Employed Physician Salary Agreements

HealthCare Appraisers approaches valuation of employed physician compensation arrangements within the unique context of healthcare regulation and generally accepted valuation principles.  HealthCare Appraisers considers the three widely established valuation approaches:

1) The Cost Approach

2) The Income Approach 

3) The Market Approaches

Every appraisal applies one or more of these approaches depending on the specific facts and circumstances of the valuation assignment.  These valuation approaches are conformed to comply with federal and state regulations (e.g., the Stark and anti-kickback statutes) and guidelines published by regulatory bodies or rendered by courts of law.

Once we gain a complete understanding of the detailed services required under the physician employment arrangement, as well as, the corresponding compensation model that is being proposed, HealthCare Appraisers determines the applicability of the three valuation approaches referenced above. 

PRODUCTION-BASED MARKET APPROACH

Generally, HealthCare Appraisers will utilize the Market Approach in the valuation of physician employment arrangements, wherein we seek to value the subject arrangement by referencing comparable arrangements in the marketplace.  However, as information on specific employment arrangements in the marketplace is generally difficult to obtain in sufficient detail for use in a valuation analysis, we generally utilize physician compensation and productivity data that is widely available and accessible through published surveys.  

A subject physician’s productivity can be benchmarked relative to his or her peers in the survey data using productivity metrics.  A corresponding level of reasonable compensation can then be determined using the compensation data from the surveys.  A fundamental assumption of this valuation method is that compensation and productivity levels generally correlate in the market survey data, leading to common terminology of “Productivity-Matched Compensation.”

HealthCare Appraisers normally relies upon both personally performed work relative value units (“wRVUs”) and professional collections (“PCs”) as primary measures of physician productivity in applying the Productivity-Matched Compensation valuation technique.  We use these two units of measure because they reflect personally performed services by the medical provider and are an indication of the physician’s individual productivity level.  Further, we note that they are widely used measures of physician productivity within the industry, and are commonly used by physician groups, hospital-health systems, operational consultants and appraisers in setting physician salary levels and developing physician compensation models.

Medical team discussing a case

OUR PRODUCTIVITY-MATCHED COMPENSATION METHODOLOGY

For purposes of valuing clinical services compensation, HealthCare Appraisers considers three specific methods to establish Productivity-Matched Compensation:

PERCENTILE MATCHING TECHNIQUE

The percentile matching technique (i.e., PMT) calculates a compensation level that corresponds to a physician’s benchmarked level of productivity based on the percentiles of productivity and compensation reported by the Surveys for the subject doctor’s specialty/subspecialty.  For example, if a health care professional’s production benchmarks at the 65th percentile value reported by one of the surveys, then the PMT guideline equals the 65th percentile compensation reported by the same survey.

MEDIAN RATE TECHNIQUE

The median rate technique (i.e., MRT) uses the median compensation rate per unit of productivity (e.g., compensation per wRVU or compensation to professional collections ratio) reported by the surveys and a physician’s historical productivity level to establish a market-based level of payment.  Specifically, we multiply the medical practitioner’s production by the median compensation rate per unit of productivity. We utilize the median rate for two reasons.  First, the median, as the middle value in a data set, can be viewed as the best proxy for a typical rate within the data set.  Moreover, we have observed that compensation at a given percentile divided by productivity metric at the same percentile frequently approximates the median rate, particularly at production levels between the 25th and 75th percentiles.

QUARTILE OF PRODUCTION TECHNIQUE

The compensation by quartile of production technique (i.e., CQPT) is identical to the MRT except that the CQPT uses median compensation to productivity rates specific to a quartile of production (e.g., less than 25th percentile, 25th percentile to median, etc.) for a given physician specialty/subspecialty to determine the guideline compensation level.  The rates used in this analysis include compensation per wRVU and compensation to PCs ratio as observed by quartile of production by MGMA.  Since the median rates used in the CQPT are specific to a quartile of production, this technique often is useful for physicians whose productivity benchmarks well above or below the median (i.e., for some specialties, the MRT may overstate or understate the FMV compensation for such healthcare providers).

Before determining Productivity-Matched Compensation, HealthCare Appraisers uses historical production to establish a physician’s “Base Year” productivity.  If wRVUs and PCs are both available for the subject physician, these methods will produce six guideline indications of Productivity-Matched Compensation, three based on wRVUs and three based on PCs.  Each set of three indications is then weighted to calculate a weighted-average guideline indication, resulting in two weighted guideline indications, one based on wRVUs and the other based on professional collections, from which to draw a final conclusion.

Medical professionals writing

NON-PRODUCTION-BASED MARKET APPROACH

As another application of the Market Approach for valuing physician employment compensation, HealthCare Appraisers uses various non-production criteria to establish an indication of FMV.  HealthCare Appraisers has developed a proprietary algorithm that is based on specific non-production criteria, including factors relating to a physician’s qualifications and experience.  This analysis also considers information related to the subject physician’s specialty and the employer’s local market.

In determining FMV compensation for clinical services in the absence of production data, we evaluate a number of considerations specific to the subject physician and the required duties.  First, we evaluate FMV compensation based solely on the subject physician’s practice specialty (referred to as the “Base Consideration”).  We then evaluate various physician qualifications and market characteristics (referred to as the “Additional Considerations”), and what impact such Additional Considerations have on FMV compensation for the subject physician’s clinical services.

Generally, HealthCare Appraisers will consider the FMV indications based on both production-based and non-production-based methods.  We may rely on one or the other, or a blending of the two indications.  In addition, when there are additional elements to the proposed employment arrangement (e.g., emergency department call coverage, administrative services, physician supervision, etc.), additional value is ascribed to each of these components in deriving the upper end of FMV, provided there is no redundancy to the components.

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