This document discusses regulatory standards for determining fair market value in medical group-physician financial arrangements. It outlines essential steps for conducting fair market valuations, including deconstructing total compensation into individual components like base salary, bonuses, and payments for additional duties. While market survey data provides benchmarks, the document advises investigating fair market value beyond surveys by considering location, scope of duties, and other relevant facts and circumstances for each arrangement. Medical groups must structure physician compensation prudently according to these standards to avoid regulatory penalties.

1. Medical Group Strategy Council
Analyzing Compensation at
Fair Market Value
Translating Regulatory Standards for Medical Group-Physician
Financial Arrangements
Tomi Ogundimu
Consultant
202-568-7382
OgundimT@advisory.com
Randy Gott
Senior Vice President, Southwind
615-794-5169
GottR@advisory.comGott
2445 M Street NW | Washington DC 20037 | P 202.266.5600 | F 202.266.5700 | advisory.com

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3. Table of Contents
Introduction................................................................................................................................................ 4
An Increasing Mandate .......................................................................................................................... 4
No Standard Method to Determine Fair Market Value—It Is About Facts and Circumstances ................ 4
Essential Steps in Fair Market Valuation ................................................................................................. 6
Applications of a Principled Compensation Assessment....................................................................... 9
Exhibit A: Medical Directorship Time Log ............................................................................................. 12
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4. Introduction
An Increasing Mandate
Across the past few years, hospitals and health systems have worked hard to secure a tightly integrated physician
base, continuing and strengthening the trend of physician employment nationwide. Advisory Board research suggests
that by March 2014, physicians will account for over 75% of new hires by hospitals.
The trend toward tighter alignment raises questions about how hospitals and medical groups can share financial
responsibility without jeopardizing independence in clinical decision-making. Federal and state regulators have
responded by introducing legislation requiring, among other things, that physician compensation be commercially
reasonable and at fair market value; however, regulatory guidance for meeting these valuation standards is limited.
Given the regulatory constraints of physician-hospital relationships, medical group leaders must understand fair
market value standards and boundaries for physician compensation. The Medical Group Strategy Council has
identified five imperatives for structuring physician compensation packages compliant with fair market value in a high-
growth environment. This report outlines these key lessons and profiles three organizations’ experiences in
compliance and compensation structuring.
No Standard Method to Determine Fair Market Value
There are three main laws that regulate fair market valuations in physician compensation arrangements: the Stark
Law, the anti-kickback statute, and IRS guidelines. All three require that physician compensation not exceed fair
market value thresholds, but none provides significant guidance on assessing fair market value.
Stark Law: As it relates to compensation for employed physicians, the Stark Law’s “bona fide employment
exception” requires that compensation be consistent with fair market value, without directly or indirectly
accounting for the volume or value of referrals. Furthermore, the law explicitly requires compensation to be
commercially reasonable even if no referrals were made to the employer.
At its core, the Stark Law requires that any financial relationship between a health care provider organization and
a physician not exceed fair market value under any circumstances. Violations of the Stark Law can lead to strict
liabilities for both the medical group and the employed physician, including:
Denial of payment from Medicare and/or Medicaid
Refunding to Medicare and/or Medicaid all payments received in violation of the law
Civil monetary penalties up to $100,000 if it is concluded that a compensation agreement hinged primarily
on guaranteed referrals
Exclusion from Medicare and Medicaid programs
Federal Anti-Kickback Statute: The statute is broader than Stark, and prohibits any portion of physician
compensation from being tied to “referring, ordering, recommending, or arranging for items or services that may
be covered under a federal or state health care program, including Medicare and Medicaid.” It requires aggregate
compensation to be set in advance, commercially reasonable, and consistent with fair market value. Like the
Stark Law, the Federal Anti-Kickback Statute prohibits compensation agreements from considering the volume or
value of referrals.
IRS Guidelines and Principles: The IRS generally requires that compensation from a 501(c)(3) not-for-profit
organization to a physician not exceed fair market value. If compensation is found to be above fair market value,
the IRS could remove the organization’s tax exempt status and/or penalize the organization using excise taxes.
Most of the confusion around fair market value exists because there are no published legal standards or formulas for
physician compensation valuations. CMS has acknowledged that every valuation will depend on the nature of the
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5. transaction, its location, and other applicable factors.1 In fact, the Stark Law explicitly permits the use of any
commercially reasonable methodology that is appropriate under the circumstances. 2 Ultimately, fair market value does
not have a single definition. As a result, organizations must consider the facts and circumstances at hand to assess
fair market value appropriately.
Regulators are on the lookout for those that abuse valuation standards and will evaluate the appropriateness of the
valuation methodology. Every organization can take key steps to proactively inoculate themselves from regulatory
scrutiny of physician compensation. The following pages contain the essential steps and considerations for
organizations looking to determine fair market value.3
1
72 Fed. Reg. 51015
2
73 Fed. Reg. 48739
3
69 Fed. Reg. 16107
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6. Essential Steps in Fair Market Valuation
Deconstructing Total Compensation
A common misconception of fair market valuation is that employment contracts will not violate the Stark Law as long
as the total amount of compensation meets commercial reasonableness and fair market value thresholds. However,
physician employment agreements are multi-dimensional, so how one defines total compensation is the key factor in
determining fair market value. The value of total compensation includes not only base salary, but additional financial
incentives including (but not limited to):
• Educational loan repayment
• Signing bonuses
• Retention bonuses
In addition to the base salary and additional cash compensation detailed above, many physicians are compensated
for responsibilities beyond traditional clinical duties. These additional duties—such as call coverage and medical
directorships—typically are compensated separately from overall compensation, and thus, payments for these extra
responsibilities must be evaluated for fair market value separately, based on the nature, frequency, and scope of
services provided.
For an employment or recruitment package that includes a variety of incentives and/or payment for multiple services,
each incentive or payment should be evaluated based on market data as well as the facts and circumstances of the
situation. It may be wise to benchmark total compensation and its various components data for which can be sourced
from a variety of surveys (see Figure I-A).
Figure I-A. Example Market-Based Surveys for Benchmarking Physician Compensation
Physician Service Associated Market Survey
Medical Directorships Medical Group Management Association, Medical Directorship and On-Call Compensation Survey
Physician Executives ACPE/Cejka Search Physician Executive Compensation Survey
Sullivan Cotter and Associates, Physician On Call Survey Report
Call Payment
Medical Group Management Association, Medical Directorship and On-Call Compensation Survey
Medical Group Management Association, Physician Compensation and Production Survey
Total Compensation American Medical Group Association, Medical Group Compensation and Financial Survey
Sullivan Cotter and Associates, Physician Compensation and Productivity Survey
Investigating Fair Market Value Standards beyond Market Data
Many executives use only market-based surveys to structuring compensation commensurately. Although survey data
is a good starting point to benchmark a range of acceptable payment, using only surveys as a reference point can
threaten efforts to achieve fair market value. For example, many market-based surveys lack a longitudinal
assessment of compensation. In some specialties, compensation fluctuates significantly year-to-year, and as such, it
may be best to use multiple years of survey data to negate disparities. Sourcing comparative data from a single
survey can give the appearance of “cherry picking” information to justify the fair market value of a particular situation;
using multiple surveys concurrently can help avoid this. Another common misconception about survey data that raises
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7. th
a challenge is the notion that any compensation at or greater than the 75 percentile of a particular survey by
definition exceeds fair market value. To the contrary, sometimes compensation at a higher level is necessary,
th
appropriate, and compliant with valuation standards. The appropriateness of compensation above the 75 percentile
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varies on a by case; in determining whether a particular physician merits payment above the 75 percentile,
organizations should consider the following factors:
• Years of experience
• Current or historical income
• Value to the medical group, health system, and community
• Special skills, expertise, or training
• Presence of similarly skilled physicians in the market
• Demand for the specialty
• Physician’s training needs
Valuation experts strongly advocate considering and documenting these and other factors to ensure a robust analysis
of fair market value, and simultaneously offer competitive compensation.
Matching Compensation to Services Provided
As a rule of thumb, compensation should directly reflect a physician’s productivity. By decoupling the two, an
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organization is raising a red flag that can easily attract regulatory scrutiny. If a physician compensated above the 75
percentile is less productive than the typical physician receiving this compensation, the fundamental premise of fair
market value is challenged. Low physician productivity should result in lower pay; accordingly, when compensation is
tied to productivity, the highest-paid physicians have a clear rationale for their differential compensation.
Physician compensation need not reflect productivity at a one-to-one ratio, but the correlation should be clear and
direct. The extent of the correlation between productivity and compensation should account for the unique
circumstances of the practice or medical group in question.
Authenticating Fair Market Valuation with Principled Documentation
Absent clear guidelines from any of the regulatory agencies about what constitutes fair market value, organizations
can inoculate themselves against future liability by extensively documenting their compensation methodology and
decisions. Progressive institutions include a comprehensive analysis of each compensation agreement that
demonstrates an understanding of fair market value relative to the specifics of the agreement. As evidence of a
thorough assessment, organizations should describe the data considered in the analysis, the applied methodology or
approach, and any pertinent circumstances used to determine the amount of compensation.
Gathering relevant data and documentation early in compensation discussions smoothes negotiations and minimizes
liability. Some examples of relevant information needed are:
• Multiple years of data on the physician’s historical income;
• Historical productivity data if available;
• The physician curriculum vitae (CV) to demonstrate unique qualifications or skills included in the valuation;
• Other relevant information, e.g. recruitment records, recent physician needs assessment, etc.
Even after a compensation agreement is signed, organizations should continue to document details of the physician’s
compensation. Physicians are often paid an hourly rate for administrative services or call pay. Executives should
ensure that physicians with responsibilities that are in addition to their clinical duties, track and document their hours
worked. Many medical directors are required to document the time spent on administrative duties in the form of a time
sheet (see Exhibit A), which serves as evidence that payment is consistent with the contract terms.
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8. This information not only serves as documentation, but as described in the Stark Law, it is vital in ensuring a robust
analysis of the relevant facts and circumstances of each fair market deliberation. Furthermore, the law acknowledges
that the level of necessary documentation will vary depending on the specifics of each case. 4 This provides health
care organizations some degree of flexibility in their approach to fair market valuation and supports each case with
documentation to the extent they feel is necessary.
Engaging Independent Auditors Early in the Process
The use of independent auditors or valuation experts is not required by law. However, whether by an outside counsel
or an internal employee, all organizations should conduct an independent evaluation early in the process. Some
compensation arrangements are more straightforward than others; progressive organizations identify those
negotiations most at-risk and work to assessing fair market value early on, often with the help of outside parties.
CMS has indicated that valuation methods developed internally may receive more intensive scrutiny because they are
susceptible to manipulation.5 Outside advisors can raise red flags and be a bellwether to gauge compliance in
financial arrangements. Addressing any discovered red flags to achieve fair market value thresholds is more
manageable early on in the negotiation process. Healthcare executives should not wait until the agreement is signed
to enlist additional support in evaluating the fair market value or reasonableness of an arrangement.
4
66 Fed Reg. 856
5
66 Fed. Reg. 944-46
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9. Applications of a Principled Compensation Assessment
The case studies presented in this section illustrate how three institutions used fair market value principles to structure
compensation packages for contracted and employed physicians.
Incorporating Competitive Dynamics, Retention in Compensation Calculations
Pseudonym Sumlin Health, a standalone hospital in the rural Midwest, employs 20 physicians, both primary care and
specialists. Only one of Sumlin’s employed physicians is a general surgeon, and that physician also is the only
general surgeon in the system’s community.
The hospital has frequently faced challenges recruiting and retaining general surgeons. Two years ago, Sumlin
successfully recruited a full time general surgeon willing to provide call services around-the-clock. During the most
recent round of contract negotiations, the surgeon requested $750,000 in total compensation, which is well in excess
th
of the 75 percentile for general surgery according to market-based survey data.
Although the surgeon’s requested compensation appeared to exceed fair market value at first glance, the executives
at Sumlin wisely did not immediately reject it. Instead, in light of the unique circumstances of the surgeon’s
employment, the committee assessed each aspect of the surgeon’s requested compensation individually—base pay
for typical clinical services, and additional payment for call coverage.
Compensation Assessment Protocol at Sumlin Health
1. Measured productivity, compared to benchmark data. In terms of wRVUs and gross professional charges,
th
the surgeon’s documented productivity was higher than his peers, exceeding the 75 percentile in reported
market data.
2. Ensured clinical base pay was consistent with productivity. Given the circumstances of Sumlin’s
th
situation, their difficulty with retaining a surgeon, and critical community need, base pay was set at the 75
th
percentile of market data. Setting this amount at the 75 percentile not only ensured that base pay was
aligned with the surgeon’s productivity level, but reflects that the amount is representative of what other
systems would pay a full time general surgeon under similar circumstances.
3. Independently valued call coverage, compensated days in excess of reasonable expectations. In
Sumlin’s employment contracts, specialists are typically required to provide call coverage per month on a
rotating basis with other physicians in their specialty. As the only general surgeon in the community, the
physician agreed to provide call coverage at all times. Sumlin structured remuneration for his availability at a
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daily rate for being on call—an amount set between the median and the 75 percentile of market data for
general surgery—for each day of call coverage in a month in excess of a minimum required number of days.
Sumlin Health used market survey data, enhanced by situation-specific qualitative information, to determine fair
market value. Sumlin’s leaders successfully structured a competitive compensation package that retained the general
surgeon for the next three years.
Accounting for Duties beyond Typical Responsibilities
Pseudonymed Tressel Medical Center is a large health system in the South. Tressel employs five full-time trauma
surgeons. One of those physicians, a 20-year veteran, volunteered to serve as the medical director for trauma
services, and assumed other responsibilities beyond the requirements of his position, including:
• Providing call coverage in excess of the required number of days per month
• Performing certain general surgery cases when not on call or covering trauma surgery
The surgeon was paid a base salary for his full-time responsibilities commensurate with compensation to the other
four trauma surgeons in the group. Separately, the surgeon was paid for his additional clinical duties, including the
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10. medical directorship. Leaders at Tressel Health System ensured that he was paid at fair market value by taking the
following actions:
1. Separately determined compensation for each job responsibility. Medical group leaders individually
assessed each component of compensation—base salary, an hourly rate for the directorship, payment for
excess call coverage, and productivity-based compensation for general surgery cases—by identifying a range
of payment benchmarks using survey data specific to each component. Because of the surgeon’s experience,
th th
payment for each component was set above the 50 percentile—but below the 75 —of benchmark data.
When available, multiple data sources were used in benchmarking each component. This ensured that
benchmarks were an appropriate reflection of the market.
2. Documented important considerations to support the valuation process. The surgeon’s employment
agreement outlined his responsibilities for each position. Because the physician was paid an hourly rate for
the medical directorship, he was required to submit a monthly time sheet. Also outlined in the employment
agreement was the expectation that time sheets would be regularly audited and the physician’s performance
would be annually reviewed.
3. Assessed the value of the aggregate compensation package, accounting for situation-specific facts.
Although Tressel structured each component at fair market value, the surgeon’s expected annual
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compensation exceeded the 75 percentile of survey data for trauma surgery. Tressel considered the
following facts in the assessment:
a. The trauma surgeon works the same number of shifts as the other employed trauma surgeons;
b. With his additional clinical and administrative duties, the surgeon ultimately works more than full-time;
c. His 20 years of experience; and
d. His documented historical income.
Given these circumstances, executives concluded that total compensation was within the boundaries of fair market
and commercially reasonable standards. While the surgeon’s compensation was relatively high, it was justified given
the documented all the facts and circumstances.
Seeking Expert Guidance to Build a Complex Package
Like many medical groups, pseudonymed Alvera Physicians had a strategic growth imperative. The 60-physician
medical group—located in the South—wanted to recruit seven physicians who were finishing their residency training.
The physicians were receiving many offers for employment, so they requested a multi-component recruitment
package that included:
• Base salary
• Incentive compensation
• Signing bonus
• Relocation stipend
• Education debt forgiven over time
Alvera Physicians’ recruitment policy permitted compensation using the above recruiting incentives. All of the
components of the recruitment packages for the residents would have a direct financial benefit to them, making it
essential that total compensation be commercially reasonable. Alvera wanted to remain competitive by offering the
comprehensive recruitment package without violating regulatory requirements. To create competitive but reasonable
compensation, leaders brought in an independent expert to conduct an objective assessment of fair market calue.
Working with the physicians and their outside counsel, leaders at Alvera accomplished two things:
1. Created a methodology for structuring a multifaceted recruitment package to be included in the
recruitment policy. The package included:
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11. A reasonable base income for each specialty with an incentive based on individual physician
productivity;
A standard signing bonus and relocation allowance;
Partial educational debt forgiveness, based on what was reasonable for each physician;
A minimum employment agreement of two years, and up to three years, depending on individual
physician circumstances.
2. Tailored every package to each physician’s specialty, experience, and individual circumstances. E.g.
the cardiologist was given a larger base pay than the pediatrician; however compensation was determined
using the same methodology for both physicians.
Alvera was able to successfully recruit the seven physicians through employment and all parties felt comfortable with
the terms of the agreements. By engaging outside counsel early on, the fair market value assessment was robust and
well documented.
Learn More
Southwind has deep expertise in understanding fair market value standards and boundaries for physician compensation.
Partnering with health systems to provide the guidance needed to meet regulatory constraints, Southwind evaluates
multiple arrangements including employed physician compensation, medical directorship stipends, payment for call and
guarantee amounts. Renowned expert Randy Gott, Senior Vice President, has more than 20 years of experience and
leads these services for Southwind.
Southwind Key Competencies
Physician • Long-term management for the physician enterprise • Deep-dive assessment to identify and quantify
Practice • Interim management ideal for driving meaningful improvement opportunities
Management improvement efforts • Executive recruiting for the physician enterprise
Practice • Experts in patient flow, revenue cycle, and IT • Financial data consolidation, reporting, and
Performance • Patient experience improvement through patient and benchmarking
Improvement provider satisfaction surveys • Start-to-finish physician compensation redesign
• Thorough pre-acquisition due diligence
Mergers & • Post-transaction transition assistance
• Negotiating deal terms to reach a definitive
Acquisitions
agreement
Value-Based • Clinical integration and accountable care
• Bundled payments
Care • Patient-centered medical homes
• Co-management
Programs • Clinical transformation
• Strategic community/ physician needs assessment
Medical Staff • Recruitment policies for a high-performing medical
• Determining fair market value and reasonableness staff
Planning
of compensation
• Subject matter experts in clinical operations,
Hospital strategy, and financial improvement • Capacity optimization
Performance • Achieving required margins at government rates • Navigating strategic imperatives
Management
• Coordination of care across the continuum
For more information on Southwind, please visit us at advisory.com/Southwind.
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12. Exhibit A: Medical Directorship Time Log
Name of Physician: __________________
Dates of Service: to
Date of Service Description of Services Provided (in detail) Hours
Total Hours:
I, _________________, certify that the above listed times for services provided are true and accurate.
__________________________________________________________
Signature of Physician Date
__________________________________________________________
Signature of _______________ Date
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