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60 Executive Briefing Best Practices in Regulatory-Compliant Physician Compensation Plan Design Matthew J. Milliron, MBA, Director, and Jim D. Carr, ASA, MBA, Partner, HealthCare Appraisers T he negotiations have concluded, the contract has been submitted for legal review and the physician candidate has scheduled the moving truck. Everything is proceed- ing according to plan… until the compliance team calls to say that a fair market value opinion supporting the arrangement is required. The next few days (or weeks) give rise to unexpected stress levels. The valuation firm has requested a stack of data to analyze what seems, on the surface, to be a straightforward compensation plan. The candidate grows anxious to see the final contract. Internal pressure to get a signed contract rises. Is this deal going to fall apart in the final hour? What went wrong? This last-minute scramble to "paper the deal" is surprisingly common. Fortunately, with proper planning and diligence, the valuation process for a physician employment arrangement can be greatly simplified. Based on our review of thousands of such arrangements, we present some best practices that can help avoid a deal-threatening crisis. 1. Be familiar with internal requirements for outside valua- tion opinions and engage a reputable valuation consultant early in the process While internal valuation review is allowed, previous gov- ernment guidance indicates a preference for independent third-party appraisals, as internal assessments may be subject to bias from deal pressure and give rise to consistency con- cerns. As a result, many hospitals and health systems have developed policies that specify when an outside opinion must be obtained. Familiarity with such policies by those involved in contract negotiations allows early identification of deals that require outside review. Obviously, the sooner the valuation process begins, the more likely it becomes that the opinion will be ready prior to completing negotiations. It is preferable to present FMV-compliant terms to the candidate initially than to withdraw an offer that is ultimately not supportable. When engaging an independent consultant, employers are encouraged to be as transparent as possible with the physician candidate regarding the FMV review. Allowing the physician to have access to the consultant may lessen suspicion of what can appear to be a "black box" process or be perceived as a negotiating tactic. 2. Answer the "why" question A compliant physician compensation arrangement must be commercially reasonable. The key question surrounding com- mercial reasonableness is: "Would the parties enter into this arrangement even if there were no potential referrals?" When assessing commercial reasonableness, it can be helpful to con- sider the following: (i) Does the employment of this physician serve a legitimate business or mission-driven purpose absent consideration of referrals? (ii) Do the qualifications of the candidate align with the position's requirements? (iii) Does the method of compensation make sense given the nature of the services? (iv) Can a single physician reasonably perform all of the duties that are being requested? (v) Is the proposed com- pensation reasonable in the context of what the physician was earning prior to employment? (vi) Is there a solid business case to justify potential practice losses without considering referrals? If the answer to any of these questions is "no," then consider whether the commercial reasonableness of the arrangement can be supported. 3. Understand the market survey data before using it Employers and physician recruiters often reference one or sev- eral market surveys when developing compensation proposals, and physicians review survey data to assess a potential employ- ment offer. When relying on market data, it is vital to have an understanding of what the data represents and how it should be used. Here are some key points: (i) The compensation data reported by the surveys typically is "all in." That is, it represents total cash compensation from all sources, including patient services, administrative duties, call coverage, ownership distributions and ancil- lary margins. This definition is important to understand when establishing the agreement's core compensation measures. The use of a high compensation rate coupled with additional payments for various other services may give rise to "stacking" concerns. (ii) The "compensation per unit" data reported by the market surveys (e.g., compensation per wRVU, com- pensation as a percentage of collections) is inversely correlated with production. In other words, the highest compensation per wRVU rates often are attributable to physicians at the lower end of the production spectrum. This phenomenon is a byproduct of the survey data collection and reporting methods. The surveyors gather data regarding annual total cash compensation and annual clinical production and use this information to calculate compensation per unit rates for the reporting practices. As a result, the highest compensation per unit rates often reflect physicians on salary guarantees with low productivity. To yield FMV total compensation, Sponsored by: