The document summarizes key issues related to physician compensation agreements and the impact of healthcare reform. It discusses the increased complexity of compensation models with multiple layers and components. Ensuring fair market value and commercial reasonableness of the overall arrangement is important as the sum of individual components could exceed what is reasonable. The presentation also covers analyzing losses, benchmarks, and factors considered in commercial reasonableness determinations. Healthcare continues shifting toward value-based payments, quality incentives, and bundled payments through initiatives like Accountable Care Organizations.

1. Hot Valuation Issues for Physician
Agreements
#AICPAhealth
2014 AICPA National Healthcare Conference
November 6, 2014
Carol W. Carden, CPA/ABV, ASA, CFE

2. Agenda
Overview
Multiple Layers of Physician Compensation – FMV and CR
Losses and Commercial Reasonableness
Impact of Health Reform
Questions
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3. Speaker Biography
Carol Carden is a Principal with Pershing Yoakley & Associates, P.C., and
provides business valuation and related consulting services to a wide variety
of business organizations, primarily in the healthcare industry. Ms. Carden’s
primary areas of expertise are in finance, valuation, managed care and
revenue cycle operations for healthcare organizations. She has performed
appraisals of businesses and securities for a wide variety of purposes such
as mergers, acquisitions, joint ventures, management service agreements and
other intangible assets.
In addition to being a Certified Public Accountant, she has also earned the
Accredited in Business Valuation (ABV) credential from the American Institute
of Certified Public Accountants, the Accredited Senior Appraiser (ASA)
credential from the American Society of Appraisers and the Certified Fraud
Examiner (CFE) credential from the Association of Certified Fraud Examiners.
She is the Chair of the Executive Committee for Forensic and Valuation
Services and the former Chair of the Business Valuation Committee for the
AICPA, was Chair of the 2010 National AICPA Business Valuation Conference
and was on the planning committee for the 2011 AICPA National Healthcare
Conference. She was inducted into the AICPA Business Valuation Hall of Fame
in 2013.

4. Multiple Layers of Physician
#AICPAhealth
Compensation

5. Overview
Hospitals and other organizations are utilizing more complex
compensation models, often with multiple layers of compensation
for multiple services (sometimes referred to as “stacking”).
With these types of models, it is important to:
• Understand the various functional agreements and how they relate to each
other.
• Know when a “stacking” analysis is in order.
• Be aware of the multiple benchmark compensation data sources available.
• Be aware of the various forms of compensation that are included in clinical
benchmark data.
• Appreciate the increased risks in stacking agreements.
• Ensure that each component of compensation, and the components when
viewed in their entirety, do not exceed fair market value (“FMV”) and are
commercially reasonable.
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6. Physician Compensation:
Multiple Layers
Clinical Services
Teaching
Services or
Research
Activities
Medical
Directorships
Call Coverage
Co-management
and Performance
Management
Mid-Level
Provider
Supervision
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7. Physician Compensation:
Multiple Layers (Cont’d)
In addition, physicians can receive compensation in many forms, such as:
Base Salary
Sign-on/
Retention
Bonuses
Productivity-
Based
Incentives
Quality-Based
Practice Incentives
Profitability
(Profit Sharing)
Excess
Vacation
Tail Insurance
Excess
Benefits
Relocation Costs
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8. Physician Compensation:
Multiple Layers (Cont’d)
As new compensation models become more complex, in
certain cases “the sum of the parts can exceed the whole”
and create commercial reasonableness and FMV issues
for the organization.
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9. Evaluation of Increased Risks
Avoid being paid for two or
more services at the same
time.
For clinical services,
need: billing and
productivity records
For administrative
services, need: time and
activity logs
Each component must be:
• Identifiable
• Measurable
• Recorded
Avoid being paid for the same
service twice (or more) via
multiple forms of
compensation
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10. Evaluation of Increased Risks (Cont’d)
Can the physician perform all of the duties due to the
number of hours required? Can quality be maintained?
Identify (or match) the compensation with each service
to be provided.
Avoid double payment for the same service or payment
for services not provided.
Model the individual compensation components to
determine the total amount of compensation that could
occur under the arrangement.
Should consider placing caps on the amount of
compensation that can be earned under each component.
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11. Valuation Process
Assess historical
productivity
(i.e., wRVUs,
collections, visits)
Analyze benchmark
compensation
associated with similar
productivity levels
• National
• Regional
• State
Analyze
benchmark data
for other
administrative
components
Stack the appropriate
components and
evaluate the
compensation in total
for FMV and
commercial
reasonableness
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12. Benchmark Compensation Data
For AMGA, HHCS, MGMA, and Sullivan Cotter surveys, the total
compensation is reported as direct compensation which may include:
salary
bonus and/or incentive payments
research stipends
honoraria
profit-sharing
clinical medical directorships
call coverage
voluntary salary reductions
However, the reported data excludes fringe benefits paid by the
medical practice (e.g., retirement plan contributions, health insurance).
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13. Inside the Stack vs.
Outside the Stack
Base compensation
Productivity
Quality incentive
Sign on/retention
Call pay-Maybe
Medical Director pay-Maybe
Supervision of mid-levels
Benefits
Co-management compensation
Practice profitability sharing
Call pay-Maybe
Medical Director pay-maybe
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14. Example Calculation
Base (up to 5,000 wRVUs) $180,000
Productivity (at expected wRVUs of 6,000) $ 40,000
Sign-on bonus $ 10,000
Quality-based incentive $ 20,000
Total potential compensation $250,000
MGMA 77th wRVUs 6,004
MGMA 79th compensation $251,892
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15. Losses and Commercial
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Reasonableness

16. Compliance Issues Regarding
Hospital-Physician Financial Relationships
COMMERCIAL
REASONABLENESS
FAIR MARKET
VALUE
SENSE CENTS
Overall
Arrangement
“WHY?”
Range of
Dollars Only
“HOW
MUCH?”
Scope
Key Question
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17. Commercial Reasonableness
Department of Health and Human Services Definition1
• An arrangement which appears to be “a sensible, prudent business
agreement, from the perspective of the particular parties involved, even
in the absence of any potential referrals.”
Stark Definition2
• “An arrangement will be considered ‘commercially reasonable’ in the
absence of referrals if the arrangement would make commercial sense
if entered into by a reasonable entity of similar type and size and a
reasonable physician of similar scope and specialty, even if there were
no potential designated health services (“DHS”) referrals.”
OIG Threshold 3
• Compensation arrangements with physicians should be “reasonable
and necessary.”
1 63 Fed. Reg. 1700 (Jan. 9, 1998).
2 69 Fed. Reg. 16093 (March 26, 2004).
3“OIG Compliance Program For Individual and Small Group Physician Practices,” Notice, 65 Fed. Reg. 59434 (Oct. 5, 2000); OIG Advisory Opinion
No. 07-10, September 20, 2007, pg. 6, 10; “OIG Supplemental Compliance Program Guidance for Hospitals,” Notice, 70 Fed. Reg. 4858 (Jan. 31,
2005).
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18. Factors in Determining CR
Business Purpose
Provider Analysis
Facility Analysis
Resource Analysis
Independence & Oversight
Commercial
Reasonableness
Determination
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19. Commercial Reasonableness
BUSINESS
PURPOSE
Does the proposed service represent a reasonable necessity essential
to the functioning of the hospital?
Is the specific purpose of the service clearly identifiable and
appropriately defined?
Does the proposed service relate to the business and/or clinical plans
of the hospital?
Does the proposed service contribute to the hospital’s profits and/or the
development of a service line?
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20. Commercial Reasonableness (Cont’d)
PROVIDER
ANALYSIS
Does the role require a physician to perform the services?
Does the role require a physician of a certain specialty to perform the
services?
Has the amount of time demanded of the physician in the proposed role
been considered?
Do any salary considerations exist related to providers of similar specialty
and experience in comparable organizations and positions?
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21. Commercial Reasonableness (Cont’d)
FACILITY
ANALYSIS
Text Goes Here
Are patient demand/number of hospital patients sufficient to justify the
service?
Are patient acuity levels such that the proposed service is necessary?
Do patient needs dictate the need for a separate and distinct physician
for the proposed services?
Are the size of the hospital and its relevant departments appropriate
for the proposed service?
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22. Commercial Reasonableness (Cont’d)
WHO
DECIDES?
Counsel
In – house
Outside
Valuation Firm
Internal
External
Internal
Management
Board
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23. Safeguards
Use qualified legal counsel / valuation firms
Do not have multiple valuations
Needs Assessment from provider that makes the business case for the arrangement (absent
referrals)
Transaction and compensation must be viewed as a whole
Avoid part-time employment arrangements, particularly with full-time benefits
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24. Safeguards (Cont’d)
Expected Losses/ROI factor
Allow for adjustments in terms based on marketplace/hospital changes; no fixed fees (without
revaluation) for more than 2-3 years
Term and Termination triggers
Clearly defined scope of services; documentation of services
Limit number of arrangements covering same services/service line
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25. Renewals and Financial Losses
Many agreements from the acquisition frenzy
coming up for renewal now
How to analyze/address losses
Industry Experience
What do the regulators think?
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26. Analyzing/Addressing Losses
What are the drivers?
• Removal of ancillary revenues
• Increased benefit costs
• Hospital overload allocations
• Others?
Offset by:
• Better managed care rates – maybe,
maybe not
• Better supply expense contracts
• Others?
American Institute of CPAs #AICPAhealth

27. Analyzing/Addressing Losses (Cont’d)
What if Losses remain after specific factor analysis?
• Contribution to mission/community need
• Uniqueness of specialty
• Competitive nature of managed care market
• What would compensation look like if the physicians were still in
private practice?
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28. Industry Experience
Benchmarks publish average
losses per physician for some
specialties (MGMA Cost
Survey for example)
Is the comparison apples to
apples?
Would the argument persuade
a regulator?
American Institute of CPAs #AICPAhealth

29. What do the Government Regulators
think about Losses and CR?
No specific guidance available
Some “informal” approaches shared indicate they might think
Losses ≠ FMV
One healthcare system court case seems to indicate they believe
losses invalidate the FMV of compensation or certainly the
commercial reasonableness of the transaction
American Institute of CPAs #AICPAhealth

30. If there are Losses, now what?
Analyze losses to identify source
Document mission-related reasons for any losses
Document other market factors that contribute to
the losses (i.e., payer environment, demand, etc.)
Make the best determination of what the physician
would earn if independent
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31. Impact of Health Reform
#AICPAhealth

32. State of Health Reform
Continue to see positive trends in
primary care compensation and
“prestige”
Still a strong consolidation
environment, particularly for primary
care
Quality incentive/withholds the norm,
not the exception
• MGMA indicates 64% of respondents had a
quality bonus/withhold
• AMGA indicated 31% had compensation tied to
something other than production
American Institute of CPAs #AICPAhealth

33. State of Health Reform (cont.)
More services are covered
More patients with coverage
• Are these primarily Medicaid patients?
• Will patients be forced to accept a lower level
of care (i.e. a mid-level provider) due to
shortages?
Higher out-of-pocket expenses for
patients – could translate to less
elective care
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34. State of Health Reform (cont.)
Increasing transparency for providers
• Data.Medicare.Gov Website –includes
comparison for Physician, ACO, Home Health,
Dialysis and Hospitals
• Commercial insurance score cards
Value-based payment modifier in play
in 2015
• Shift from reporting incentive to performance
incentive/reduction
No loss of momentum in bundling
payments or ACO development
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35. Tiered Value-Based Payment Modifier
Both upside reward and downside risk
Focused on outliers in quality and cost
Composite scores for cost and quality
Three tiers – High, Average, and Low
Additional upward adjustment for care of sickest patients
Sum of upward adjustments will be offset by downward adjustments
American Institute of CPAs #AICPAhealth

36. Bundled Payments for Care Improvement
Five-year
initiative
launched
January 31,
2013
Private
payers
already
using
bundled
payments
Initiative
Based on Medicare ACE
Demonstration Project –
free range ACO
Single payment for
defined group of services
within specified episode
of care
Pricing based on
discount of payer’s
historic total cost
Gain-sharing incentives

37. ACOs – Here to Stay?
22 of the Pioneer ACOs remain – 699,000 covered
lives
As of January 2014, 351 MSSP ACOs covered
5.3 million lives
There are approximately 250 commercial ACOs
covering 12.4 million lives
It sure looks that way…..

38. #AICPAhealth
Questions?

39. Contact Information
Carol Carden, CPA/ABV, ASA
PYA
(800) 270-9629
ccarden@pyapc.com
www.pyapc.com
Twitter: @carolcardenpya
American Institute of CPAs #AICPAhealth