Practical business considerations (how much pay); Human resource issues, such as a formal written description of the duties;

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1 r e a d e r t a ke- away Learn what goes into determining a fair level of pay for a medical directorship Understand how the concept of fair market value applies to paid medical directorships Know the two options offered by the Stark II law for establishing hourly rates for a medical directorship and the implications of the Medicare antikickback statute Read a case example of a hospital s proposed arrangement for a paid medical directorship Fair and square What s fair market value for medical directorships? By Hobart Collins, CMPE a b o ut t h e author Hobart Collins, CMPE, MGMA Health Care Consulting Group principal, hobartcollins@bellsouth.net A t hospitals across the country over the last 20 years, the number and substance of paid medical directorships has increased dramatically, as has the scope of responsibility and authority for these positions. The trend has multiple causes, including enhanced quality initiatives, increased complexity of hospital-based clinical programs requiring medical decision-making, and a desire by hospitals to formalize physician participation beyond the traditional voluntary participation model. These trends are coupled with changing attitudes among physicians about substantive donations of time without remuneration. The majority of medical directorships are now paid positions. Some directorships involve modest time commitments or responsibilities and relatively small amounts of remuneration; others entail significant responsibility and logically garner significant levels of compensation. A determination of the appropriate level of pay involves: Practical business considerations (how much pay); Human resource issues, such as a formal written description of the duties; Performance evaluation criteria (expectations); and Regulatory and compliance determinations of fair market value. In addition, the dynamics of the marketplace come into play, particularly in specialties in high demand and short supply. Fair market value a complex issue Apart from general legal considerations, which are not a part of this article and for which participants need appropriate legal counsel, the most common compliance issue relating to paid medical directorships involves the fair-market-value concept. The question is answered relatively simply for a full-time, paid position: Most hospitals subscribe to one of a number of credible survey reports that provide comparative data for full-time management positions such as chief medical officer or residency program director. However, fair-market-value determinations relating to compensation for part-time, paid medical directorships, when the physicians also separately and independently practice medicine, is more complex from regulatory and compliance standpoints. The three primary considerations in this area involve the so-called Stark II law that prohibits physician self-referral, exempt-organization (nonprofit) considerations and Medicare antikickback laws. Stark II law offers safe harbor An hourly pay rate is a fairly common method of compensating part-time paid medical directors. The Stark II final rule establishes a formulaic approach that creates a safe harbor. Note that use of this formula is required if the tax-exempt-organization wishes to fall under the safe-harbor provisions, but beyond that consideration p a g e 4 4 MGMA Connexion May/June 2007

2 B u s i n e s s a n d C l i n i c a l O p e rations This Web version may be reproduced for individual use. there is no specific requirement for using the method. Organizations that choose not to use the Stark II method simply do not qualify for the Stark II safe harbor. The Stark II final rule offers two options for establishing hourly rates: Using an hourly rate that is less than or equal to the average hourly rate for emergency room physicians in the relevant physician market as long as the market has three hospitals providing emergency room care. This rule applies to all specialties; adherence creates a safe harbor. The absence of a safe harbor does not mean that the agreed-upon compensation is excessive or illegal; it simply means that the arrangement does not qualify for a safe harbor. According to the Stark legislation, this method applies to a determination of fair market value for a medical specialty. Relying on the national median from four of the five physician compensation survey reports identified in the Stark II final rule (see box, page 48). Divide this number by 2,000 hours to determine the hourly rate. Reasonable payment presumptions Private inurement the expropriation of money from a tax-exempt organization for private gain is a longstanding and familiar concern relating to financial relationships between nonprofit hospitals and physicians. A more recent regulatory development relating to physician compensation arrangements is intermediate sanctions. A section of the Internal Revenue Code, , Rebuttable presumption that a transaction is not an excess benefit transaction, states that payments under a compensation arrangement can be presumed to be reasonable if: The arrangement is approved in advance by an authorized body of the organization comprising individuals without a conflict of interest with respect to the compensation arrangement; on appropriate comparability data in making its determinations; and The basis for the authorized body s approval of the compensation was adequately documented. Many organizations, particularly nonprofit hospitals that require a reasonableness or fair-market-value opinion under these considerations, will retain an independent consultant to do the work. Beware of the Medicare antikickback statute The Medicare antikickback statute prohibits fraud and abuse by individuals and organizations that participate in the Medicare and Medicaid programs. In the context of paid medical directorships, the antikickback statute mandates that a compensation arrangement between a hospital and a physician cannot represent an inducement or a reward for that physician to make referrals to the hospital. According to the statute, such an arrangement must be consistent with fair market value in arms-length transactions and not determined in a manner that takes into account the volume or value of any referrals of business. Other considerations The fair-market-value and reasonableness definitions cited above are regulatory in s e e Fair, p a g e 4 6 No disqualified persons participate in the decision-making process; That authorized body obtains and relies MGMA Connexion May/June 2007 p a g e 4 5

3 Fair f r o m p a g e 4 5 nature and may not necessarily reflect the reality of the marketplace. If the compliance-driven determination of fair market value is not sufficient to obtain the willing participation of physicians, then clearly the regulatory determination of fair market value does not fit the local market conditions. This is often the case with scarce specialties such as neurosurgery, for which demand far exceeds the supply, and physicians are unwilling to accept the regulatory definition of fair market value as the basis for compensation for part-time medical directorships. Disagreement over the proposed rate usually prompts price negotiation between the buyer and the seller generally the hospital and the physician. The hospital must document the facts and circumstances that support the argument that the agreed-upon level of compensation reflects local marketplace realities. Because these arrangements typically produce levels of remuneration that fall outside of the various regulatory safe harbors, clients almost always seek third-party opinions. In addition to economic fair-market-value issues, paid medical directorships typically involve many complex legal issues that call for assistance from legal counsel. Case example The following case example is intended to describe a unique set of circumstances with a unique conclusion. The illustration involves a nonprofit hospital that seeks to qualify for the safe harbor under Stark II; it is not intended to describe a universal method or rule for determining fair market value. Note that the proposed arrangement involves a written description of duties and responsibilities a formal agreement between the two parties that spells out the nature of the relationship and the remuneration to be paid. A 300-bed nonprofit community general hospital has a cardiac catheterization laboratory. p a g e 4 6 MGMA Connexion May/June 2007

4 Dr. Jones, a board-certified cardiologist, has for many years served as the part-time medical director of the cath lab in return for an annual stipend of $20,000. The stipend was established 12 years ago; the basis for determining this payment is now lost in the mists of time. Initially, the part-time medical directorship entailed modest, informal responsibilities and modest amounts of Dr. Jones time. However, over the years the cath lab s patient volume has increased dramatically, competition among physicians to use the cath lab time has heated up and quality control and compliance initiatives have become more complex and time-consuming for Dr. Jones to administer. Both he and the hospital recognize that the annual stipend of $20,000 is now a token payment and does not fairly reflect the time commitment, responsibilities, authority and performance expectations of the medical directorship as it now is structured. Dr. Jones and the hospital s management collaborated on a formal written description of duties and responsibilities for the cath lab s medical directorship. This description clearly articulates the responsibilities, accountabilities and performance evaluation criteria of the position. Dr. Jones maintained and submitted a log of his activities as medical director for two months. That demonstrated that the performance of the duties outlined in the job description required an average of 10 hours per week, or 520 hours per year. Based on such a commitment, one of Dr. Jones partners will cover for him during vacations and other time off. Using the prescribed method outlined in the Stark II final rule, hospital leaders determined that the average of the survey medians for cardiology was $283,595. Dividing that sum by 2,000 hours produces an hourly rate of $ Although 520 hours multiplied by $ produces a final value of $73,824, Dr. Jones was prepared to accept an annual stipend of $60,000 because, in his mind, that represented fair remuneration; he did not want to present himself as negotiating for the highest fee. s e e Fair, p a g e 4 8 m g ma. c o m From the home page, search for medical directors, hospitals group practice relations and physician compensation models In the MGMA Store, enter 5414 in the Search Products box for the Information Exchange Medical Directors-Hospital/Health Facilities ; 6451 for the book Physician Compensation Plans: State-ofthe-Art Strategies e - mail u s Do physicians in your practice act as paid medical directors in hospitals? If so, how is compensation determined? Tell us at connexion@mgma.com We ve elevated partnership to an art form. Providing truly great service is a craft all its own. At RI, we move in lockstep with our clients needs, offering fast turnaround, custom note formatting, 24-hour phone support, even helping troubleshoot their EMR issues. Discover how we put the art in partnership contact us today! One partner. Endless possibilities. Accuracy Affordability Turnaround Collaboration Call or visit us at RItranscription.com MGMA Connexion May/June 2007 p a g e 4 7

5 Fair f r o m p a g e 4 7 Resources for determining directorship hourly rate Survey reports that can be used to determine the hourly rate for medical directorships under the Stark law (identified in the Stark II final rule): Medical Group Management Association Physician Compensation and Production Survey Report Sullivan, Cotter & Associates Inc. Physician Compensation and Productivity Survey Hay Group Physician Salary Survey Report ECS Watson Wyatt Hospital and Health Care Management Compensation Report Certainly, not every situation will resemble this example; it serves to illustrate how the Stark II final rule formula is employed. Facts and circumstances differ from case to case, and some physicians are more motivated than others to seek the highest level of payment at the same time that some hospitals are motivated to pay as little as possible. The general tenor of relationships between hospitals and physicians also varies. Good relationships tend to encourage amicable negotiations over pay, while less-than-ideal relationships between the parties tend to set the stage for contentious negotiations, difficulty in reaching an agreement and maintaining an effective working relationship. For many reasons, the typical community general hospital in 2006 most likely will have a significant number of paid medical directorships; in 1986 there probably were only a few. Because the compliance considerations relating to fair market value and reasonableness apply both to the hospital and the physician, it is important to structure the economics of these relationships so that they are consistent with the considerations outlined in this brief analysis. William M. Mercer Integrated Health Networks Compensation Survey New Direction System Improved Financial Performance A Viable, Fee-for-Service Program Single/Multiple Location Implementation in 30 Days To incorporate a revenue-boosting weight loss program into your business, call (800) or visit us online at today. 821 East Gate Drive Mt. Laurel, NJ p a g e 4 8 MGMA Connexion May/June 2007