MD Ranger Bullseye

Market Conditions Contributing to Commercial Reasonableness

August 2014

In June's Bullseye, we discussed commercial reasonableness and how to determine if physicians should be paid for particular services. Some contributing factors to determine commercial reasonableness are organization-specific, but others are influenced externally.

We previously outlined six factors that help to determine commercial reasonableness:

  1. Determine the duties and responsibilities of the physician.
  2. Consider the physician's background and experience, as well as her knowledge of the business.
  3. Does a physician have to perform the service, or can it be done by another clinician or professional?
  4. Is it necessary to have a physician of a certain specialty in the position?
  5. Consider the economic conditions of the marketplace.
  6. Is this a service that hospitals typically pay physicians to provide?

The first four factors can be handled internally. People within your organization are best equipped to address the scope of the position and whether a given physician is qualified. You may find that for whatever reason, it is necessary to pay for a position. However, the last two points above are external factors outside the organization's control, and may strongly influence the need to pay for a position in question. Benchmarking can be a powerful tool to understand the market and determine answers to these questions.

Economic Conditions
Physician demand should be a factor in determining commercial reasonableness for particular positions. Overall economic conditions are not something you can control, yet it is important to be in tune in order to know when you may need to pay more to align with high-quality physicians. Consider what type of hospital you are, and how that affects physician payments. For example, if you are a trauma center and have more strict requirements for emergency coverage, paying physicians to help you meet these requirements simply must be done. MD Ranger suggests comparing your facility to similar organizations to determine both whether or not compensating a position is commercially reasonable, and to set the most appropriate payment rate if the position should be paid. Look for market data that allows you to perform more sophisticated drill-downs into types of facilities to get the best comparisons for your organization.

Do hospitals generally pay for this service?
There are numerous factors contributing to whether hospitals typically pay for a position or not. Consider the size of the panel, and how likely the physician is to get called to the hospital during a shift. A particularly burdensome call schedule or a small panel could be a good reason to pay. A poor payer mix, or a high likelihood of indigent care could also be a reason to compensate physicians. Lastly, consider if the physician is restricted from revenue generating activities while on call, or if the physician is required to be on-site during the shift. These two factors most definitely contribute to higher per diems.

In order to help hospitals determine commercial reasonableness, MD Ranger collects data on the frequency that a particular service is paid. Because MD Ranger collects hospital contract data holistically, it can determine the percent of hospitals who report paying for a service. This market data allow hospital leaders to make informed decisions when they are determining commercial reasonableness.

A critical consideration for physician administrative and directorship positions is how many paid positions for the specialty exist at your facility and across the organization. When your facility is considering paying for a role in a specialty that already has paid administrative roles, what is being proposed might be commercially unreasonable. For example, in pathology, 45% of MD Ranger subscribers report having one paid administrative position and 32% report having two. Three or more directors is quite rare. If your facility has four or five paid administrative positions in pathology it could be justified; however, you will need documentation for why the additional positions are necessary. It isn't the same across all specialties or positions. For example, paying four or five administrative positions in cardiology is about as common as paying one position, as demonstrated below.

Number of paid pathology administrative positions per facility graoh

Because there is variation across specialties, it is important to benchmark your directorship and administrative positions. MD Ranger has found that some hospitals simply have too many medical directors. Not only does this problem affect your financial position, it also increases your compliance risks significantly.

Above all, while determining whether it is reasonable to compensate a doctor at your organization, it is important to look at all the factors that play into commercial reasonableness. In order to make smart decisions, facilities need access to data-driven information about the market as well as when other facilities generally pay for a position or not.

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