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Establishing fair market value physician compensation in a changing industry

Insight Article - September 24, 2021


Compliance Regulations

Provider Compensation

Amid all the changes happening in the healthcare industry, one of the biggest challenges is ensuring that the compensation levels paid to employed physicians complies with evolving fraud and abuse regulations. The ramifications for noncompliance with these regulations can be significant, with some health systems agreeing to pay eight- or nine-digit settlement claims to satisfy real or perceived violations.

Federal fraud and abuse regulations

There are several regulations that govern physician relationships, including the Physician Self-Referral Law (Stark Law), the Anti-Kickback Statute (AKS), the Private Inurement Statute, the False Claims Act (FCA), the Civil Monetary Penalties Law, and the Health Care Fraud Statute. The primary regulations governing physician compensation arrangements are the Stark Law and AKS.

The Stark Law prohibits physicians from referring a patient to an entity with which the physician has a financial relationship when the referral is for the furnishing of certain designated health services (e.g., lab, PT, OT, radiology, DME, inpatient services) unless a particular exception applies. The Stark Law is a strict liability statute, meaning that the intent to violate the law is not required to be in violation of the law, and penalties include fines and/or exclusion from participation in Medicare and Medicaid.

The AKS is a criminal law that prohibits the knowing and willful payment of remuneration, which includes cash compensation and other perquisites (such as free or below-FMV rent, excessive compensation, free meals) to induce or reward patient referrals or the generation of business involving any item or service payable by Medicare and Medicaid. Criminal penalties for violating the AKS include fines, jail time, and exclusion from Medicare and Medicaid programs.

Other fraud and abuse laws, including the False Claims Act and the Civil Monetary Penalties Law, impose further fines and sanctions for violation of these regulations. There are several federal regulations that govern provider compensation arrangements, and the cost of noncompliance with these regulations can be significant.

The high cost of noncompliance

There have been several court cases with hefty price tags in recent years that highlight the importance of complying with these regulations. The most notable and often-cited case involved Tuomey Healthcare, which was found to have violated the Stark Law and the FCA. Initially, there was a $237 million judgment against Tuomey Healthcare, which was ultimately settled in 2015 for $72.4 million and included the sale of the health system to Palmetto Health.1

Another high-profile case in 2015 involved Adventist Health System, which paid a $118.7 million settlement to resolve allegations that the health system had violated the Stark Law and the FCA.2 More recent settlements involving Stark, AKS and the FCA include a $46.1 million settlement from Sutter Health and Sacramento Cardiovascular Surgeons Medical Group in 2019,3 a $48 million settlement from the Texas Heart Hospital in 2020,4 and a $21 million settlement from Akron General Health System in July 2021.5

These cases highlight the significance of strong compliance programs and robust processes for ensuring a compliant FMV provider compensation program.

Help through a pandemic: The COVID-19 waivers

When the COVID-19 pandemic hit in early 2020, the Centers for Medicare & Medicaid Services (CMS) scrambled to understand how to help healthcare providers address the pandemic and remove barriers that might otherwise prevent physicians and advanced practice providers (APPs) from taking care of COVID-19 patients. The result was the establishment of blanket waivers that, for the duration of the declared public health emergency (PHE), medical groups wouldn’t need to be as diligent in ensuring the compensation provided to physicians and APPs was consistent with FMV.

These waivers helped medical groups on two fronts. First, organizations could provide battle pay — premium pay, bonuses, hardship payments and other forms of compensation — to providers on the front lines of the pandemic to ensure there would be enough hospitalists, emergency medicine, critical care and other providers to provide care to the influx of patients to hospitals.

Second, organizations could also use the waivers to provide compensation guarantees to providers not on the front lines but affected by the significant decreases in volume due to bans on elective procedures and patients in the ambulatory setting delaying care until COVID-19 got more “under control.” Since FMV compensation is at least in part driven by a provider’s level of personally performed work relative value units (wRVUs), net professional collections, patient contact hours or some other measurement of provider work effort, the waivers allowed organizations the ability to continue to provide competitive compensation levels to physicians even when the work effort wasn’t necessarily there to support the level of compensation provided, as long as the organization fit within one of the various COVID-19 purposes outlined in the waivers.

Latest iteration of Stark and AKS

While the blanket waivers provided organizations some level of protection during the COVID-19 pandemic, key changes to the federal fraud and abuse regulations took effect in January 2021 that may take some of the FMV pressure off organizations for the longer term.

The main changes to these regulations were primarily two-fold. Within the Stark Law, CMS simplified and streamlined the definitions of FMV, commercially reasonable, and the volume or value standard to make it more clear for organizations to understand how to satisfy these three important prongs of a compliant provider compensation arrangement. While these definitions are still not expressed in an exact way — for example, CMS elected to not provide specific guidelines stating that a certain market percentile is always FMV — the changes should give organizations a bit more clarity on how to establish compliant compensation programs.

The second and perhaps more meaningful change is that the Stark Law and AKS introduced new exceptions (Stark) and/or safe harbors (AKS) related to value-based arrangements. In the many conversations I’ve had recently with internal and external counsel, the consensus seems to be that if a value-based exception is met and a physician takes on meaningful downside risk as part of the employed provider compensation arrangement, that provider’s value-based compensation may no longer be subject to FMV. Commercial reasonableness and other factors would still apply; however, a provider potentially could have a lopsided incentive that provides a greater level of upside potential if a physician agrees to take on a meaningful level of downside risk (more than 10%).

Organizations looking to make use of the new value-based exceptions should consult with internal and/or external counsel for further clarification on the applicability of these exceptions.

FMV challenges for 2022

Several challenges have emerged that require organizations to make careful considerations in their provider compensation arrangements heading into 2022.

Continued impact of the COVID-19 pandemic

One of the main challenges organizations face in 2022 is the continued impact of the COVID-19 pandemic. With cases surging in the United States as we enter the fall season and the potential for the continuation of the pandemic into 2022, organizations will need to continue to understand and account for the COVID-19 pandemic in their provider compensation formulas.

The main impact on FMV is that the COVID-19 pandemic makes it difficult to accurately gauge and measure an individual physician’s work effort relative to other physicians in the market. Volumes in 2020 were broadly and significantly impacted by the shutting down of elective procedures and moving patient visits out of the clinic and into a virtual setting. These effects were felt into the first months of 2021 and may be felt again during the second half of 2021 as COVID-19 cases and hospitalizations spike.

CMS Medicare Physician Fee Schedule changes

Another impact is that of the 2021 Medicare Physician Fee Schedule (MPFS), the mechanisms by which organizations are reimbursed for provider services and many compensate their employed providers. The biggest change to the 2021 MPFS was that it significantly increased the wRVU for E/M codes used in the outpatient setting for face-to-face visits with patients.

Changes to the E/M code values were significant, particularly for visits with established patients. The wRVU impact is shown by code in Table 1.

While the intention behind the changes to wRVU values for these services is to recognize primary care and other cognitive specialists’ work more appropriately, from a practical perspective, the new values will make determining FMV physician compensation more difficult for organizations in 2021.

The impact of COVID-19 and the MPFS on surveys

The reason these first two trends are particularly challenging pertains to the impact these factors will have on the compensation and productivity surveys organizations use to set compensation levels going forward. Many organizations would use the most recent compensation surveys, such as the 2021 MGMA DataDive Provider Compensation report, to set compensation levels for physicians in 2022.

This approach works well when there aren’t significant factors impacting either compensation or productivity levels beyond the typical changes of inflation or minor changes in productivity. The most recent surveys are based on 2020 data, which was significantly impacted by COVID-19, and do not include the changes to the 2021 MPFS. In short, while the 2021 surveys may be a great way to evaluate physician performance in 2020, these surveys are likely not as applicable for setting physician compensation arrangements in 2022.

Moreover, with the COVID-19 impact lingering into 2021 and many organizations delaying adoption of the 2021 MPFS in their compensation plans, next year’s surveys may also suffer from forward-looking applicability issues. While MGMA and the other survey organizations will work to ensure participants report wRVU levels under the 2021 MPFS, it’s important for organizations to note that data are self-reported and therefore dependent upon what responding organizations end up doing.

The most important takeaway from these first three FMV challenges is that organizations must be diligent in establishing FMV compensation arrangements in 2022. Inaction or acting with a limited understanding of the various factors increases the risk of paying physicians at levels that exceed FMV.

The industry’s move from volume to value

Another factor for organizations to consider is the increasing proportion of value-based reimbursement within an organization’s payer contracts from government and nongovernment payers. In the fee-for-service world, determining FMV physician compensation was somewhat simpler — the more wRVUs a physician produced or the more professional revenue a physician generated, the greater that physician’s value.

These days, quality outcomes, patient satisfaction, and other nonproductivity-based incentives are common in payer contracts (revenue to the organization) and in provider compensation arrangements (distribution of that revenue to physicians). While the historical determinant of value has been productivity (such that a physician who produces 5,000 wRVUs is valued more than a physician who produces 4,500 wRVUs), these nonproductivity components add another variable to consider.

If the same physician producing 5,000 wRVUs has median performance on these outcomes-based metrics, his value may be the same as or even less than the physician producing 4,500 wRVUs with top-decile quality levels and top-box patient satisfaction scores.

While this concept that a physician with better outcomes is valued higher than a similar-producing physician with worse outcomes, pinpointing that value differential is incredibly difficult. Industry salary surveys don’t measure the impact quality performance has on differentiating physician compensation as they do for wRVUs, collections, or the other measurable productivity-based metrics. Incorporating quality performance requires organizations to make assumptions about the market that may not be grounded in reality.

Key takeaways

Despite changing fraud and abuse regulations that arguably make it easier for organizations to determine FMV physician compensation levels, other changes affecting the healthcare industry heading into 2022 make it much more difficult. What is clear is that organizations need to be more sophisticated in their approaches to determining FMV physician compensation, as historical methods are proving less valid as the industry changes.

To be successful in 2022, organizations must take a more strategic, analytical approach to benchmarking. Organizations can no longer simply look to a published median compensation per wRVU and update their compensation plans accordingly. Now, organizations must truly understand market benchmarks, consider the impact of COVID-19, changes to the MPFS, and the continued move from volume to value-based patient care. In addition, organizations must more closely engage with their internal or external counsel to ensure that any changes to provider compensation are in line with changing fraud and abuse regulations.

With these targeted enhancements to the provider compensation arrangements, organizations can set themselves up for successful, compliant provider compensation programs in 2022 and beyond.

Learn more

MGMA Consulting has partnered with VMG Health to provide a new line of fair market value (FMV) consulting services to help you navigate physician compensation design and information on valuation for acquisitions. Learn more at


  1. U.S. Department of Justice. “United States Resolves $237 Million False Claims Act Judgment against South Carolina Hospital that Made Illegal Payments to Referring Physicians.” Oct. 16, 2015. Available from:
  2. DOJ. “Adventist Health System Agrees to Pay $115 Million to Settle False Claims Act Allegations.” Sept. 21, 2015. Available from:
  3. DOJ. “California Health System and Surgical Group Agree to Settle Claims Arising from Improper Compensation Arrangements.” Nov. 15, 2019. Available from:
  4. DOJ. “Texas Heart Hospital and Wholly-Owned Subsidiary THHBP Management Company LLC to Pay $48 Million to Settle False Claims Act Allegations Related to Alleged Kickbacks.” Dec. 18, 2020. Available from:
  5. DOJ. “Northern Ohio Health System Agrees to Pay Over $21 Million to Resolve False Claims Act Allegations for Improper Payments to Referring Physicians.” July 2, 2021. Available from:

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