Survey says? Alternative approach to the fair market value of physician compensation

For well over a decade, the use of physician compensation surveys has been the predominant paradigm for establishing the fair market value of physician compensation. Surveys are used not only in setting fair market value compensation for healthcare regulatory compliance purposes, but also in valuing physician practices for divorce proceedings. In addition, many physician groups and health systems use survey data to set compensation levels for their member physicians.

In two recent BVR webinars on the fair market value of physician compensation, healthcare valuation experts Mark Dietrich and Timothy Smith refute conventional wisdom regarding the compensation hospitals pay to employ physicians and offer an alternative approach to determine fair market value.

FCA lawsuits

New paradigm

Two issues are key to this matter. The first is the use of compensation survey data, and the second is physician relocation. These issues, and their new approach, are fully explained in Dietrich and Smith’s recently published book, the BVR/AHLA Guide to Valuing Physician Compensation and Healthcare Service Arrangements, 2nd edition.

The government has been winning False Claims Act (FCA) lawsuits against a number of hospitals, reaping huge fines. These lawsuits (with more on the way) have emerged out of the trend of hospitals acquiring medical practices. The thrust of the cases is the measurement of the fair market value of physician compensation and whether the deals are commercially reasonable. The key quantitative analysis the government uses for commercial reasonableness is “significant losses” on physician practices. If the arrangement appears to fail this commercial reasonableness test, the government may suspect a Stark law violation (e.g., payments for referrals).

Misuse of survey data

In establishing reasonable or fair market compensation, most practitioners focus on survey data, especially from the Medical Group Management Association (MGMA) and the American Medical Group Association (AMGA). The problems with the surveys are that they are not based on random samples and the same organizations are reporting to at least two different surveys, according to Dietrich and Smith. Also, survey data are not always consistent with information about collections in the very same surveys.

wRVU rates in surveys are flawed means of setting compensation

Many hospitals and practices use work relative value units (wRVUs) as a means of measuring productivity, but the compensation data and wRVU rates in the surveys are a seriously flawed means of setting compensation, they say. They explain that the present use of physician compensation surveys to establish fair market value is based on several false premises, including:

  1. The surveys have statistical significance for the 90% or so of physicians not included in the surveys;
  2. The survey compensation per wRVU is always fair market value and commercially reasonable—the common wRVU technique utilized virtually assures that the employing institution will lose money on the practice, something that appears to be commercially unreasonable based on the recent court cases;
  3. That physicians will relocate to earn the median and, therefore, everyone should earn the median—an idea that is both statistically incoherent and not borne out by academic research; and
  4. That the 75th percentile of compensation per wRVU or compensation-to-collections ratio is a mythical ceiling on fair market value

Local-market conditions that are not measurable in the surveys may necessitate losses on physician practices due to supply and demand, payer contract rates, local-market competition, and national shortages of high-demand specialties, among other factors. The commercial reasonableness of these losses should be documented in advance and can, in fact, be documented through use of a different method as well as other techniques.

Myth of relocation 

Hospitals feel that, if they don’t pay their physicians at least the median compensation for their specialty, they will relocate to earn more. But Dietrich has done extensive research on physician mobility that refutes this notion, which is the government’s position. Physicians are less likely to relocate than other occupations, based on significant research that has been done on physicians’ mobility. For example, 10 years after being trained, two-thirds of physicians are still in the same state, according to the Association of American Medical Colleges, which tracks physician training and practice patterns. When a physician does move, it’s most likely after residency is completed.

Of course, there are exceptions, such as neurosurgeons, who are heavily recruited due to demand for that specialty. But, overall, Dietrich contends that the idea that a physician will relocate if he or she doesn’t get the median compensation does not hold up to scrutiny. However, this is the current mindset among hospitals and appraisers—a mindset that needs to change.

RBRVS approach to set fair market value compensation

Resource-based relative value scale (RBRVS) approach 

Dietrich and Smith have developed strategies hospitals can use to compensate physicians in a way that is consistent with their business goals without triggering government lawsuits. Instead of paying physicians the median compensation, hospitals could set fair market value compensation based on the resource-based relative value scale (RBRVS). RBRVS is a fee schedule that uses a complex formula to determine the payment due a physician for patient services and takes into account such factors as:

  • The resources used;
  • Practice expenses;
  • Malpractice expenses;
  • Geographic location; and
  • Others.

It measures direct compensation and benefits for physicians and excludes other costs or revenues unrelated to the physician’s personally performed clinical services. RBRVS reveals how much of what is collected should go toward paying doctors instead of overhead, according to Smith. The amount of collections could be allocated to physicians based on compensation vis-à-vis overhead and insurance, which allows the hospital to set compensation based on conditions in the local market, he says.

Another way to avoid the rash of lawsuits and government attacks on practice losses is for hospitals to focus more on negotiating for better rates for physician practices, Dietrich and Smith point out. Hospitals typically don’t think of this on the practice side—they normally focus on getting better commercial rates for hospital services in order to show profits in that area. But, if they put this same effort into the practice side, the physicians could be paid more with less exposure to compliance risk.

These strategies could help reduce or eliminate losses on physician practices, which would take hospitals out of the line of fire of FCA lawsuits, they say. However, this will require a different mindset and a willingness to rethink compensation surveys.

Want to learn more about this new paradigm?

Download a chapter from Dietrich and Smith’s recently published book, BVR/AHLA Guide to Valuing Physician Compensation and Healthcare Service Arrangements, 2nd edition,where they go into more detail on this topic.

Do you agree or disagree? 

Dietrich and Smith want to hear your thoughts. Comment below or send them to our executive editor, Andy Dzamba, at