship.1
3. Identify all factors and circumstances pertaining to
compensation between the hospital and physician.
1 Federal Register / Vol. 72, No. 171/ Wednesday, September 5, 2007/ Rules and Regulations states, “Reference to multiple,
objective, independently published salary surveys remains a prudent practice for evaluating fair market value.”

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How Does One Value Compensation?
5-Step Approach
4. Identify one or more approaches to determine
compensation valuation:
 Income Approach: Forward-looking premise of value based on the assumption that the
value of a service is equal to the sum of present values of the expected future benefits of
providing a service.
 Cost Approach: The cost of what it would be to replace the services the physician
provides.
 Market Approach: Comparing comparable market data for the services being provided in
a similar environment.
5. Reconcile various approaches and document your
valuation in writing.

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Fair Market Value
 Hypothetical willing buyer
 Hypothetical willing seller
 Reasonable knowledge of the relevant facts by both
parties
 Neither party is under compulsion to buy or sell
 Arms-length transaction in an open and unrestricted
market
 Presumed ownership transfer as of a specific date

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FMV Compensation
 Required for any transactions in which a financial
relationship exists between parties with the ability to refer
patients
 Not very prescriptive
 Use of multiple, objective compensation surveys
 Attributed clinical compensation rates for clinical services and
administrative compensation rates for administrative duties
 Relationship with commercial reasonableness (to be
discussed later)

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Healthcare Fair Market Value
Key Concepts
 Determined from the perspective of hypothetical
buyers and sellers without the ability to refer
business to one another.
 No consideration for post-transaction buyer
synergies. However, such synergies often exist!
 The financial terms of the transaction must make
economic sense based on the assets being
sold/received.
 Post-transaction compensation must be taken into
consideration.

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Compensation Stacking

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Employment Models
Common elements include:
 Base compensation
 Productivity threshold – many times based on work relative value unit
(wRVU) level
 Incentive compensation for productivity
 Incentive compensation for quality outcomes
 Sign on or retention bonus
 Compensation for excess call coverage
 Compensation for supervision or teaching services
 Administrative compensation
Hospitals and other organizations continue to utilize complex compensation models,
often with multiple layers of compensation for multiple services sometimes referred to
as “stacking.”

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Regulatory Guidance
Stark II Phase III specifies that you can pay for
both clinical and administrative services, but
the rate paid for clinical services should be
appropriate and the rate paid for administrative
services should be appropriate. These may or
may not be the same rates of pay.

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Assessing the Risk
• More moving parts
• Higher total compensation
• Ensuring the correct
benchmarks are considered
• Assessing each part and the
whole package
How risky is this agreement?
=

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Sources of Data
MGMA: Compensation, medical director, and call surveys
Sullivan Cotter: Compensation, administrative compensation, and call
surveys
AMGA: Compensation and administrative compensation
HHCS: Compensation and administrative compensation
Towers Watson: Compensation and administrative compensation
Niche surveys like anesthesia, trauma, cardiology, neurosciences, and
academic compensation
And others…..choices galore!

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Commercial Reasonableness
 Department of Health and Human Services Definition1
 An arrangement which appears to be “a sensible, prudent business
agreement, from the perspective of the particular parties involved, even
in the absence of any potential referrals.”
 Stark Definition2
 “An arrangement will be considered ‘commercially reasonable’ in the
absence of referrals if the arrangement would make commercial sense if
entered into by a reasonable entity of similar type and size and a
reasonable physician of similar scope and specialty, even if there were
no potential designated health services (DHS) referrals.”
 OIG Threshold3
 Compensation arrangements with physicians should be “reasonable and
necessary.”
1 63 Fed. Reg. 1700 (Jan. 9, 1998).
2 69 Fed. Reg. 16093 (March 26, 2004).
3 “OIG Compliance Program For Individual and Small Group Physician Practices,” Notice, 65 Fed. Reg. 59434 (Oct. 5, 2000); OIG Advisory
Opinion No. 07-10, September 20, 2007, pg. 6, 10; “OIG Supplemental Compliance Program Guidance for Hospitals,” Notice, 70 Fed. Reg.
4858 (Jan. 31, 2005).

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Factors in Determining CR
Business Purpose
Provider Analysis
Facility Analysis
Resource Analysis
Independence & Oversight
Commercial
Reasonableness
Determination

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Quality Incentives

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What Models Are Being Used?
21%
12%
10%
11%
14%
32%
0%
1%-24%
25%-49%
50%-74%
75%-99%
100%
PercentatRisk
Percent Employed Physician Staff
with Portion of Compensation at
Risk?
Source: HealthLeaders Media Physician Alignment Survey 2014
Old Models:
• Straight Production
(wRVUs)
• Guaranteed Salary
New Models:
• Quality Incentives
• Panel Management

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Clear Trend: Some Portion of
Physician Compensation “At-Risk”
Health Leaders Media, Physician Alignment: New Leadership Models for Integration, September 2014
57%
of respondents currently have at least 50% of
their employed physicians with some portion of
compensation at-risk
81%
of respondents expect to have at least 50% of
their employed physicians with some portion of
compensation at-risk within three years

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Organizations’ Dominant
Physician Compensation Model
HealthLeaders Media, Physician Alignment: New Leadership Models for Integration, September 2014
Of Note…
• PYA’s experience and
observations mirror the shift
indicated in these findings.
• PYA also observed a shift
from models that only
incorporate these elements
as a “bonus” to standard pay,
to those that place these
components at-risk (possible
withhold), offset by the
upside potential to earn
above historical
compensation levels.
58%
Respondents using wRVU plus incentive
25%
Respondents using wRVU only

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Physician Incentive Payment Survey
What does your organization use to guide the payment of physician incentives?
HealthLeaders Media, Physician Compensation: Shifting Incentives, October 2011
4%
23%
7%
50%
57%
75%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Referrals
Chart Completion
Participation in Administrative Duties
Patient Satisfaction Scores
Quality Metrics
Productivity Measures

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Inclusion of Quality Incentives
Source: Sullivan, Cotter and Associates, Inc. 2012 Physician Compensation and Productivity Survey.
About one-half (49%) of
organizations incorporate
non-productivity
measures in incentive
compensation plans.
60%
30%
23%
83%
39%
35%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Patient
Satisfaction
Patient Safety Care
Coordination
PercentageofOrganizationsUsingTypeof
QualityIncentive
Primary Care Providers Specialists

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$180
$160
$120
$25
$85
$20
$25
$35 Quality
Incentive
Capitation or
Episode
Based
Productivity-
based
CURRENT NEAR TERM LONGER TERM
A Balancing Act Compensation
Stacking (in 000’s)
Compensation only
increases if quality
improves

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Physician Value Modifier –
2017 Quality Tiering
Low Quality Average Quality High Quality
Low Cost 0.0% +2.0x* +4.0x*
Average Cost -2.0% 0.0% +2.0x*
High Cost -4.0% -2.0% 0.0%
*Eligible for an additional +1.0x if reporting clinical data for quality measures and
average beneficiary risk score in the top 25% of all beneficiary risk scores.
Based on 2015 Performance

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Here to Stay
“Our goal is to have 85% of all Medicare fee-
for-service payments tied to quality or value by
2016, and 90% by 2018.”
“Our target is to have 30% of Medicare
payments tied to quality or value through
alternative payment models by the end of 2016,
and 50% of payments by the end of 2018.”
Source: HHS Secretary Sylvia Burwell (January 30, 2015)

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Affiliation Models

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Trends in Merger & Acquisition Activity
 Still a fairly active trend
 Involves primary care and specialty practices
 Generally only paying for tangible assets
unless large practice
 Post-transaction compensation is a key
assumption
 Generally involves ancillary service lines like
ASCs and imaging
 Likelihood of cash distribution is a key driver
 Many are structured as pass-through entities
so this becomes an important component of
the valuation
Hospital
Acquisition of
Physician
Practices
Hospital/
Physician
Joint
Ventures

Physician Management Agreements
Still see new and renewed clinical co-
management agreements
Bundled payment for care improvement
(BPCI) is becoming more commonplace and
expanding in conjunction with Comprehensive
Care for Joint Replacement (CCJR)
Increasingly seeing gainsharing arrangements
being pursued

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Other Physician Affiliation Models
New employment and renewals of existing employment
agreements
Physician leasing arrangements – not as common
Professional Services Agreements (PSA) as an
alternative to employment, sometimes referred to as
synthetic employment. Popular in states with corporate
practice of medicine prohibitions.

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Population Health

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Key Healthcare Reform Provisions
Bundled Payments
Value-Based Purchasing
Accountable Care Organizations
Clinically Integrated Networks

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Levels of Fund Distribution

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PERSHING YOAKLEY & ASSOCIATES, P.C.
800.270.9629 | www.pyapc.com
Carol Carden, CPA/ABV, ASA, CFE
Angie Caldwell, CPA, MBA
Pershing Yoakley & Associates, P.C.
(800) 270-9629
ccarden@pyapc.com
acaldwell@pyapc.com

Hot Topics in Physician Compensation

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