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Executive Session: Fair market value and the shift to value-based physician compensation

Podcast - February 19, 2022

Benchmarking & Forecasting

RVUs

Provider Compensation

David N. Gans MSHA, FACMPE
The updates to the Physician Self-Referral Law (also known as Stark) and the Anti-Kickback Statute in recent years added new layers of complexity to the task of ensuring fair market value compliance, commercial reasonableness and other regulations covering physician compensation arrangements.

Anthony Domanico, MBA, CVA, director at VMG Health and head of its provider compensation design and consulting service line, joined MGMA’s Executive Session podcast recently to detail his work in helping organizations move their compensation models for employed physicians and advanced practice providers (APPs) from volume to value.

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Editor’s note: The following Q&A is an abridged version of the podcast discussion. None of the following is intended as legal advice; please consult with internal or external counsel regarding these topics.

Q. Can you summarize the 2021 changes that are affecting physicians and health systems?

A. By far, the biggest change — particularly in Stark — is verification around and a more complete separation of the so-called “big three” — fair market value, commercial reasonableness and the volume-or-value standard.

Under previous iterations of these regulations, these three concepts were loosely defined and largely intertwined. Under the new rules, the big three have been separated out and clarified to make it easier for organizations to really wrap their head around these concepts. … However, CMS stopped short of … providing a safe harbor or rebuttable presumption that clearly determine what is fair market value, such as a percentile of a given survey. Instead, CMS pointed out that individual facts and circumstances matter — that the 98th percentile or more might be fair market value for one physician with a set of good facts.

Perhaps even more importantly, they called into question a strict reliance on surveys to establish fair market value compensation, suggesting that surveys are just one piece of the puzzle to determining whether compensation is consistent with fair market value and reasonable.

The key takeaways are that the fair market value, commercial reasonableness and volume-or-value standards are now better defined, but not fully defined. It’s still open to interpretation. And there's new ways for organizations to start to move the needle on some of these value-based compensation plans that Medicare and other payers are really trying to push.

I think the biggest change that may provide the biggest help and protections to health systems is the introduction of value-based exceptions under Stark and safe harbors under the Anti-Kickback Statute. … The concept is if an organization is using these exceptions — and having physicians take on some level of downside risk in their compensation model for value-based activities, such as quality, patient satisfaction — that organization's physician compensation arrangement may be less subject to some of the rules around fair market value but would still need to be commercially reasonable and compliant with the volume-or-value standard.

If an organization wants to start to think about moving into this value-based space, from a payer contracting and a physician compensation standpoint, in addition to consulting with a valuation or strategy group, it's a very good idea to consult with your internal or external attorney before just trying to rely on one of these exceptions, just to make sure that you're setting things up in a reasonable way.

Q. The previous definition of fair market value stated that physician compensation “must be set in advance, consistent with fair market value, and not determined in any manner that takes into account the volume or value of referrals or other business generated by the referring physician.” The new Stark rule revises this, stating the fair market value, commercial reasonableness and the volume-or-value standards are separate, distinct, and they must be met to determine compliance to regulation. Can you give our listeners a little bit more explanation on the volume-or-value standard?

A. Admittedly, we as evaluators don't get asked to do a lot of work with the volume-or-value standard, because most organizations don't tie compensation directly to the volume or value of referrals. They pay for these things indirectly through RVU-based compensation models.

A few years back, [the Bookwalter v. UPMC case] had the industry concerned that RVU-based compensation plans could be a violation of the volume-or-value standard. Fortunately, the outcome of that case alleviated some of those concerns.

In this latest iteration of Stark, CMS clarified that only those compensation models that directly tie referrals into the compensation plan are those that they're targeting here. RVU-based plans that most organizations are using today don't violate the volume-or-value standard. CMS outlined this in an objective test… that amounts to two questions:

  • Does a mathematical physician compensation formula exist that includes designated health service (DHS) referrals or other business generated as a variable?
  • If the answer to that question is “yes,” then does a physician’s compensation increase or decrease based on a positive or negative correlation with physicians’ referrals or other business generated?
With these two questions, CMS is indicating that what they're trying to do is stop any compensation arrangement that directly ties to the volume or value of a physician’s referrals. Indirect ties, such as collections-based or RVU-based formulas, are not violations of this volume-or-value concept.

Q. You described how hospitals and health systems need to carefully consider certain unique facts and circumstances. Can you give more insights on those facts used for structuring compensation arrangements for doctors?

A. CMS declined to provide safe harbors that ground fair market value in the market surveys. While they did that, they didn't say you should throw out surveys altogether. … CMS stated that, for many physicians, surveys might be the only tool you need to determine fair market value.

The key factor that CMS is driving home with these changes to fair market value in particular, is that facts and circumstances matter. You need to consider those factors before determining your compensation policies and how you're going to comply with fair market value and commercial reasonableness.

CMS gave two examples to illustrate this point:
  1. An orthopedic surgeon is one of the top orthopedic surgeons in the country, highly sought after by professional athletes with knee injuries due to specialized techniques, high success rates, good outcomes. That physician might command significantly higher compensation than the run-of-the-mill orthopedic physician (with median compensation around $450,000). Their compensation might be reasonable or fair market value at excess of the 90th percentile.
  2. A family medicine physician, whose median compensation is about $250,000. If the organization is in a low cost-of-living area with good schools and other positive cost of living factors, but the organization has a poor payer mix and a tenuous economic position … CMS is saying fair market value might be less than the median in that case.
One of the other things that CMS did is they rebutted a common application of the survey data, stating that it really isn't their position that compensation below the 75th percentile is always fair market value, nor that compensation above the 75th percentile is always suspect. … We think CMS is really trying to squash those beliefs.

Organizations should take a fresh look at their compliance policies to ensure that compensation arrangements are getting an appropriate level of review. Many organizations have internal thresholds that say, “up to the 75th percentile is OK,” or, “up to the 90th percentile is OK,” and everything else really requires an outside fair market value opinion from a valuation firm. Those organizations might want to institute further checks and balances to ensure — even if we're dealing with a compensation level between the 50th and 75th percentiles — that level of compensation is only provided to physicians with high productivity, high quality outcomes or other performance metrics that support elevated levels of compensation.

Many organizations are using this as an opportunity to revamp their compensation plans to more closely tie to these concepts: Pay should be aligned with productivity, or quality or other non-productivity-based factors that are good indicators of provider work effort and patient outcomes.

Q. In recent years, commercial and government insurers have expanded payments to practices associated with meeting value-based goals, such as improving quality or cost savings. What are the key points to consider when establishing a physician compensation arrangement that takes into consideration payments for value-based initiatives?

A. Any change from volume to value needs to be done in a meaningful and strategic way. … It used to be that there was one variable: Productivity determined compensation. Now we're moving to more of a multivariable compensation arrangement where productivity and quality need to be the differentiating factors for compensation. … You might have two providers who are producing at the 50th percentile, and now compensation should further differentiate based on high and low quality.

If an organization had paid $50 per RVU previously, that organization might pay $45 to $55 per RVU, and the $10 difference between the high and the low of that range is paid out based on quality performance. Some other organizations provide a percentage of the shared savings that come in, or quality bonuses that are received from the payers. Regardless of how a compensation model is structured, organizations should have some guidelines that they follow to determine the appropriate level of quality payout for providers.

We look at a few different rules when we differentiate compensation:
  • Value-based metrics or quality metrics need to be selected based on clinical evidence or credible medical support. These metrics should be based on objective or measurable data.
  • Any payments for improvement in quality or improvement in cost containment should be re-based on an annual basis.
  • Organizations should be cautious of compensation that's tied to maintenance goals.
  • If the physician agrees to take on meaningful downside risk in the value-based compensation plan, that can support higher levels of compensation consistent with what CMS is saying from a value-based risk perspective.
  • Organizations should consider including safeguards for quality and arrangements that are focused on cost savings. I know some payers have incentives that health systems can earn tied to cost containment, but cost containment can't be at the sake of patients receiving good care; it has to be balanced. If an organization wants to include some incentive in their compensation plan for cost savings, that metric should be balanced against making sure that the providers are responsible for getting good outcomes as well.
Q. The Anti-Kickback Statute’s requirements basically said that aggregate compensation methodology needs to be set in advance, which allows for outcomes-based payment (e.g., higher amounts earned for even small improvements). How do you see these regulations allowing practice leaders to pursue compensation formulas that reward improving quality or cost saving?

A. Previous iterations of the various exceptions and safe harbors required that the aggregate compensation level or amount must be set in advance to satisfy the rules of those exceptions. The key changes to the professional services safe harbor under the Anti-Kickback Statute only require that the methodology of compensation be set in advance.

The parties to an arrangement don't need to define the total aggregate compensation in advance. … In addition, some payer contracts pay back a level of shared savings to organizations, which is really difficult to truly define in advance. I think organizations have been a little skittish and probably rightly so to include some of these new payment mechanisms in their physician compensation plans at the risk of being out of compliance. Now, an organization can determine that methodology. … You can set those methodologies in advance and flex the payment as needed as that reimbursement pool grows or shrinks.

These changes allow an organization to have more flexibility and have a better idea of how they can be compliant. It gives them the flexibility to change and adapt more quickly. While compensation generally historically needed to be set in advance for at least a one-year period, these changes really allow organizations to adapt wherever is needed as long as any new methodology or new structure is only effective on a prospective basis.

Changing from aggregate compensation in the methodology just gives organizations more flexibility to be nimble and make changes as the program evolves over time as we're all still figuring out this new value-based world.

Q. This concept of flexibility becomes very important as organizations try to better align their physician compensation incentives to their missions. Traditionally, organizations relied on salary surveys as the basis for compensation. This is still a core portion of setting fair market value. How should a health system evaluate the surveys they use and the factors they need to put into consideration for national compensation data?

A. One of my biggest work areas right now is working with organizations to really understand how to strategically use (and maybe strategically not use) surveys in their compensation formulas. I think a move away from surveys is not advised.

Many organizations have taken a “set-it-and-forget-it” approach to surveys: They tie to the national 50th percentile published compensation for work RVU rates in the MGMA survey, and that's how they pay employed physicians for their productivity-based compensation. What I believe CMS is intending [to signal] is that this set-it-and-forget-it approach is not advised. There's a lot of nuances out there.

Organizations really need to take the time to make sure they understand the surveys and where they can be successfully implemented and where they can't. Many organizations don't know that if you look at two different surveys, you might have two very different definitions of something as basic as what is total cash compensation. Some surveys don't include call pay; some surveys are total W-2 compensation.

Surveys can still be a guide when setting compensation, but determining how to interpret the surveys, where to place physicians within a survey range is almost kind of more art than science. For most physicians, typical compensation formulas that are grounded in survey data is still the market best practice. But as we think through the examples that CMS gave — the orthopedic surgeon, the family medicine physician — organizations need to be mindful in their approach to compensation.

There's a lot going on in the 2021 surveys; we've got surveys affected by COVID-19, we've got the 2021 fee schedule, and significantly increased RVU values for the same work effort. We've got all these factors that, if an organization isn't mindful of, you risk over- or underpaying your physicians. Then you need to understand when it makes sense to over- or underpay your physicians, based on facts and circumstances.

When those facts and circumstances do require an organization to significantly deviate from typical survey usage, an organization should really understand and document those factors that they use to make that decision. Consider getting an opinion from an outside third party just to make sure that the assumptions you're making when setting compensation levels are reasonable and consistent with how an evaluator might view it.

By far, the most important thing an organization needs to understand is how is revenue coming into the system. In a fee-for-service world, that was easy. … With multiple payers now focusing on adding value, organizations now have multiple drivers of revenue, and there's multiple different levers to pull to make sure you know that you're getting the same or better revenue than you've gotten historically.

To set up a successful compensation plan, organizations really need to understand those drivers and set compensation in a way that aligns organization and provider behaviors to work together toward those outcomes.

Q. Any closing thoughts to today's discussion?

A. The landscape is complex. Try to understand your current compliance system and how to better position it to be compliant in this new value-based world of healthcare. You don't need to do that alone. Consulting firms can help think through the strategic side. Internal and external counsel can help position an organization to be compliant with these emerging regulations around Stark Law and the Anti-Kickback Statute.

Now's not the right time to do nothing. You really need to understand these multitude of factors that are influencing our reimbursement as health systems and compensation that we're paying to our physicians. It's important to understand those factors in the building, design, and revamp of your compensation plans; your policies; and governance structures to make sure that you're setting yourself up for success in the future.

Additional resources

About the Author

David N. Gans
David N. Gans MSHA, FACMPE
Retired senior fellow, industry affairs MGMA

David N. Gans can be reached at davegans406@gmail.com.

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