Valuation of Compensation for Physician Services

Medical Director Compensation

This article is the fourth in a series involving current healthcare management issues. An in-depth article on this issue was published in The Value Examiner’s September/October 2017 issue. In that issue, the authors discuss issues setting forth medical director services and establishing defensible compensation arrangements.

[su_pullquote align=”right”]Resources:

Commercial Reasonableness of Physician Compensation—Analytical Update with MACRA

Understanding Physician Compensation Models and a Look at Current Trends

The FMV Problems with Ancillary Services in Valuations of Physician Compensation and Medical Practices

Advanced FMV Compensation Issues Under the Stark Group Practice Definition

Forms of Physician Practice Reimbursement

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In the face of uncertain reimbursement, the rising costs of healthcare services, and value-seeking reforms pushing for higher quality care at lower prices, providers are turning to alignment, integration, and cooperation as key strategies to create high-quality and high-efficiency healthcare delivery organizations.^[1]  This trend is resulting in the increased corporatization of medicine, including a greater number of physicians being employed by hospitals.[2]  Concurrently, there has been a parallel growth in the number of hospitals compensating physicians for their performance of hospital administrative functions, including medical directorships.^[3]  Corresponding with the increase in the corporatization of medicine, governmental authorities have engaged in heightened regulatory scrutiny related to the legal permissibility of these arrangements, including whether physicians are actually performing the services outlined in the relevant medical directorship agreement.[4]

This final installment in the four-part series on the classification and valuation of compensation for physician services will provide a brief overview of this process for medical director services.  Please see the full article in the September/October issue of The Value Examiner, available November, 2017.

There are numerous variations within the classification of medical director services, including:[5]

1. Medical Director, General: Generally responsible for all activities related to the delivery of medical care and clinical services, such as: cost management, utilization review, quality assurance, and medical protocol development, as well as overseeing the activities of group physicians, including recruiting and credentialing[6]
2. Service Line Medical Director: Similar to a “Medical Director, General” but specific to a particular clinical service line (e.g., cardiology, orthopedics)[7]
3. Medical Director of Clinical Research responsible for:
   • Research design, methodology, data collection, analysis, and summation of outcomes
   • Grant proposal preparation
   • Attending research conferences
   • Compliance with protocols, regulations, and research objectives
   • Serving as a liaison between funding agencies and the organization[8]
4. Medical Director of Clinical Operations
   • Monitors day-to-day operations
   • Develops, implements, and monitors policies/procedures
   • Oversees non-physician technical and records staff
   • Responsible for improving quality and reducing cost by streamlining workforce and technology[9]
5. Medical Director of Quality Management: Responsible for developing and coordinating programs designed to ensure that medical practices meet the organization’s and third party’s quality goals and objectives. This position requires a licensed physician.[10]

Courts are evaluating, under the Stark Law and Anti-Kickback Statute, whether physician medical directors are actually performing the services outlined in the agreement.  For example, in U.S. v. SCCI Hospital Houston, the U.S. challenged the commercial reasonableness of the compensation paid by the hospital to three physician medical directors.^[11]  The government’s financial expert stated that the commercial reasonableness of a medical director arrangement depended upon the agreement being “essential to the functioning of the hospital,”^[12] and emphasized that there had to be “sound business reasons for paying medical director fees to referring physicians.”^[13]

In developing a certified opinion of value related to the provision of medical directorship services, certain requisite documents related to the proposed arrangement(s) should be obtained by the valuation analyst, including:^[14]

1. The proposed agreement(s) for administrative, executive, and medical director services (including a detailed description of all tasks, duties, responsibilities, and accountabilities [TDRAs] related to the services to be performed)
2. All agreements for similar positions at the employer entity, including the scope of services to be performed under each of those agreements, the annual hour requirements, and annual compensation paid to each medical director
3. Documentation regarding the board certification, qualifications, and tenure of those physicians performing services under all similar medical directorship agreements
4. Documentation of offers made to previous (or other existing) medical directors
5. Documentation regarding the medical staff’s need for administrative direction (based on clinical activities, hospital research efforts, community outreach programs, etc.)
6. The employer’s medical staff bylaws and roster
7. Timesheet records and the time spent and work performed by the physician on each service subject to the medical directorship agreement
8. The size of the employer, number of patients, acuity levels of patients, and the specific needs related to the particular service line
9. The number of committees and meetings that require the medical director’s involvement and/or attendance, as well as the average frequency and duration of each committee and meeting
10. Documentation that the employer (at least) annually assesses the effectiveness of the medical director in performing his or her TDRAs, as well as the commercial reasonableness of the contract
11. Descriptions of quality programs, including centers of excellence and “never event”^[15] committees

The review of these documents by the valuation analyst, as well as results from interviews with employer management and physicians, will serve as the basis for supporting the development of the certified opinion related to the scope of services to be performed.^[16]

A certified opinion as to whether the proposed compensation is both within the range of FMV and commercially reasonable, prepared by an independent, certified valuation professional, working with competent healthcare legal counsel as to the pertinent regulatory thresholds, and supported by adequate due diligence and documentation, will significantly enhance the efforts of healthcare providers to establish a defensible position that the proposed compensation arrangement is in compliance with all regulatory requirements.^[17]  This is particularly important in the heightened and ever-changing regulatory environment in which healthcare providers operate, with the potential severity of penalties, as well as related business consequences for entering into transactions and arrangements that subsequently may be found to be legally impermissible.^[18]

[1]       “A Guide to Physician Integration Models for Sustainable Success” American Hospital Association, September 2012, http://www.hpoe.org/Reports-HPOE/guide_to_physician_integration_models_for_sustainable_success.pdf (Accessed 5/19/2014), p. 4–5.

[2]       “Monopolizing medicine: Why hospital consolidation may increase healthcare costs” by Scott Baltic, February 24, 2012, Medical Economics, http://medicaleconomics.modernmedicine.com/medical-economics/content/tags/hospital-employment/monopolizing-medicine-why-hospital-consolidation-?page=full (Accessed 12/15/2016).

[3]          “The Managed Health Care Handbook” By Peter R. Kongstvedt, 3rd ed., Gaithersburg, MD: Aspens Publishers, Inc., 1996, p. 147–48, 158.

[4]       U.S. ex rel. Kaczmarczyk, et al., v. SCCI Hospital Ventures, Inc., Civ. No. H-99-1031, (July 12, 2005), Fair Market Valuation Report – Kathy McNamara.

[5]       “Healthcare Valuation: Financial Appraisal of Enterprise, Assets, and Services, Volume 2” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, CVA, CM&AA, Hoboken, NJ: John Wiley and Sons, 2014, p. 868–869.

[6]       Ibid, p. 869; “MGMA 2015: Management Compensation Report Based on 2014 Survey Data” By Medical Group Management Association, 2015, p. 227.

[7]       “Healthcare Valuation: Financial Appraisal of Enterprise, Assets, and Services, Volume 2” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, CVA, CM&AA, Hoboken, NJ: John Wiley and Sons, 2014, p. 868.

[8]       Ibid.; “MGMA 2015: Management Compensation Report Based on 2014 Survey Data” By Medical Group Management Association, 2015, p. 230.

[9]       “Healthcare Valuation: Financial Appraisal of Enterprise, Assets, and Services, Volume 2” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, CVA, CM&AA, Hoboken, NJ: John Wiley and Sons, 2014, p. 868.

[10]     “The 2015 Physician Compensation and Productivity Survey: Including PhDs, Medical Group Executives and Mid-Level Providers” By Sullivan, Cotter, and Associates, Inc., 2015, p. A-53.

[11]   U.S. ex rel. Kaczmarczyk, et al., v. SCCI Hospital Ventures, Inc., Civ. No. H-99-1031, (July 12, 2005), Fair Market Valuation Report – Kathy McNamara.

[12]   Ibid.

[13]   Ibid.; “Fair Market Value in Health Care Transactions” By Lewis Lefko, Haynes and Boone, LLP, July 20, 2007, http://www.worldservicesgroup.com/publications.asp?action=article&artid=2086 (Accessed 10/9/2009).

[14]        Ibid, p. 213–214.

[15]     “‘Never events’ are errors in medical care that are clearly identifiable, preventable, and serious in their consequences for patients,” thereby indicating a serious problem in the safety and credibility of the health care provider. Additionally, CMS indicated that such “‘never events,’ like surgery on the wrong body part or mismatched blood transfusion, cause serious injury or death to beneficiaries, and result in increased costs to the Medicare program to treat the consequences of the error.” “Eliminating Serious, Preventable, and Costly Medical Errors—Never Events,” Centers for Medicare & Medicaid Services, May, 18, 2006.

[16]        “The Adviser’s Guide to Health Care: An Era of Reform – The Four Pillars, Volume I” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, CVA, CM&AA, and Todd A. Zigrang, MBA, MHA, FACHE, ASA, New York, NY: AICPA, 2015, p. 214.

[17]     Ibid, p. 927.

[18]     Ibid.

Robert James Cimasi, MHA, ASA, FRICS, MCBA, CVA, CM&AA, is chief executive officer of Health Capital Consultants, with over thirty-five years of experience in serving clients and a professional focus on the financial and economic aspects of healthcare service sector entities, including valuation consulting and capital formation services; healthcare industry transactions, including joint ventures, mergers, acquisitions, and divestitures; litigation support and expert testimony; certificate-of-need; and other regulatory and policy planning consulting.

Mr. Cimasi can be contacted at (800) 394-8258 or by e-mail to rcimasi@healthcapital.com.

Todd A. Zigrang, MBA, MHA, ASA, FACHE, is president of Health Capital Consultants, where he focuses on the areas of valuation and financial analysis for hospitals and other healthcare enterprises. Mr. Zigrang has significant physician-integration and financial analysis experience and has participated in the development of a physician-owned, multispecialty management service organization and networks involving a wide range of specialties, physician-owned hospitals as well as several limited liability companies for acquiring acute care and specialty hospitals, ASCs, and other ancillary facilities.

Mr. Zigrang can be contacted at (800) 394-8258 or by e-mail to tzigrang@healthcapital.com.