hot topics in physician compensation

CAROL CARDEN, CPA/ABV, ASA, CFEANGIE CALDWELL, CPA, MBAPershing Yoakley & AssociatesMay 18, 2016

Hot Topics in Physician Compensation

Prepared for Kentucky Society of CPAs #AICPAhealth

Agenda

Valuation Overview

Stacking Considerations

The Role of Quality Incentives

Affiliation Models

Population Health Initiatives

Prepared for Kentucky Society of CPAs 3 #AICPAhealth

Valuation Overview


What is Value, Valuation, andCompensation 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


Why are Compensation ValuationsPerformed?

Hospital Needs AssessmentsMedical Directorship AgreementsEducational Services Agreements

Supervision AgreementsOn-Call Agreements

Employment AgreementsConsulting Agreements

Professional Clinical ServicesQuality Incentive Programs

Recruitment Incentive Programs


How Is Compensation Valued?

5-Step Approach1. 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.”


How Does One Value Compensation?

5-Step Approach4. 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.


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


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)


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.


Compensation Stacking


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.”


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.


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?

=


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!


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).


Factors in Determining CR

Business Purpose

Provider Analysis

Facility Analysis

Resource Analysis

Independence & Oversight

Commercial

Reasonableness

Determination


Quality Incentives


What Models Are Being Used?

0%

1%-24%

25%-49%

50%-74%

75%-99%

100%

21%

12%

10%

11%

14%

32%

Percent Employed Physician Staff with Portion of Compensation at

Risk?

Perc

ent a

t Ris

k

Source: HealthLeaders Media Physician Alignment Survey 2014

Old Models:• Straight Production

(wRVUs)• Guaranteed Salary

New Models:• Quality Incentives• Panel Management


Clear Trend: Some Portion ofPhysician 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


Organizations’ DominantPhysician 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


Physician Incentive Payment Survey

What does your organization use to guide the payment of physician incentives?

HealthLeaders Media, Physician Compensation: Shifting Incentives, October 2011

Referrals

Chart Completion

Participation in Administrative Duties

Patient Satisfaction Scores

Quality Metrics

Productivity Measures

0% 10% 20% 30% 40% 50% 60% 70% 80%

4%

23%

7%

50%

57%

75%


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. Pati

ent S

atisfa

ction

Patien

t Safe

ty

Care C

oordi

natio

n0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

60%

30%23%

83%

39%35%

Primary Care Providers Specialists

Perc

enta

ge o

f Org

aniz

atio

ns U

sing

Typ

e of

Q

ualit

y In

cent

ive


$180$160

$120

$20 $25

$35

$25 $85

Quality Incen-tive

Capitation or Episode Based

Productivity-based

CURRENT NEAR TERM LONGER TERM

A Balancing Act CompensationStacking (in 000’s)

Compensation only increases if quality

improves


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


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)


Affiliation Models


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

Prepared for Kentucky Society of CPAs

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


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.


Population Health


Key Healthcare Reform Provisions

Bundled Payments

Value-Based Purchasing

Accountable Care Organizations

Clinically Integrated Networks


Levels of Fund Distribution

PERSHING YOAKLEY & ASSOCIATES, P.C.800.270.9629 | www.pyapc.com

Carol Carden, CPA/ABV, ASA, CFEAngie Caldwell, CPA, MBA

Pershing Yoakley & Associates, P.C.(800) 270-9629

[email protected]@pyapc.com