Fair Market Value of Physician Compensation

In the midst of a huge wave of physician integration, a very important regulatory compliance requirement regarding compensation is showing up in every transaction: fair market value. This is often a source of frustration and misunderstanding in the negotiation process.

The fair market value process is a fact of life in health care transactions and appraisers can help keep well-meaning parties from the perils of Stark, Antikickback and False Claims prosecution. These five tips will help you better navigate this process and give you more control and influence over the exercise.

1. Compensation Generally Corresponds to Productivity

While this cannot be applied to every specialty, most fair market value analyses begin with the premise that there needs to be a reasonably close relationship between work effort and compensation. This relationship is typically stated in terms of total productivity and total compensation.

So, if your productivity is at the 50th percentile and you hope to be paid at the 75th, you are probably going to have to demonstrate value outside of Work Relative Value Unit (WRVU) production to convince an appraiser to sign off on that higher compensation amount.

2. Per Unit Compensation Does Not Correlate to Total Productivity

This is always of great disappointment to physicians, but the survey issuers actually tell us that there is an inverse relationship between total compensation and compensation per WRVU.

What this means is that if your total production is at the 90th percentile of survey data, payment on a per WRVU basis at the 90th percentile of market data will likely produce a total compensation outside of the range of fair market value.

Example Survey Data (Family Practice)

90th Percentile WRVUs — 7,000

90th Percentile Compensation per WRVU — $59

90th Percentile Compensation — $300,000

To pay a 90th percentile WRVU producer at the 90th percentile compensation per WRVU rate results in the following: 7,000 x $59 = $413,000. Clearly the $413,000 produced by the application of the 90th percentile compensation per WRVU rate is outside of the range of fair market value, absent unusual facts and circumstances (see the next tip).

3. Facts and Circumstances Matter

Physicians should not assume that appraisers inherently understand the value of their work or the efforts that are made. Activities that you may not be compensated directly for today could have value to a potential employer. Those activities should be documented and made available for an appraiser’s consideration.

4. Understand the Survey Data

It should be no problem to ask an appraiser to discuss the relied upon sources of information regarding compensation. Most appraisers use multiple survey sources and reconcile the findings based on the arrangement and presentation of underlying data. The better physicians understand the data, the more likely they will be to identify how well their practice fits into the data. The less fit there is to the data, the more an appraiser will need to consider adjustments to get the right answer.

The three most common sources of survey data are the annual compensation surveys issued by the Medical Group Management Association, American Medical Group Association, and Sullivan Cotter & Associates. It is worth noting that none of these three surveys report total compensation in exactly the same way. Therefore, it is critical to understand what is in each survey definition and what groups are responding to the surveys to find the best fit for you.

5. Understand Your Own Productivity

Do not take for granted that accountants or consultants will be able to really understand how much and how hard you work. A calculation of WRVUs produced can be performed by just about anyone, but raw numbers rarely tell the whole story. By understanding and taking ownership of your productivity, especially in an era of pay based on WRVU productivity, you stand the best chance of an appraiser accurately capturing the value of your clinical efforts.

Practices with mid-level providers and procedure-based specialists often have the most difficulty in capturing and communicating productivity data with enough granularity to allow appraisers the opportunity to understand the true value of work performed. The lack of detail includes applicable supervision credit, modifier utilization, and charity care provided.

Randy Biernat, CPA , ABV, CFF is a Director at Katz, Sapper & Miller in Indianapolis, IN. Katz, Sapper & Miller is a leading provider of accounting, tax and consulting services to the medical community. For more information about Katz, Sapper & Miller, or the topic discussed in this article, Randy can be contacted at RBiernat@ksmcpa.com, or by phone at (317) 844-4851.

Katz Sapper & Miller is also a proud member of the National CPA Health Care Advisors Association (HCAA), a nationwide network of CPA firms devoted to serving the health care industry. Its members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact the HCAA at info@hcaa.com.

Good examples of unusual facts and circumstances that may warrant compensation disproportionate to productivity include: an extremely high on-call coverage burden; significant non-clinical duties (teaching, service line leadership, etc.); developing a new service line; serving a large geographic region in an underserved specialty; and others.