Can the Sum of the Parts be Greater Than the Whole?

In the continuing evolution of hospital/physician relations, new and more complicated pay arrangements find their way into the market each year. However, overpayment of physicians can run afoul of regulatory requirements for fair market value and commercial reasonableness. Having more than one paid service or compensation arrangement between parties increases the risk that aggregate compensation is more than FMV. While the compensation terms outlined in each agreement may represent FMV, when taken together, total compensation in some cases can exceed FMV. The following scenarios show some of the ways that pay arrangements can be “stacked,” placing the parties at higher risk:

  • Physicians receive compensation above FMV in the aggregate.
  • Physicians are paid more than once for the same or overlapping work.
  • The total duties, when combined, are unrealistic for a single individual or party to perform.
  • The total of all responsibilities causes one or more duties to be of a lesser scope than expected.
  • Published survey data used in determining pay are misinterpreted to exclude certain compensation.

In each, or a combination of the above, the parties assume a great deal of risk for non-compliance with the Stark law.

The risk of stacking is not just limited to employment contracts or on-call pay, which will be discussed in another blog topic. Hospital payments for professional service arrangements, teaching, research, and a few others may result in aggregate overpayments. Below is just one hypothetical example of a trouble spot to avoid.

Clinical Co-Management Arrangements

In an effort to improve clinical quality, many hospitals create agreements with specialists to co-manage a specific hospital service line or, in some cases, an entire hospital. When quality is positively impacted in a meaningful way, everyone wins: health care costs are better controlled, hospitals save money and can earn incentives, physicians may receive bonus compensation, and patient care improves.

Hospital A put in place a cardiology clinical co-management arrangement. One of its goals was to engage the cardiologists through actively participating in the administration of the cath lab. The compensation paid included a base rate, primarily associated with administrative duties, committee service, and the physicians’ time spent administering the service line. The compensation also included an incentive rate, payable only if the physicians reached certain quality metrics.

After a few months, when outside counsel looked at some employment agreements that were nearing their renewal data, everyone was surprised to find out that the co-management agreement contained duties that overlapped with the cath lab medical directorship agreement, which had not been terminated with the inception of the CCMA. It was also noted that similar duties were present in the one physician’s employment agreement. Because the co-management agreement was stacked along with the medical directorship and an employment agreement without contemplation of this in the CCMA FMV analysis, two physicians may have been overpaid in the aggregate for the same responsibilities.

However, one possible solution, assuming the facts were known about the cath lab medical director position and the employed physician’s cath lab duties, would be to adjust the CCMA base rate to reflect the overlapping agreements. Termination of the cath lab agreement and amendment of the employment agreement would have presented another alternative.

Avoid Stacking

In addition to not making the missteps in the hypothetical above, there are steps you can take to protect physician contracts with many moving parts:

  • Ensure each component of compensation is FMV
  • Study the various agreements to ensure that there are no duplicative or overlapping responsibilities
  • Analyze surveys with a goal of understanding the following factors, among others:
    • Nature of respondents and pay rates
    • What constitutes "baked in" elements of compensation
    • Time and scope expectations for the service
  • Ascertain, if possible, a schedule or the number of hours needed to perform each duty or service and identify conflicts
  • Evaluate payment methods to ensure that conflicts or duplications are not created

As always, seek guidance from qualified legal counsel and valuation experts with experience in health care and stacked arrangements to help you navigate this complex area.


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Topics: Physician Compensation, What is Fair Market Value

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