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Meeting the Board’s Responsibility for Overseeing Physician Compensation

Prepared and Presented by:

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Chad StutelbergKevin Talbot

Moderated by:

William F. Jessee, MD, FACMPE

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Participant code: 610-285-8791


Participant Information

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Faculty

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Moderator

William Jessee, MD, FACMPE, Senior Vice President and Senior [email protected]

Dr. Jessee is one of the nation’s leading experts on physician services management and hospital-physician integration. Skilled in the development and implementation of strategies for creating aligned economic interests among physicians, hospitals and payers, Dr. Jessee is widely recognized as an expert on health policy issues, and the role of governance in quality improvement and patient safety. Dr. Jessee served for more than 12 years as President and Chief Executive Officer of the Medical Group Management Association (MGMA).

Presenters

Chad Stutelberg, Executive Vice President and Practice [email protected]

Chad Stutelberg is Executive Vice President and Practice Leader of the Physician Services practice at INTEGRATED Healthcare Strategies. He has been a healthcare consultant for over twelve years. Prior to joining INTEGRATED Healthcare Strategies, Mr. Stutelberg worked for the University of Minnesota Department of Pediatrics. Mr. Stutelberg’s consulting experience lies in the areas of physician benchmarking, compensation, and operations.

Kevin Talbot, Executive Vice President and Practice [email protected]

Kevin Talbot is the Senior Vice President and Practice Manager of the Total Compensation and Rewards practice of INTEGRATED Healthcare Strategies. Mr. Talbot has worked extensively with healthcare organizations ranging from the country’s largest health systems to independent community hospitals to state hospital associations. Mr. Talbot regularly advises health care Boards and senior executives on all aspects executive compensation and benefits.


Who We Are

INTEGRATED Healthcare Strategies is a management consulting firm with over 30 years of service dedicated exclusively to healthcare organizations. Our core services include:

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• Compensation & Benefits (Exec., Physician, Mgmt & Staff)

• Executive Search

• Human Resources Consulting

• Labor Relations

• Surveys (Engagement, Compensation & Benefits)

• Governance & Physician Leadership Development

• Physician—Hospital Integration

• Merger & Acquisition Services To join conference call

Dial-in: 1-866-809-9263;



A Sample of Our Clients

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Agenda

• Why the board MUST oversee compensation of employed physicians

• Physician compensation reasonableness framework

• Market analysis methodology

• Compensation management and governance

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WHY THE BOARD MUST OVERSEE COMPENSATION OF EMPLOYED PHYSICIANS

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Key drivers of board oversight

1. Growing numbers of employed or contracted physicians (AHA estimates 25% of the physician population are hospital employees)

2. Risk to hospital not-for-profit status

3. Risk to physicians

4. It’s the law

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What is the board to look for?

“Reasonableness” of the compensation• Generally defined as not exceeding “fair market value”

Internal equity

Alignment with organizational goals

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PHYSICIAN COMPENSATION REASONABLENESS FRAMEWORK

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Reasonableness Framework

Healthcare organizations entering into, modifying, or renewing financial relationships with physicians and other providers must comply with the federal and state laws that regulate these relationships. Laws are numerous and complex, but the key areas of review include:

• Taxpayer’s Bill of Rights 2 (“TBOR 2”)

• Medicare anti-kickback statute

• Stark

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No one regulation provides a complete picture of what fair market value (FMV) is, but all call into question any financial arrangement between a hospital and its physicians

• FMV is a fundamental requirement under all of these areas

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“Fair market value” is defined as the value in arms-length transactions consistent with the general market value. General market value means the price an asset would bring as a result of bona fide bargaining between well-informed buyers and sellers who are not otherwise in a position to generate business for the other party, or the compensation that would be included in a service agreement as the result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party on the date of acquisition of the asset or at the time of the service agreement. Usually the fair market value is the compensation that has been included in bona fide service agreements with comparable terms at the time of the agreement, where the price or compensation has not been determined in any manner that takes into account the volume or value of anticipated or actual referrals.

13Productivity

Co

mp

ensa

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25th 50th 75th 90th

25th

50th

75th

90th

Compen

satio

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ativ

e To P

roduct

ion

Factors that influence fair market value:•National/regional market data

•Productivity

•Overhead

•Payer mix

•Reimbursement

•Quality/Performance

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“Commercial Reasonableness” is defined as an arrangement that 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 referrals.

“Reasonable Compensation” as described in Section 162 of the Internal Revenue Service (“IRS”), reasonable compensation is generally considered to be "...only such amount as would ordinarily be paid for like services by like enterprises under like circumstances."

Productivity

Co

mp

ensa

tio

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25th 50th 75th 90th

25th

50th

75th

90th

Factors that influence commercial reasonableness:•National/regional market data

•Practice profitability

•Community need

•Market competitiveness

•Training

•Experience


Our Philosophy on FMV

• FMV is not a single number but a range of values

• FMV is primarily considered to be based upon comparisons to survey data – more data driven

• Commercial reasonableness relies more heavily on the “facts and circumstances”

• Fair market value and Commercial Reasonableness are intertwined– A final determination of fair market value is based upon a balancing of the data and the facts and

circumstances

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What to look for In Market analysis of Compensation

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Market Benchmark Sources

• Clinical Market Data Surveys– Medical Group Management Association (“MGMA”), 2012 Physician Compensation and Production

Survey

– American Medical Group Association (“AMGA”), 2012 Medical Group Compensation and Financial Survey

– Sullivan, Cotter and Associates (“SCA”), 2012 Physician Compensation and Productivity Survey Report

• INTEGRATED Physician Compensation and Production Proprietary Database (referenced for validation purposes)

• The cash compensation and productivity data utilized in our analysis represents a weighted average of the available sources by specialty/position

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How We Test for “Reasonableness”

• Test 1: Cash model(s) design– Does the model comply with regulatory guidelines

• Passes Test 2 and/or Test 3 as defined below

• Test 2: Payout rate less than 75th percentile of national market data– Payout rate is defined as clinical cash compensation per wRVU rate or clinical cash

compensation to professional collections rate

– Most not-for-profit organizations target physician payout rates at the median

– Factors that may justify a payout rate above the median include:

• High productivity

• Low overhead

• Favorable payor mix

• High ancillary services

– Market payout rate is specialty-specific

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How We Test for “Reasonableness” (cont.)

• Test 3: Clinical cash compensation is below the 75th percentile of the national market– Organization can document community need for the position

– The 75th percentile of the survey data is the maximum cash compensation that a not-for-profit organization can pay based on providing access and meeting community need without having to justify pay relative to production

– Market clinical cash compensation is specialty-specific

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Market Analysis Summary

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$0.0

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000

wRVUs

Ca

sh

Co

mp

en

sa

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n (

00

0s

)

New Physician

Market Median $40.03

Lower than Lower than Expected Expected

CompensationCompensation

Lower than Lower than Expected Expected


75th Percentile $47.38

25th Percentile $35.17

P50 = $194.3

P25 = $162.0

P75 = $238.5

P90 = $295.1

P25 = 4,059 P50 = 4,882 P75 = 5,852 P90 = 6,980

Higher than Higher than Expected Expected


Higher than Higher than Expected Expected



Compensation management and Governance

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Physician Compensation Management Process

• The process for developing the compensation should be as follows:– Resource data (e.g., surveys, local market)

– Evaluate strategic importance of position

– Build the “Business Case”

– Ensure support systems are operational:

• Clinic staffing

• Clinic equipment/space

• Performance measurement systems e.g., billing

• Physician support systems e.g., marketing, mentoring, administrative point of contact

• Annual re-evaluation for:– Market competitiveness

– Regulatory compliance

– Meeting physician needs

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Management Accountabilities for Physician Compensation

• The following accountabilities are typically put in place:– Business Case – Accountable Executive e.g., Vice President Physician Network, Service

Line Leader, etc.

– Financial Case – Accountable Executive and Finance

– Community Need – Recruitment

– Medical Case – Chief Medical Officer

– Legal Review

– External Third Party Review (Compensation outside of the pre-established range e.g., 75th percentile of survey data)

– Board/Committee – Approve model structure, physician outliers, physician leaders

• Accountabilities should be re-evaluated annually

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Role of the Board Compensation Committee

• Oversight of the organization’s physician compensation program– Ensure appropriate administration of the physician compensation program

– Ensure regulatory compliance (i.e., compensation model design, review outliers and highly compensated individuals)

– Ensure adequate linkage between the program’s objectives and the mission, vision and values of the system

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Governance Best Practices

• Establish a clear and explicit compensation philosophy and policy statement to guide decision making– Document rationale for exceptions to policy clearly in minutes

• Establish a separate and entirely independent compensation committee (typically the same committee that oversees executive compensation)– Charged to oversee compensation for disqualified individuals (i.e., employed physician

leaders, but not all physicians)

– Charged to develop and oversee a physician compensation philosophy for those that are not disqualified

– Required to meet at least two or more times a year

– Required to report periodically to the whole board

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Governance Best Practices (cont.)

• Charge the Committee with establishing a rebuttable presumption of reasonableness for all disqualified individuals– Identify all disqualified physicians

– Review all items going on the Form 990, and understand what they are

• Ensure that physician compensation and financial arrangements are consistent with current regulatory requirements (e.g., physician compensation provided is at fair market value and thus reasonable) – Conduct regular audits to ensure processes, in application, are consistent with

organizational policy

– Highly productive physicians

– Physician leaders

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Establishing a Presumption of “Reasonableness”

• Ensure that all parties considering the compensation have no conflict of interest with regard to the physicians pay– Exclude anyone from the process who may have a potential conflict, and document the

exclusion

• Obtain and rely upon appropriate comparability data– Determine whether that comparability data is truly appropriate for the position, and for the

circumstances, and document

• Articulate the rationale for the Committee’s compensation decisions, and document• Consider the long-term impact of the compensation package and positioning, and

document• Determine whether the physician’s compensation will be reasonable because it

represents fair market value for the services provided and other reasons to support the decision to provide the determined level of compensation, and document

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Management’s Role

• Obtain recently published market data• Update internal market comparisons annually• Ensure compensation models are competitive• Identify potential compliance concerns, highly compensated individuals, etc.

– Obtain all relevant background information

• Seek outside review• Facilitate compensation philosophy, model development• Establishing & administering new hire guidelines• Prepare annual report for the Committee

– Compensation relative to market– Outlier analysis– Update on physician program issues/changes

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When Do You Need an Outside Opinion?

• Physicians identified through the internal annual review process as representing a potential compliance concern

• Highly compensated individuals– Any physician paid at or above the 90th percentile of the market regardless of productivity

and/or– Any physician that is paid a rate of compensation that exceeds a pre-determined threshold

e.g. payout rate at or above 60th percentile

• Physicians functioning in non-traditional roles that represent a variety of responsibilities ranging from clinical to physician leadership

• Any agreement to “close” a service or provide an exclusive relationship to one group• Any physician who qualifies as a “disqualified individual” under IRS section 4958

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A Sample Board Policy Flow Chart

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Renewal or new contract identified

Accountable executive takes renewal or new

contract to management

committee for decision

Contract completed and

reviewed by accountable

executive

Accountable executive to

obtain physician(s)

signature(s).

Accountable executive executes

contract, distributes originals to physician, Legal & File

and initiates any necessary payroll

Updated / newcontract added

to database

YES

NO

APPROVED

Accountable executive

requests contract from Legal Department

Note: Recommended to develop a master database that tracks all Economic Relationships (ie: Employment, PSA, Med Director)

Contract details (ie: compensation, term, duties, etc) finalized

Contract details (Term Sheet or Letter

of Intent) communicated to

INTEGRATED for Fair Market Value (FMV)

Review

Proposed compensation represents Fair Market ValueYES

NO

Note: This is where a Compensation Committee would sign -off on Economic Relationships per your policy (ie: > 50th percentile of market)

Accountableexecutive takes contract to Board Committee for approval


Questions?

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Contact Information

ContactChad [email protected]

Kevin [email protected]

William F. Jessee, MD, [email protected]

1.800.327.9335 | [email protected] | www.INTEGRATEDHealthcareStrategies.com

Connect

Our LocationsDallas | Kansas City | Minneapolis | Palm Springs

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