Physician Compensation Challenges: 5 Common Fair Market Value Mistakes and Potential Solutions

Fair market value (FMV) determination in physician compensation, also known as compensation valuation, is crucial for ensuring compliance with regulatory standards and maintaining equitable pay structures. For nearly 30 years, valuation professionals at PYA have witnessed many different types of mistakes that can lead to legal issues, financial losses, and dissatisfaction among physicians. This article explores five common FMV physician compensation valuation mistakes and provides insights on how to potentially avoid them.

5 Common FMV Mistakes and Ways to Avoid Them

1. Assuming a Formula Can Establish an FMV Opinion [1]

Common Mistake: According to Revenue Ruling 59-60, a foundational document issued by the Internal Revenue Service to provide guidelines for business valuations, “a determination of fair market value, being a question of fact, will depend upon the circumstances in each case. No formula can be devised that will be generally applicable to the multitude of different valuation issues.”[2] While this revenue ruling was issued in the context of business valuations at the time, today, it is generally accepted that compensation valuation is also not an exact science.

Potential Solution: Rather than using a predetermined formula, which may or may not consider all the relevant facts, circumstances, and applicable valuation methods needed to render an FMV opinion, develop an FMV guidelines policy. The FMV guidelines policy should stratify individual agreements based on organizational risk tolerance with the understanding that as the level of compensation or number of compensation elements increases, the review and approval process also grows in equal complexity. Here is a quick example of the framework of a guidelines policy:

• If compensation is less than the 50^th percentile, vice president approval and supporting salary survey data are required.
• If compensation is greater than the 50^th percentile and equal to or below the 60^th, the same requirements as outlined above plus written justification and chief operating officer approval for the compensation range. Written justification may include items such as low availability of physicians within a specialty, unsuccessful efforts of negotiation at lower rates of compensation with multiple parties, adverse consequences of not retaining the physician, unique physician qualifications, etc.
• If compensation is greater than the 60^th percentile and equal to or below the 75^th, same as above in addition to chief executive officer written acknowledgement of compensation range.
• If compensation is greater than the 75^th percentile, same as above in addition to written third-party valuation opinion and approval by compliance committee.

While the above example includes thresholds of total compensation, other FMV policies might include total compensation per work relative value unit (wRVU), compensation to professional collection ratios, or other applicable metrics.

2. Failing to Consider the Definition of “Personally Performed” when Calculating Physician wRVU Productivity

Common Mistake: When calculating a physician’s wRVU productivity for the administration of compensation plans and valuation purposes, appropriately accounting for modifiers as well as “incident to,” “split-shared,” and “global billing” situations that may occur between physicians and advanced practice practitioners (APPs) is often overlooked. For example, in instances where physicians and APPs work collaboratively in the office, work performed by an APP as “incident to” may be billed as personally performed under the physician’s provider identification number. According to the Stark law definition of “personally performed,” however, a service is “not personally performed” by the referring physician if it is performed or provided by any other person, such as the referring physician’s employees (even on an “incident to” basis), independent contractors, or group practice members.[3]

Potential Solution: If a physician collaborates with one or more APPs, delve into how the providers collaborate and whether incident to, split-shared, or global services are performed. Evaluate productivity data on a rendering-provider versus billable-provider basis. Finally, if significant collaboration is occurring, consider having the physician cover the costs of the APP or adjust a physician’s wRVUs or compensation per wRVU amount to account for this collaboration. For more details regarding these potential solutions, visit this PYA on-demand webinar.

3. Relying Solely on Benchmark Compensation Surveys to Determine FMV

Common Mistake: While benchmark compensation surveys can be useful in helping to determine FMV, over-reliance on them without considering other key factors can be problematic. Notably, according to the Centers for Medicare & Medicaid Services (CMS), “we continue to believe that the fair market value of a transaction—and particularly, compensation for physician services—may not always align with published valuation data compilations, such as salary surveys. In other words, the rate of compensation set forth in a salary survey may not always be identical to the worth of a particular physician’s services.”[4]

Potential Solution: Use benchmark compensation surveys as a guide, but also consider other specific needs and circumstances surrounding the subject being valued. Market data for physicians who are not able to refer, the cost to replace a certain service, historical compensation, exceptional work effort, physician quality levels, and supply and demand for a particular specialty are just a few of the items that should be considered in addition to physician benchmark compensation data.

4. Assuming the Median (or less than the 75^th Percentile) of Benchmark Data is Fair Market Value

Common Mistake: One of the most common mistakes in compensation valuation is assuming the median (or 75^th percentile) compensation figure from benchmark surveys is automatically fair market value. As one example regarding the inappropriate use of the median, in 2015 Citizens Memorial Center settled allegations when compensation was set below the median but was alleged to exceed FMV because the physicians were not making median compensation before the transaction, and no one would be willing to pay median compensation unless they were considering the volume or value of referrals. As another important reference (using the 75^th percentile), according to CMS, “we are uncertain why the commenters believe that it is CMS policy that compensation set at or below the 75^th percentile in a salary schedule is always appropriate…The commenters are incorrect that this is CMS policy.”[5]

Potential Solution: Every compensation valuation is facts and circumstances specific. Failure to consider all facts and circumstances (e.g., a physician’s experience/name recognition, recruitment or retention difficulties, community need) can lead to an incorrect conclusion, no matter where that conclusion falls as a percentile in benchmark compensation surveys.

5. Overlooking Non-Monetary Benefits as Part of a Physician’s Total Remuneration

Common Mistake: Compensation valuation is not just about taxable wages (e.g., base salary, productivity bonus, quality incentive). Non-monetary benefits such as health insurance, retirement plan opportunities, and weeks of vacation can be missed when establishing the total remuneration paid to a physician. Further, non-salary compensation like signing bonuses, relocation allowances, and student debt reimbursement are often overlooked. These elements can significantly impact the overall compensation package and should be included in FMV assessments.

Potential Solution: Include a comprehensive analysis of both total compensation (including taxable compensation elements) and benefits when determining FMV. Generally accepted physician compensation benchmark surveys often report benefit levels in addition to physician compensation. In working with these surveys, pay close attention to the benefit definitions, so you can use “apples to apples” comparisons to make any transaction-specific adjustments that may be required given the facts and circumstances at hand.

By addressing common FMV issues with the proposed solutions, organizations can ensure fair, competitive, and compliant compensation structures that attract and retain top physician talent. If you would like additional guidance related to fair market value, provider compensation design, or any matter related to compensation valuation, commercial reasonableness, compliance, or strategy and integration, our executives are happy to assist.

Learn more:

• Check out 10 lessons learned from recent governmental complaints.
• Learn about professional services agreements between physicians and hospitals.
• Read an executive brief on clinical co-management arrangements between physicians and hospitals.

[1] As used in this instance, an FMV opinion is not to be confused with a calculation of value that provides an approximate indication of fair market value based on the performance of certain/limited procedures agreed upon by the appraiser and client (rather than an opinion of value, where the valuator is free to apply all valuation approaches and methods deemed appropriate under the circumstances).

[2] Internal Revenue Service (IRS). Revenue Ruling 59-60. 1959-1 C.B. 237. 

[3] 42 C.F.R. 411.351. Additionally, PYA recommends that healthcare legal counsel be consulted to ensure compliance with all applicable laws related to determining when a service is personally performed by a physician. 

[4] Centers for Medicare & Medicaid Services (CMS). Medicare Program; Modernizing and Clarifying the Physician Self-Referral Regulations. Federal Register, Vol. 85, No. 234, December 2, 2020, pp. 77492-77576. Available at: Federal Register.

[5] Ibid.