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Finding the Best Market Range for FMV

October 2015

Using market data to document fair market value for physician contracts can be a cost effective way to standardize compliance efforts. However, it still can be tricky to determine the most appropriate market range to use for an overall standard or when a variation is justified. Choice of benchmark may even be difficult for some contracts. Many providers adopt a single benchmark quantile as the standard. Nonetheless, there are times when a higher rate is justified or a job description doesn’t quite fit the available benchmarks.

Commercial Reasonableness

The first question to ask when paying for physician services is whether it is reasonable to make the payment. Are other providers paying for the service? Is the service needed and payment necessary? Not all services warrant payment. Compliance requires a determination of both commercial reasonableness and fair market value. To be compliant, it is first necessary to determine the need to pay, then to determine how much.

The IRS provides guidance on how to evaluate commercial reasonableness. According to the Internal Revenue Manual, §4233.27, specific factors to consider include:

  • Duties and responsibilities of the physician
  • Physician's background, experience, and knowledge of the particular engagement
  • Economic conditions of the marketplace

Other factors may include:

  • Does a physician have to perform the service or can a less costly person do it?
  • Is a specific specialty required for the position? Clearly the director of a dialysis center should be a nephrologist. But, does specialty matter for the Chief of Staff or chair of utilization management?
  • Do other facilities pay for the service or pay for multiple positions within a particular specialty?

Which service?

Finding an appropriate benchmark for some positions can be a challenge. MD Ranger has more than 160 physician contract benchmarks, yet we still regularly work with subscribers to find the most appropriate benchmarks for less common situations. Is a neurology directorship the same for accredited and non-accredited stroke programs? Can an adult subspecialty benchmark be used for pediatric subspecialties if no pediatric benchmarks are available?

Sometimes it helps to triangulate across multiple benchmarks. For example, for an adult congenital heart center medical director it could make sense to use the heart center, the cardiology, and the cardiovascular surgery benchmarks or number of hours, depending on the size and regional draw of the center. If the proposed contract rates fall below all of the selected benchmarks, documentation may be sufficient for compliance purposes.

Hospital or contract characteristics:

Benchmark reports typically publish payment rates for all providers as well as for more specific facility and contract characteristics. Our annual analysis of the 23,000+ contracts in the MD Ranger database determined that some characteristics have a statistically significant impact on rates:

Trauma: Level I and II trauma centers incur on average a 32% premium for call coverage.

Hospital size: Larger hospitals pay more per contract for both call coverage and medical direction. For every increase of 100 in average daily census (ADC) over 100, call coverage rates increase on average 25% and annual medical direction payments increase 14%. Larger hospitals also have more paid coverage and administrative positions.

Restricted call coverage: When physicians are restricted from performing other tasks such as seeing private practice patients in their office or scheduling surgery while on call, payment rates are from 50-100% higher on average, depending on the service. The impact is particularly true for surgical call contracts.

How Close to the Percentile Should Rates Be?

Benchmarks can shift from year-to-year hence setting rates right at a maximum percentile can be risky. Shifts are generally small, especially with a large survey database, however you can take steps to mitigate the risk of having to reduce a contract at renewal because a benchmark declined.

Be strategic while setting payment rates.

Perhaps your organization has set its FMV standard at or below the 75th percentile. That doesn't mean every contract should be exactly at the 75th percentile. Different rates may be more appropriate for some positions or physicians. Allowing some wiggle room by negotiating rates between the 50th and 75th percentile anticipates rate fluctuations over time. This is especially recommended when the benchmark in question comes from a smaller data set since such rates are more likely to fluctuate.

If the contract was within fair market value when signed, and documentation exists, payment rates can remain as is until the contract expires.

This is why documentation is crucial. If you document that the contract rates were below a benchmark value when the contract was signed, it is compliant until the contract expires. Upon expiration, if the benchmarks are no longer valid, extra documentation will be needed. This may include written analysis of the value of the program, the particular credentials of the physician, the time spent fulfilling contract duties, inflation rates and comparisons to old and new benchmarks. This is one reason the government advises against ‘evergreen’ contracts and suggests contract terms of no more than two or three years.

All contracts should not be above average.

A higher rate may be justified for unique situations, but factors should be well documented. Relevant factors may include a limited number of physicians in a particular specialty, high call burden, unfavorable payer mix or, a program director who is one of the top specialists in the U.S. with documented credentials. These all can all be legitimate reasons for high rates; after all, someone has to be above the 90th percentile in all benchmarks. However, all payment rates above the 90th percentile need thorough documentation and they should be reserved for unusual situations, not the standard for all physician contracts at an organization.

Demonstrate efforts to negotiate the lowest possible rate.

Documenting the negotiation process and basis for rates is a compliance necessity. If you are unsuccessful in reaching agreement on a rate within your benchmark standard, take special care to document negotiations. Note who met with whom and explain the attempts to negotiate lower rates. In some situations, it may also be necessary to issue an RFP for the service to document that you were unable to procure the needed services for a lower rate.

Documentation is everything and some situations will require a formal valuation to validate the need for higher than “market” rates. A strong compliance program will build a process that depends on smart use of market data, intelligent and consistent analysis and documentation of exceptional situations.

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