Valuations normally happen with two goals in mind in a medical group practice:
- Valuing the business (Physician owners sometimes get divorced, after all.)
- Valuing services.
The reasons, however, are more a matter of compliance. Stark Law, the Medicare Anti-Kickback Statute and other federal regulations limit the types of business relationships into which physicians can enter and mandate a commercial reasonableness known as fair market value (FMV).
Differences in methodology that underpin valuation work can have a significant impact on a medical group practice’s costs as they relate to physician compensation. That’s where Timothy Smith, CPA, ABV, principal, TS Healthcare Consulting LLC, enters the picture.
Smith worked for years in assessing valuation work for a large hospital chain while it was under a corporate integrity agreement (CIA), which led him to go into valuation work and ultimately co-edit the industry’s textbook on physician compensation valuation.
As most people who have dealt with FMV can attest, there’s no magic wand to wave and produce a single, immutable valuation that acts as an ironclad protection in a federal case.
“From a compliance perspective, you don’t get the ‘get-out-of-jail-free’ card by having an outside valuation,” Smith said at MGMA19 | The Data Conference. “It will give you brownie points for intent with the government, but if you have a case arise … what’s going to drive the boat is a battle of the experts.”
Similarly, it’s incumbent upon practice leaders who commission an outside valuation of compensation to decide what to do with the outcome.
“You should be inspecting your valuations. … There’s nothing wrong with it,” Smith noted. “[Valuators] are taught to support and defend our work. We know that our work may one day be subject to litigation, and we’re taught professionally to document our files, to do adequate research. … Every valuator should be able to give you a really good account of why they did what they did, why they didn’t do certain things.”
Approaches to valuation
Valuators approach the question of value from three primary perspectives, Smith said:
- The market approach: Looking at comparable sales transactions for a particular subject
- The cost approach: Looking at the cost to replicate or build up a particular business interest or service
- The income approach: Looking at income derived from a business or commercial property or — in the case of services — the income of services provided.
When it comes to a standard of value, FMV is the value of an arm’s-length transaction between a hypothetical buyer and seller, in contrast to an investment value specific to an actual buyer and seller. For example, one telecom company purchasing another has a “synergistic impact,” Smith said, compared to if a major investor purchased that same telecom for cash flow only.
This causes friction in hospital-doctor deals, because those doctors know all the referrals they’re putting in a hospital, and the hospital knows the local market. Armed with those specifics, it might lead some to gravitate toward investment value. “The regulatory standard is fair market value, which is transactions apart from referrals,” Smith noted. “That’s the real key of the regulation.”
Common concerns for comp valuations
The three perspectives for valuation take on specific meaning when applied to physician compensation valuation, Smith noted:
- Industry data sources are gathered for the market approach.
- The cost approach requires valuing different service/resource elements.
- The income approach identifies net income or cash flow from physician services for buyer or seller.
Especially with the market approach, the amount of information in the report metrics can be too much or too little to apply to a specific arrangement, such as the “stacking” issue of looking at total compensation data and attempting to draw conclusions about how much of it is tied to productivity versus other factors, such as medical directorships, co-management or on-call pay.
“If I’m valuing a clinical service arrangement, I wish I had just clinical comp data, not total [comp],” Smith said.
A recurring dilemma: To use national data or regional?
Valuators and practices face concerns with using national-level survey data or regional data for a specific market. “Each market in healthcare has its own dynamics. … Different marketplaces have different physician contracts — those give rise to different compensation,” Smith said.
Many practice leaders might argue to use national data, either because it has more respondents or because their physician recruiting market is national. Smith noted that regional data may not always be more reflective of a local market, but did advise to be careful about insisting on a valuator exclusively using certain regional data. “It’s a scope limitation that makes the valuation no longer truly independent, because the valuator doesn’t choose the data that is most appropriate,” Smith said.
Common pitfalls in using survey data
Many popular claims about compensation survey data are just myth, Smith said. “We have a lot of conjecture and speculation being passed off as truth,” Smith added. “People say, ‘The reason doctors are at X percentile is because of this reason,’ and that may make sense — it’s a plausible hypothesis, but it’s really untested.”
Herd mentality around valuation also is prevalent. “The government’s expert in the Tuomey case — her answer for her valuation methodology was the following: ‘This is how everybody does it,’” Smith said. “This groupthink is no substitute for real data analysis.”
Valuing medical directorships and administrative services
Market approaches to medical directorship arrangements (MDAs) emphasize hours, resulting in a need for hourly data to value an MDA.
The difficulty, however, is differentiating administrative service pay and clinical service pay. Smith points to the example of a cardiovascular surgeon: “In the [operating room], cutting people — all kinds of open chest procedures that are high risk, they’re very demanding,” Smith said. The work of reviewing claims or doing education as part of a medical directorship is “not as demanding of a service as cracking open somebody’s chest … dealing with life and death.”
Additionally, valuing MDAs is complicated by some data sources not differentiating between employed physician rates and independent physician rates, along with the need to determine which percentiles to use.
Valuing unrestricted call
Unrestricted call — in which a physician doesn’t need to be on campus — often involves a fixed amount per shift, sometimes with added activation fees, guaranteed collections and similar elements.
Smith noted two key components to call compensation: physician availability and uncompensated care. “You’re paying them to restrict their location and their use of their time,” Smith said. “Then to the extent they’re seeing lots of patients in your ED or on an unassigned inpatient basis, whether or not you pay, you’re actually giving them a stipend that helps to offset the cost of the care.”
Response time and mode dictate availability pay, generally. A surgeon providing trauma coverage at a Level 3 facility has 30 minutes from receiving a pager call to get to the patient’s bedside, whereas a typical general surgery call requirement includes 30 minutes to respond to the call and then another 30 minutes to come in. Panel size and rotations also create varying burden levels to consider.
Scoring models that look at trauma versus non-trauma coverage, call rotation, panel size, payer mix and the like often help valuators navigate survey data for this area. “Those points translate” into a certain percentile of compensation survey data.
Alternatively, the cost approach could be used to build up availability pay and uncompensated care pay separately. Some survey data sources include encounters per work RVU (wRVU) that can aid in estimating what care would be per encounter.
Employing physicians to provide call coverage is another option, Smith noted, by estimating the number of physicians needed to provide the call on an employment basis; estimating compensation and benefits costs using survey data; estimating collections and overhead using survey data; and estimating practice losses and dividing the total into the shifts covered.
When it comes to uncompensated care, Smith noted that all the information on physicians providing emergency care cases is embedded in the hospital’s billing records. “It’s there,” Smith noted. “You’ve got to know how to dig it out, but it’s there.”
Valuing restricted call
Costs change for call coverage when doctors must be on site. “They can’t really do anything else,” Smith said, which means finding the cost of putting a bunch of providers in a hospital versus what they might collect. “There’s typically a shortfall,” Smith said, adding that the key assumptions to valuing this area is how many physicians it will take.
Valuators will then turn to survey data for three different assumptions: physician cost, overhead and collections. Smith said some might assume compensation and overhead costs are between the median and 75th percentile based upon multiple surveys, along with assuming 25th percentile to median collections and assuming median overhead. “It’s all based upon picking certain percentiles and saying that’s what the doctors should get,” he said.
Valuations for physician compensation are opinions, and Smith emphasized that practice leaders who want to ensure they have legally defensible valuations can ask for valuators to show their work and defend the opinions and assumptions baked into the work.
That active inquiry can help practice leaders avoid receiving and relying on what Smith calls “cookie-cutter” valuations.
“Valuations are not supposed to be about rules of thumb or automated formulaic analyses,” Smith said.
Additional resources
- To hear more from Timothy Smith about digging deeper into survey data with David N. Gans, listen to the August episode of the Executive Session podcast: mgma.com/exec-smith.
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