Tom Moran, Nelson Mullins Riley & Scarborough, LLP

Julie Hill, Georgetown Hospital System Human Resources

Physician Employment

Physician Employment Agreements

Physician Compensation 1. Compensation Standards

2. Appraisals

3. Compensation Methodologies

4. Caps on Compensation

5. Practical HR Issues

6. Non-Compete Update

7. Alternatives to Physician Employment

Physician Compensation Survey Data

What is appropriate compensation?

Medical Group Management Association (MGMA) Physician

Compensation Survey is published annually and includes both

national data and data by geographic location.

Sample: MGMA Standard (Southern

Region) Orthopedic Surgery

25th

Percentile

Median 75th

Percentile

90th

Percentile

Compensation $400,000 $535,522 $670,353 $859,739

Compensation

/ Work RVUs

$46.32 $59.10 $71.44 $98.58

Work RVUs 6,447 9,074 11,442 14,147

Collections $532,617 $751,040 $884,199 $1,238,199

Collections/

Work RVUs

$74.00 $81.85 $89.00 $103.00

Gross Charges $1,166,395 $1,867,229 $2,602,203 $3,101,174

Sample: MGMA Standard (Southern

Region) Family Medicine

25th

Percentile

Median 75th

Percentile

90th

Percentile

Compensation $167,459 $205,797 $270,998 $347,859

Compensation

/ Work RVUs

$36.98 $43.02 $51.68 $65.37

Work RVUs 3,859 4,884 6,016 7,377

Collections $299,858 $369,445 $476,367 $595,418

Collections/

Work RVUs

$68.00 $74.52 $85.00 $101.00

Gross Charges $444,508 $566,001 $774,630 $1,075,279

Sample: MGMA Standard (Southern

Region) General Surgery

25th

Percentile

Median 75th

Percentile

90th

Percentile

Compensation $288,268 $361,281 $465,800 $572,786

Compensation

/ Work RVUs

$40.70 $48.06 $58.16 $79.83

Work RVUs 5,693 7,946 9,802 12,136

Collections $308,521 $503,228 $636,855 $824,706

Collections/

Work RVUs

$59.00 $65.52 $71.00 $80.00

Gross Charges $794,996 $1,293,376 $1,672,105 $2,092,912

Challenges in Using Survey Data

Compensation of physicians previously practicing in

community

Importance of Obtaining "Privileged"

Appraisal of Compensation

Standards of Value Used in Appraisals

Fair market value (as defined by the Internal Revenue Code,

Stark and Anti-kickback)

Commercial reasonableness (as defined by Stark)

Utilization of Attorney-Client Privilege to Protect Appraisals

Fair market value and commercial reasonableness are legal

issues (not simply economic issues)

Advantages of obtaining attorney-client privilege for appraisals

Sample Appraisal Language:

Healthcare Regulatory Environment The following represents a very brief summary of a lengthy and complex set of regulatory requirements and is not intended to be exhaustive. In general, the healthcare industry is a highly regulated industry in which federal and state regulations address the relationship between physicians and healthcare service businesses. Below you will find an overview of the key regulations; each is considered to be an important part of the healthcare regulatory environment.

Federal False Claims Act

Federal anti‐kickback laws (fraud and abuse laws and regulations)

Stark laws (physician self‐referral laws and regulations)

IRS private inurement regulations (affecting tax‐exempt organizations)

State anti‐kickback and self‐referral laws

The False Claims Act is a federal law that allows people who are not affiliated with the government to file actions against federal contractors claiming fraud against the government. As it relates to healthcare organizations, the Act applies to an individual or organization that seeks to collect healthcare reimbursement from Medicare (or other federal programs) under false pretenses. The anti‐kickback law makes it a felony to offer, pay, accept, or solicit payment for the referral of, or the arranging for, the referral of items, services, or patients reimbursed by any federal or state healthcare program. The anti‐kickback law has safe harbor provisions that allow for certain business practices that would not be treated as violations of the anti‐kickback statute.

The Stark laws prohibit a physician with a financial relationship with an entity that provides certain designated health services from referring patients to the entity. The Stark statute and regulations have numerous detailed exceptions to this referral prohibition.

The IRS private inurement regulations regulate the actions of tax‐exempt organizations. A hospital or healthcare organization that is exempt from tax must be operated exclusively for charitable purposes. No part of an exempt hospital’s net earnings may inure to the benefit of a private shareholder or individual. The primary purpose of the exempt hospital must be to serve the public interest rather than a private interest.

The potential payments made to Physician in exchange for the services provided must be at fair market value to help ensure compliance with the applicable laws that regulate the arrangement. Therefore, the first step in our analysis is to define fair market value.

Sample Appraisal Language:

Documentation of Physician Need Based on a report issued by the Association of American Medical Colleges’ Center for Workforce Studies, the number of general surgeons relative to the population in the United States has declined steadily since 1981, decreasing from a ratio of 7.68 per 100,000 down to 5.69 per 100,000 in 2005. (The Association of American Medical Colleges (AAMC) Center for Workforce Studies report “Recent Studies and Reports on Physician Shortages in the US: May 2011” is a summary of 33 state-specific reports on physician shortages, 22 specialty-specific shortage reports, and six national studies on the physician workforce.)

According to a recent study released by the American College of Surgeons (ACS) Health Policy Research Institute, growth in the number of general surgeons nationally has stagnated, increasing only 0.2% between 2004 and 2008, which has resulted in a decrease in the surgeon-to-population ratio nationally. (“The Surgical Workforce in the United States: Profile and Recent Trends” was published in April 2010 by the American College of Surgeons Health Policy Research Institute (ACS/HPR) in collaboration with AAMC Center for Workforce Studies. http://www.acshpri.org/documents/ACSHPRI_Surgical_Workforce_in_US_apr2010.pdf.)

The study also indicated that the specialty is experiencing a notable aging in its physician workforce; as of January 2009, 47% of active general surgeons were age 55 or older. According to a report from the Federal Health Resources and Services Administration (HRSA), by 2020 there is expected to be a shortage of 21,400 general surgeons nationally. (The study Physician Supply and Demand: Projections to 2020, conducted by The Lewin Group on behalf of HRSA, as cited in the article “Physician Shortage Spreads Across Specialty Lines” by Scott Harris in the October 2010 online issue of the AAMC Reporter. https://www.aamc.org/newsroom/reporter/oct10/152090/physician_shortage_spreads_across_specialty_lines.html.)

Sample Appraisal Language:

Fair Market Value Standard The standard of value used in this engagement is fair market value. The term “fair market value” is defined in the Internal Revenue

Code Revenue Ruling 59‐60 as “the price at which the property would change hands between a willing buyer and a willing seller when

the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable

knowledge of relevant facts.” The term “medical services” can be substituted for “property” in this definition for the purpose of

determining fair market value compensation in a service or employment relationship.

The IRS also addresses the issue of fair market value in its regulations concerning excess benefit transactions for 501(c)(3) tax‐exempt

organizations. Financial relationships between tax‐exempt, 501(c)(3) health organizations and physicians require compliance with Section

4958 of the Internal Revenue Code (IRC), which prohibits these transactions. An excess benefit transaction consists of the payment of

unreasonable compensation or another transaction in which a “disqualified individual” is overpaid for the goods or services provided or

receives the benefit of the excess value provided to the tax‐exempt organization. For purposes of this analysis, a disqualified individual is

defined as one who is in a position to exert substantial influence over the affairs of an organization at any time during a five‐year period

prior to the excess benefit transaction. The standard used by the IRS to value property when assessing these transactions is fair market

value, defined as “the price at which property, or the right to use property, would change hands between a willing buyer and a willing

seller, neither being under any compulsion to buy, sell, or transfer property, or the right to use property, both having reasonable

knowledge of all relevant facts.” IRS Regs. § 53.4958‐4(b)(1)(i). In services arrangements, the amounts paid by tax‐exempt organizations

must be considered “reasonable compensation,” which IRS regulations define as “the value of services that would ordinarily be paid for like

services by like enterprises (whether taxable or tax‐exempt) under like circumstances.” IRS Regs. § 53.4958‐4(b)(1)(ii)(A) .

The Stark law and regulations provide a more specific definition of fair market value and commercial reasonableness. “Fair

market value” means “the value in arm’s length transactions, consistent with the general market value.” The “general market value” of

services means “the compensation that would be included in a service agreement as the result of bona fide bargaining between

well‐informed parties to the agreement who are not otherwise in a position to generate business for the other party… at the time of the

service agreement. Usually, [fair market value compensation is] the compensation that has been included in bona fide service agreements

with comparable terms at the time of the agreement, where the price or compensation has not been determined in any manner that takes

into account the volume or value of anticipated or actual referrals.” 42 C.F.R. § 411.351.

Sample Appraisal Language:

Fair Market Value Standard (cont.) Physician compensation that is compliant with the Stark law and regulations cannot be determined in a manner that takes into account, directly or

indirectly, the volume or value of any Medicare Designated Health Services referrals or other business generated by the physicians to the entity that

will employ them or to other affiliated entities; however, compensation may, in some cases, include a productivity bonus that is based on services

personally performed by the physician. 42 C.F.R. § 411.352(i)(3).

Under the Stark law and regulations, the term “commercially reasonable,” when applied to compensation, means that the compensation will be

provided under an agreement that would be commercially reasonable even if no Medicare Designated Health Services referrals were made by the

physicians to the entity that will compensate them or to other affiliated entities. The employment or services arrangement must be commercially

reasonable, taking into account the nature and scope of the arrangement, and the arrangement must further the legitimate business purposes of the

parties.

Under the Stark law, the following definitions apply:

A Medicare Designated Health Services referral is defined as a request by a physician for, the ordering of, the certifying or recertifying of the need

for, or the establishment of a plan of care for, any of the Designated Health Services (as defined below); a request for a consultation with another

physician; any Designated Health Services test or procedure ordered by or to be performed by or under the supervision of that other physician, but

not including a service personally performed or provided by that physician (as defined below); or the directing of another person or entity to perform

any of the above actions when a bill will be submitted for the services to the Medicare program.

Designated Health Services include clinical laboratory, physical therapy, occupational therapy, outpatient speech‐language pathology, radiology,

and imaging services; radiation therapy services and supplies; durable medical equipment and supplies; parenteral nutrition, enteral nutrition,

prosthetic, and orthotic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services and

the provision of related billable equipment and supplies. Designated Health Services do not include the technical component of angiographies,

angiograms, and cardiac catheterizations performed in a freestanding setting, but do include these services when they are performed as inpatient or

outpatient hospital services.

A service is “not personally performed or provided” by the referring physician if it is performed or provided by any other person, including, but not

limited to, the referring physician’s employees (even on an “incident to” basis), independent contractors, or group practice members.

Sample Appraisal Language:

Commercial Reasonableness Standard and Summary

Under the Stark regulations, a “commercially reasonable” arrangement is defined as an arrangement that “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 for Designated Health Services referrals.” 69 FR § 16093.

For purposes of this assessment, reasonable compensation means that the compensation, or payments for the year, was consistent with the fair market value of the identifiable services or assets provided by the physician in exchange for the compensation provided and was commercially reasonable, as such terms are used in the Stark law and regulations. When this standard is met, we believe that the compensation will also be consistent with fair market value for IRS purposes. In this situation, the negotiated compensation rate was not determined in a manner that took into account (directly or indirectly) the volume or value of any referrals or other business generated by the referring physicians to Hospital entities.

Fair market value and commercial reasonableness standards do not prescribe the method by which compensation is paid; they only require that the sum total of compensation provided is at a fair market and commercially reasonable value level and that certain referral‐related factors have not affected the compensation. Furthermore, fair market value is typically viewed in the marketplace as a range of potential payments that a prudent seller and buyer negotiate and/or establish rather than a single dollar amount.

Sample Appraisal Language:

Description of Compensation Terms Initial Term Compensation: As an employee of Hospital, during his first four years, Physician will receive a base salary of $______ per year. Additionally, during this time, if he generates more than ______ work RVUs (“wRVU”) per year, he will be eligible to receive a production bonus of $______ per work RVU achieved beyond this threshold. (We note that the compensation per work RVU formula will only include work RVUs for services personally performed by Physician.) The production-based bonus will be calculated and paid on a quarterly basis.

Over the initial term, Physician is to use his best efforts to meet certain Annual Work RVU Thresholds. During any partial and the first fiscal year of the agreement from the commencement date through the start of the Hospital’s fiscal year, he is to use his best efforts to generate at least ______ work RVUs annually. During the second, third, and any subsequent fiscal years of the agreement, he is to use his best efforts to produce a minimum of ______ , ______ , and ______ wRVUs per year, respectively.

Sample Appraisal Language:

Desc. of Compensation Terms (cont.)

Year 5 and Thereafter Compensation: Upon the agreement’s

renewal after the initial four-year term, Physician will be

compensated based on his personal productivity in the practice.

He will not receive a base salary, but will instead receive

$_____ per work RVU for the first _____ work RVUs

generated each year; $_____ for the next _____ work RVUs;

and $_____ per work RVU above _____.

Sample Appraisal Language:

Desc. of Compensation Terms (cont.) Incentives: Over the term of the agreement Physician will also be eligible to receive an annual $_______ Patient Quality Bonus for the provision of high quality patient care, which will be measured based on certain criteria established by The Joint Commission’s Ongoing Professional Practice Evaluation (OPPE) and gathered by the Premier healthcare alliance. It is our understanding that Physician must meet the applicable Annual Work RVU Threshold in order to be eligible to earn the Patient Quality Bonus. This bonus is guaranteed to Physician during the initial term of his employment, including any Guarantee Year, if applicable.

In the first year of the agreement, Physician will also be eligible to receive a $_______ signing bonus. Additionally, he will be eligible to receive reimbursement of up to $_______ for documented moving expenses related to his relocation to the Hospital community. Finally, he will be eligible for a housing allowance, which will reimburse him for a loss of up to $_______ incurred upon the sale of his current home in connection with his move to the Hospital area. Reimbursement will be based on the difference between the appraised value for the property (as determined by a qualified real estate appraiser) and the gross consideration received by Physician upon its sale.

The maximum total compensation Physician is eligible to receive under the agreement in any year, including base salary and all incentive or bonus opportunities (excluding any unassigned call pay, medical staff committee participation, and moving expense reimbursement amounts), is set at the MGMA’s 90th percentile of compensation for general surgeons in the Southern region based on the then-current survey.

Physician will be eligible for participation in employee benefit plans offered by Hospital to its physician employees over the term of his employment. The offered package currently includes health, dental, vision, life, disability, and malpractice insurance coverage, a number of wellness programs, and retirement benefits and options, including a 403(b) plan and a 457(b) plan. Employed physicians are eligible to receive between 24 and 34 days per year of paid time off for vacation, sick leave, holidays, and continuing medical education (CME) attendance, with time accruing based on a physician’s years of service. Physician will also be eligible to receive reimbursement of up to $2,500 per year for CME expenses, to include seminar fees, travel, professional organization membership dues, periodical subscriptions, books, and other educational materials. Please see the attached Exhibit A for additional details regarding the current benefits offered to Hospital-employed physicians.

If the agreement is terminated for any reason, and Physician practices medicine in the Hospital service area at any point during the three-year period after the agreement’s termination, he is required to remain in the private practice of medicine (that is, he must not contract with or otherwise affiliate with any other hospital in the Hospital service area). If he does not meet this commitment, Physician will be required to pay damages to Hospital of $______ per day that he is in violation of this requirement during the applicable three-year period.

Sample Appraisal Language:

Conclusion Tying Compensation to Standards In summary, given the results of our research and calculations, we found the compensation terms included in the proposed Employment Agreement between Physician and Hospital to be commercially reasonable and consistent with fair market value, as such terms are defined by the Stark laws, federal anti-kickback laws, and IRS private benefit inurement laws and regulations (as further described in the foregoing discussion). Our opinion is supported by our findings that 1) Physician will be providing general surgery services to the Hospital community, a specialty for which the Hospital has determined there to be a shortage of providers in the community; 2) there is expected to be a continuing need for these types of services for the foreseeable future; 3) his base compensation in his first four years of employment is set at approximately the median for general surgeons, with the opportunity to earn a production bonus for wRVUs generated beyond the ___th percentile benchmark at a rate that reflects the ___th percentile benchmark; 4) upon the agreement’s renewal in Year 5, he will be paid based on his personal production at a rates that reflect the lower end (the ___nd, ___th, and ___th percentiles) of the market benchmarks of compensation per work RVU for physicians in his specialty; 5) the methodology is designed so that his compensation will be commensurate with his production levels; 6) the 90th percentile compensation cap adds to the reasonableness of the arrangement; and 7) the proposed bonuses and incentives are in line with those commonly being offered to recruited physicians. It is our view that the proposed compensation and compensation methodology including clinical compensation, quality bonuses, and recruitment incentives reflect what similar organizations in similar communities would pay for similar services.

Physician Compensation

Methodologies

Base Salary with wRVU Threshold Example: $210,000.00 Base Salary; 5,000 wRVU Threshold

Incentive Compensation wRVU Methodology is Common

Example: $42.00 for the first 5,000 wRVUs performed and $47.00 per wRVU for each wRVU performed in excess of 5,000

Percentage of Collections

Patient Quality Bonus

wRVUs must be "personally performed" by physician

Physician Compensation Cap

Law strongly encourages cap on physician compensation Example: Total compensation paid to physician in any single fiscal year shall not

exceed 90th percentile compensation as set forth in the then current MGMA

Physician Compensation Survey for physicians in the same specialty in the Southern

Region.

Tracking Issue: Someone must track physician's

compensation to ensure he or she is not paid in excess of cap

amount.

HR Practical Issues

Technology Limitations Issue: Physician is not paid as a

typical employee

How to enter contract terms into payroll system.

HR may be required to enter an hourly rate to put into payroll

system when calculation of an hourly rate is impossible under

some compensation methodologies (example: wRVU-based

compensation)

Recommend including a flat base salary (example:

$210,000.00) in the contract to avoid this problem

HR Practical Issues (cont.)

Physician Benefits and Transition Issues

1. Vacation

2. Gap in Health Coverage

3. Classification Issues

4. Reporting Issues

5. Signing Bonus Issues

6. Transitioning Physician to Corporate Culture

Physician Vacation

Policy Issue: Vacation policy for physicians with wRVU-based

compensation incentive compensation models may be

different than policy for other hospital employees

Employment contract should explicitly state that contract

terms rule over normal hospital policies

Example: To the extent a Hospital's personnel policies, plans

and procedures are in conflict with this Agreement, this

Agreement shall control.

Potential Gap in Medical Insurance

Coverage

Normal hospital policy may provide that employees are not

eligible for the hospital's medical insurance until 30 or 60

days after start date

Potential gap in coverage issue for new employees

Possible Solution

Exempt Classification Issues

Issue: Physician's employment is not tracked in terms of

hours. Should physician be classified as an exempt employee?

Contract should state that physician is full-time, exempt

employee

Reporting Issues (1099 vs. W-2) • Employee Physician = Compensation reported on W-2

• Independent Contractor Physician = Compensation reported on 1099 for:

• Medical Director Agreements

• Call Pay Agreements

• Committee Agreements

• Dual Status Physicians (Both Employee and Independent Contractor) should have pay reported on both W-2 and 1099

• Section 530 Safe Harbor - IRS cannot retroactively reclassify the worker’s status from independent contractor to employee if all workers in the same position are treated the same.

Signing Bonus Issues

Signing Bonus is usually paid in advance, which can lead to

withholding and other issues

Solution: Treat the bonus as a loan to physician

Sign a note for bonus amount

Physician will be required to repay if he does not follow through

with contract terms

Note will be forgiven at the completion of required term

Forgiveness of note is income to physician

Transitioning Physicians to Hospital

Culture

Physician is no longer the employer

HR Education Points:

Early training and intervention.

Physician cannot hire and fire at will.

Physician will be expected to personally follow hospital policies and meet all requirements of the hospital.

Example language in employment contract: Physician shall comply with all Hospital Medical Staff bylaws, rules, policies, procedures, guidelines or standards contained within Hospital’s personnel handbooks or policies (if any), as the same may hereafter be revised or amended. To the extent such handbook is in conflict with this Agreement, this Agreement shall control.

Non-Compete Update: Baugh and Feldman

v. Columbia Heart Clinic (Jan. 16, 2013)

Facts:

Two shareholder physicians (interventional cardiologists) left their practice in 2006 and opened up a competing practice 300 yards away.

Two years earlier, all of the shareholder physicians signed a non-compete agreement with Columbia Heart.

The agreement provided that shareholders could not compete with Columbia Heart, and any competing shareholders are subject to:

Liability for "liquidated damages"

Forfeiture of any severance ($60,000)

Forfeiture of any monies Columbia Heart owed to the physician ($240,000)

Forfeiture of the competing shareholders' last 12 months of compensation ($575,000)

Non-compete Update: Baugh and Feldman v.

Columbia Heart Clinic (Jan. 16, 2013) (cont.)

Rulings: The South Carolina Court of Appeals (Justice Thomas)

ruled as follows:

1. The non-competition agreements were enforceable.

Specifically, the prohibition against assisting any person as a

director, officer or employee to engage in practice of

cardiology within a 20 mile radius of any practice office is

enforceable.

2. The liquidated damages provision is enforceable ($1.8

million)

Alternatives to Physician Employment:

Physician Services Agreements

1. Employment Agreements vs. Physician Services

Agreements (PSAs)

2. Differences between Employment Agreements and

Physician Services Agreements

Employment v. PSAs: Basics Employment Model: All practice staff is employed by Hospital

Physicians

Nurses

Staff

Midlevel Practitioners

PSA Model: Physician group remains the employer

Hospital pays for the services of physician group on an independent contractor basis

Hospital HR has extremely limited involvement

Benefits remain responsibility of physician group

Physician group may still be paid wRVU-based and incentive compensation

Differences Between PSA's and

Employment Agreements for HR

Physician is not an employee of the hospital and therefore:

Physician is not eligible for any hospital benefits (including

professional liability insurance, health insurance, retirement

plans et.)

HR does not need to be involved in the terms of physician's

contract

Hospital does not withhold taxes on the monthly services fee