Ohio Hospital Association 2014 Annual Meeting June 10, 2014 Compensating Employed Physicians In An Evolving Health Care Environment Kimberly Mobley, Sullivan, Cotter and Associates, Inc., kimmobley@sullivancotter.com Claire Turcotte, Bricker & Eckler LLP, cturcotte@bricker.com
Environment Market forces are driving change Expanded access across the system Physician shortages Changing reimbursement Cost reductions, improved efficiency value Process and outcomes measurement quality Patient satisfaction and consumer transparency focus on the patient Movement of care from inpatient to ambulatory settings Increasingly complex regulatory environment 1
Environment Regulatory environment Stark Law - comply with employment or other exception Anti-kickback Statute (AKS) - prohibits remuneration for referrals IRS Section 501(c)(3) prohibits private benefit and private inurement Civil Monetary Penalty Law (CMP) - prohibits hospital payments to physicians to reduce services to Medicare/Medicaid patients Medicare Shared Savings Program (MSSP) Waivers - Waive compliance with Stark, AKS and CMP if in accountable care organization (ACO) Further information on key regulations regarding physician compensation is contained in Appendix A 2
Environment Key Cases and Settlements Tuomey Healthcare System Caution: Physician practices running at loss or compensation in excess of collections Taking into account volume or value of referrals to hospital Commercial reasonableness? Too good to be true- probably is! $237M judgment against hospital Halifax Hospital and Medical Center Problem bonus pool included Stark DHS Took into account volume or value of referrals to hospital Compensation in excess of FMV violated Stark Bradford Valuation considered referrals to hospital; select wisely Others 3
Environment Key Compliance Concepts Fair market value (FMV) Commercial reasonableness Not taking into account the value or volume of referrals or other business generated Enforcement climate is increasingly focused on FMV and commercial reasonableness 4
Environment Physician compensation trends - highlights Gap in compensation between primary care and specialists increased over the past 10 years; however, In 2013 primary care increases exceeded specialists Over the past five years, physician cash compensation has been increasing at a faster pace than productivity Most common physician compensation approach today still includes a productivity component - typically work Relative Value Units (wrvus) Compensation for quality/performance/value is growing rapidly Organizations are considering patient panel size for primary care Detailed data on physician compensation trends is contained in Appendix B 5
Environment Quality incentives continue to grow and are used by 35% of organizations Median Annual Quality Incentive Payment Median Annual Quality Incentive Payment As a Percent of TCC Hospital-Based $22,920 Hospital-Based 7% Surgical $20,000 Surgical 5% Medical $20,000 Medical 6% Primary Care $7,730 Primary Care 4% All Specialties $15,000 All Specialties 5% $0 $5,000 $10,000 $15,000 $20,000 $25,000 0% 1% 2% 3% 4% 5% 6% 7% Source: SullivanCotter s 2013 Physician Compensation and Productivity Survey Report 6
Case Studies The complex business, labor market and regulatory environment has had a significant impact on physician compensation within health care organizations The remainder of the presentation focuses on three case studies representing common physician compensation issues and landmines faced by physician employers 7
Case Study One Quality Conundrum The Hospital employs 20 primary care physicians who are paid as follows: Base salary: $200,000 - $250,000 Productivity incentive based on wrvus: $10,000 - $100,000 Quality incentive of up to 5% of total cash compensation (TCC): $12,000 - $25,000 The Hospital also has two commercial contracts which allow for quality incentives to be passed through directly to the physicians. This past year, these quality incentives increased significantly. The physicians received payments of $40,000 - $50,000 8
Case Study One Quality Conundrum Regulatory issues Stark Law and IRS require compensation to be FMV Stark requires arrangement to be commercially reasonable (i.e., a sensible, prudent business agreement even if no referrals to hospital) Employer quality incentives slightly above market median But, conundrum is quality payments directly to physicians under Hospital commercial contracts may: Not be for physician s services Duplicate employer quality payment Not be commercially reasonable Also consider if any disincentive to provide services 9
Case Study One Quality Conundrum Are the quality incentives paid by commercial payers included in FMV for employed physicians? When reviewing physician compensation for FMV, TCC, which includes compensation from all sources, must be taken into consideration. It should be noted that market benchmark data includes the quality payments That would mean that the TCC levels for the primary care physicians would range from $262,000 to $425,000 Ten of the physicians will have TCC levels well exceeding the 90 th percentile of the market 10
Case Study One Quality Conundrum Review their TCC to wrvu productivity to see if it supports the compensation It appears the productivity levels support the TCC for two of the 10 physicians exceeding the 90 th percentile of the market Going forward, the organization should redirect the quality incentives from the commercial payers to go to the health system so that the physicians do not receive double payments for quality The health system should review and if appropriate, update its compensation plan to align with contemporary market and local reimbursement practices 11
Case Study Two Highly Compensated Physician The Hospital has an Orthopedic Surgeon who is paid over the 95 th percentile of the market. This is due to his high productivity level. The compensation and productivity for the physician are described below: Medical Directorship: $50,000 for.10 FTE (200 hours per year). This equates to $250 per hour Current clinical total cash compensation: $1,000,000. This is based on: Base salary of $500,000 Quality incentive of $25,000 wrvu productivity incentive of $425,000 Based on wrvus of 20,000 Is there any way that this can be FMV? What are the key issues I need to understand? 12
Case Study Two Highly Compensated Physician Regulatory issues Stark Law and IRS require compensation to be FMV Stark requires arrangement to be commercially reasonable (i.e., a sensible, prudent business agreement even if no referrals to hospital) The productivity incentive should be paid based on personally provided services If the physician is producing wrvus well above market norms, check to make sure they are not receiving wrvus for Advanced Practice Clinicians or other providers Based on the high productivity level, does the physician actually have the time to perform the Medical Director services? Outlier arrangements present risk suggesting audit and independent valuation and Board/Committee review Consider cap on total compensation? Quality or culture concerns? 13
Case Study Two Highly Compensated Physician What steps can we take to support the compensation level? Review and confirm the wrvu productivity The collections correspond with the wrvu productivity levels The wrvus are for personally provided services; this physician does not use any Advanced Practice Clinicians The wrvus have been adjusted for modifiers Review the clinical TCC for alignment with productivity Overall clinical TCC of $950,000 based on 20,000 wrvus equates to $47.50 per wrvu The rate paid per wrvu is slightly below market median The clinical TCC is 20% over the 90 th percentile The wrvu productivity is 35% over the 90 th percentile 14
Case Study Two Highly Compensated Physician Review the physician s work effort related to Medical Director duties. Based on the high level of productivity, the Hospital must ensure that the physician is actually providing the 200 hours of Medical Director services The physician kept a time sheet and logged in 212 hours for Medical Director services in the past year There were performance expectations with the role and he scored a meets or exceeds expectations on each of the five performance goals There were noted quality improvements in his area over the past year, which have been documented 15
Case Study Two Highly Compensated Physician May want to have an independent third party review the proposed compensation arrangement Review the arrangement with the health system s independent Board and obtain the appropriate approvals The information was submitted to the Board for review and approval 16
Case Study Three Bonus Pool The Hospital is acquiring a Cardiology group. They are requesting the following proposed compensation plan: Base salary of $250,000 per physician Productivity incentive: $40.00 per wrvu for wrvus exceeding 6,000 wrvus per physician. Based on historical productivity, it is estimated the productivity incentive will range from $50,000 to $150,000 A quality incentive up to 5% of base salary. This equates to $12,500 per physician Two percent (2%) of the Cardiology service line revenue. Estimated payments would be $35,000 per physician 17
Case Study Three Bonus Pool What are the regulatory issues that the Hospital needs to consider? Stark Law and IRS require compensation to be FMV Employer quality incentives at about market median However, paying a percent of Cardiology service line is problematic Could take into account volume or value of designated health services referrals (e.g., Halifax problem) even if allocated based on physician s personal services IRS disfavors revenue-sharing arrangements Physicians will no longer own or bill for ancillary services which will become Hospital services 18
Case Study Three Bonus Pool The overall TCC for the physicians is estimated to range from $347,500 to $447,500. This is lower than the compensation levels we have paid to other Cardiologists and their historical productivity supports the compensation. Are there any concerns with FMV for this arrangement? FMV is an important consideration; however, the structure of the compensation arrangement must also be taken into consideration. A percent of service line revenue is not permitted The physicians believe they are entitled to a percent of the ancillaries that they refer to the hospital. Why can t they be paid for that? From an FMV perspective, the compensation arrangement could be modified to ensure it is structurally sound and compensation could be added to other components, such as base salary, rates paid per wrvu or the quality incentive 19
Speaker Information and Q&A Kimberly Mobley Sullivan, Cotter and Associates, Inc. Claire Turcotte Bricker & Eckler LLP 4000 Town Center 9277 Centre Pointe Drive Suite 1750 Suite 100 Southfield, MI 48075 West Chester, OH 45069 248.204.9520 513.870.6573 kimmobley@sullivancotter.com cturcotte@bricker.com 20
Appendix A: Federal Laws Impacting Compensation of Employed Physicians 21
Federal Laws - Tax The concerns under IRC Sections 501(c)(3)/4958: IRC Section 501(c)(3) Private benefit, substantial non-exempt purpose Inurement IRC Section 4958 Excess benefit based on amounts exceeding FMV Prohibited revenue-sharing arrangements still undefined Background reading: www.irs.gov/charities-&-non-profits/exempt-organizations-continuing- Professional-Education-Technical-Instruction-Program 22
Federal Laws Tax (continued) General principles: Overall compensation not above reasonable, FMV levels Caps hard or soft Distinguishable from private practice No quasi-equity (share in net income) Criteria for incentives should be tied to factors based on physician s own performance If compensation is tied to net income, focus only on physician s own activities (including those under direct supervision) Caution with using net income at all; maybe only as trigger or circuitbreaker 23
Federal Laws Tax (continued) General principles (continued): Avoid disincentives based on payer source (or lack thereof) Adhere to the rebuttable presumption process (Section 4958) Review and approval by independent board or committee Based on review of independent market data Thorough and timely documentation Ensure proper reporting No violations of Stark or Anti-Kickback Laws 24
Federal Laws Stark and AKS Principal concepts to keep in mind: FMV Commercial reasonableness Not taking into account the value or volume of referrals or other business generated Enforcement climate is increasingly focused on FMV and commercial reasonableness 25
Federal Laws Stark and AKS (continued) Stark Law basics: Prohibits a physician from referring to an entity for designated health services (DHS) if physician has a financial relationship with the entity UNLESS: Arrangement satisfies ALL requirements of a Stark exception Exceptions for common compensation arrangements require that compensation = FMV And is commercially reasonable DHS include ALL inpatient and outpatient hospital services 26
Stark Law Example Community Hospital Employment Physician Community Hospital NO Referral for inpatient or outpatient hospital service Physician UNLESS, satisfies Stark Employment Exception 27
Federal Laws Stark and AKS (continued) Stark Employment Exception: Excepts payment by employer to a bona fide employee physician for services if: For identifiable services Consistent with FMV of the services Does not take into account (directly or indirectly) the volume or value of any referrals by the referring physician Agreement would be commercially reasonable even if no referrals were made to the employer Payment may include a productivity bonus based on the physician s personally performed services 28
Federal Laws Stark and AKS (continued) Stark and commercial reasonableness Commercial reasonableness = Would a prudent person enter into the arrangement even if no referrals? Consider business purposes such as: Strategic objectives Demonstrated community need for specialty or service Objective to add or expand services to community or segment of patients (e.g., indigent, submarket) Quality improvement goals Unique skills of the physician 29
Federal Laws Stark and AKS (continued) Stark Law permits an employer to condition an employed physician s compensation on the physician referring patients to specified providers (i.e., within the system) if the compensation arrangement: Is set in advance for the term of the agreement Is consistent with FMV for the services (and payment does not take into account the volume or value of anticipated or required referrals) Otherwise complies with a Stark exception Complies with both of the following: Referral requirement is in a written agreement signed by the parties Referral requirement does not apply if the patient expresses a preference for a different provider, or the patient s insurer requires a different provider, or the referral is not in the patient s best medical interest in the physician s judgment The required referrals relate solely to the physician s services covered by the employment 30
Federal Laws Stark and AKS (continued) Anti-Kickback Statute Prohibits remuneration to induce or reward referrals for governmental items/services Focus on intent of the parties (on one or both sides) Remuneration (= anything of value) Commercial reasonableness Nexus to referrals If even one purpose of an arrangement is to induce or reward making or arranging for referrals, the arrangement is tainted 31
Federal Laws Stark and AKS (continued) AKS Safe Harbors and risk generally Safe harbors - if ALL criteria are met, little risk of fraud and abuse Commercially reasonable (i.e., intrinsic commercial value to purchaser) items or services Exchanged for FMV If fail to satisfy an exception or safe harbor: Analyze facts and circumstances Scrutinize intent of parties In the grey/risk zone 32
Federal Laws Stark and AKS (continued) AKS Employment Safe Harbor Remuneration does not include any amount paid by an employer to an employee who has a bona fide relationship with the employer for employment in the furnishing of any item or service payable by Medicare, Medicaid, or other federal health care programs Employee has same meaning as in 26 U.S.C. 3121(d)(2) Does not include FMV or commercial reasonableness Payment must be for physician s covered services 33
Federal Laws Stark and AKS (continued) Common AKS problems Failure to satisfy ALL elements of statutory exception or regulatory safe harbor Failure to establish FMV and/or commercial reasonableness Evidence of improper intent to induce referrals (i.e., bad facts) Whistleblowers 34
Consequences of Violating Federal Laws Potential penalties under tax law: Penalty taxes on physician(s) and board/management Loss of tax-exempt status Potential penalties under Stark and AKS: Medicare nonpayment or refund of tainted DHS claims Civil penalties Imprisonment or fines Exclusion from Medicare/Medicaid programs False Claims Act liability Reputational risk Diversion of organizational resources 35
Appendix B: Physician Compensation Market Trends 36
Physician Compensation Trends Current compensation approaches have resulted in a widening gap between primary care physicians and specialists Ratio of Average TCC for Ten Major Specialties to the Average of the Ten Specialties: 2003 Ratio of Average TCC for Ten Major Specialties to the Average of the Ten Specialties: 2013 Psychiatry 0.73 Psychiatry 0.70 General Pediatrics 0.77 General Pediatrics 0.73 Family Practice 0.81 Family Practice 0.74 Internal Medicine 0.81 Internal Medicine 0.78 Anatomic and Clinical Pathology 0.89 Emergency Medicine 0.98 Overall 1.00 Overall 1.00 Emergency Medicine 1.07 Anatomic and Clinical Pathology 1.01 Obstetrics/Gynecology 1.12 Obstetrics/Gynecology 1.02 General Surgery 1.13 General Surgery 1.25 Anesthesiology 1.30 Anesthesiology 1.27 Diagnostic Radiology 1.37 Diagnostic Radiology 1.51 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 2003 Range of Pay Ratios: 0.73 to 1.37 2013 Range of Pay Ratios: 0.70 to 1.51 Source: SullivanCotter s 2013 Physician Compensation and Productivity Survey Report 37
Physician Compensation Trends Overall Increase to Median TCC between 2012 and 2013 Source: SullivanCotter s 2013 Physician Compensation and Productivity Survey Report 38
Physician Compensation Trends TCC Median Values Over 20 Years $202,454 $171,359 $150,000 $135,734 $116,205 $109,283 $474,603 $398,928 $347,966 $269,896 $207,046 $203,895 $500,000 $450,000 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 1993 1998 2003 2008 2013 Pediatric Surgical Specialties Adult Surgical Specialties Hospital Specialties Adult Medical Specialties Pediatric Medical Specialties Primary Care Source: SullivanCotter s 2013 Physician Compensation and Productivity Survey Report 39
Work RVUs Physician Productivity Trends Median wrvu Productivity 9,000 8,560 8,500 8,363 8,365 8,294 8,091 8,000 7,617 7,500 7,000 5,898 6,041 6,147 6,198 6,206 6,355 6,500 6,000 5,500 2008 4,694 2009 4,879 2010 4,849 Year 2011 4,800 2012 4,823 2013 4,970 5,000 4,500 Surgical Specialties Medical Specialties Primary Care Source: SullivanCotter s 2013 Physician Compensation and Productivity Survey Report 40
Collections Physician Productivity Trends Median Collections $800,000 $669,934 $677,163 $687,403 $709,737 $732,889 $664,968 $750,000 $700,000 $650,000 $514,435 $370,704 $474,962 $407,376 $526,667 $413,331 $543,735 $409,949 $529,295 $429,200 $538,698 $428,306 $600,000 $550,000 $500,000 $450,000 $400,000 $350,000 Surgical Specialties Medical Specialties Primary Care 2008 2009 2010 Year 2011 2012 2013 $300,000 Source: SullivanCotter s 2013 Physician Compensation and Productivity Survey Report 41
Median Collections per wrvu Physician Productivity Trends Median Collections per wrvu $85.00 $80.00 $75.00 $70.00 $72.10 $70.99 $78.53 $78.02 $76.93 Surgical Specialties Medical Specialties Primary Care $65.00 $66.51 2009 2010 2011 2012 2013 Year Source: SullivanCotter s 2013 Physician Compensation and Productivity Survey Report 42
Physician Compensation Trends Variance in Physician TCC by Location/Setting Average Value Percent Above/Below National Average Specialty Area Rural Suburban Urban Overall 4.43% 2.33% -1.01% Primary Care -1.64% -1.22% 1.91% Medical 7.44% 3.16% -1.55% Surgical 5.36% 0.50% -0.06% Hospital-Based 0.64% 4.88% -2.72% Source: SullivanCotter s 2013 Physician Compensation and Productivity Survey Report 43
Physician Compensation Trends Clinical compensation typically consists of pay for work effort (volume, wrvus, time) Work RVUs continue to be the most prevalent method, with the following percent of organizations using them: 100% 80% 60% 40% 20% 68% 63% 71% Trend: Increasing the compensation tied to quality and patient satisfaction 0% Primary Care Medical Specialties Surgical Specialties Source: SullivanCotter s 2013 Physician Compensation and Productivity Survey Report 44
Quality Incentives Quality incentives continue to grow and are used by 35% of organizations Median Annual Quality Incentive Payment Median Annual Quality Incentive Payment As a Percent of TCC Hospital-Based $22,920 Hospital-Based 7% Surgical $20,000 Surgical 5% Medical $20,000 Medical 6% Primary Care $7,730 Primary Care 4% All Specialties $15,000 All Specialties 5% $0 $5,000 $10,000 $15,000 $20,000 $25,000 0% 1% 2% 3% 4% 5% 6% 7% Source: SullivanCotter s 2013 Physician Compensation and Productivity Survey Report 45
Quality Incentives In 2013, SullivanCotter conducted the Physician Incentive Compensation: 2013 Edition, Focus on Quality This was an invite-only survey targeting Large Clinic Group organizations and a select few other groups SullivanCotter has relationships with and that currently incorporate quality measures in their compensation plan design in a significant manner Survey responses were received from 25 organizations 46
Quality Incentives Quality survey highlights 68% of respondents had quality incentive tied to compensation as a core component for all specialties 32% had incorporated compensation for select specialties only (i.e. PCP) 92% Indicated that quality measures differ between specialties/departments/service line 58% have incorporated quality metrics into their Advance Practice Clinician (APC) compensation plans 47
Quality Incentives Adult Pediatric 48
Quality Incentives Surgical Composite (Cardiothoracic, General, Orthopedic) Medical Composite (Cardiology, Endocrinology, Neurology) 49
Key Takeaways From Trends Health care reform has already begun to impact physician compensation Health care organizations are engaged in physician compensation and benefit plan redesign Physician compensation is moving toward achievement of patient satisfaction and quality goals, while maintaining a heavy focus on production Compensation tied to quality/patient satisfaction generally ranges from 5%-10% Leading organizations are building the infrastructure for improved, timely reporting of quality outcomes and service indicators 50