Read This Before Your Next Physician Contract Negotiation

Negotiations with physicians can be difficult no matter how positive the relationship between the physician and the organization may be. Conversations about compensation take time and effort to plan and do not always go as anticipated. By preparing carefully for these discussions, you can take strides to achieve the best possible outcome for all parties.

Review all prior and existing agreements

Start by reviewing the contract that is up for negotiation as well as prior contracts with the group or individual. If it is a current agreement that is expiring, review the key terms and scope of services. If it is a new arrangement, familiarize yourself with what has already been offered to the provider and the proposed scope of services. Check and see if additional contracts exist for the physician or group in question. Multiple contracts with the same physician or group could result in overpayment that is sometimes referred to as “stacking”. It may be reasonable to have multiple agreements with the same physician for different services, but you should keep careful documentation of total payments to ensure that the aggregate amount does not exceed market rate compensation for an individual. For example, if an oncologist with a clinical practice is paid to be the medical director of an infusion service as well as the chief of staff and the director of the cancer center and the aggregate hospital payments exceeds the compensation for a full time oncologist, there could be an issue if her clinical revenues reflect a full time practice as well.

Establish goals and objectives

Before beginning a contract negotiation, determine the ideal outcome of the contract in terms of payment and work expectations. Know when you can compromise and when you can’t before any talks with the other party begin. Strategize with others to determine what the physician or group’s goals are; set realistic expectations for the arrangement. Are the expected number of hours realistic? Does the physician have the leadership skills needed to be effective?

Research the Market

Always perform due diligence before starting negotiations. Commercial reasonableness is an important aspect of physician contracting, especially for a new position. Consider if the position is truly necessary for your organization or results in measurable quality improvement, and that it makes good business sense independent of any referrals by the physician or group.

Know reasonable payment rates for the specialty and the service in question. High quality market data is a great resource. While you should be familiar with the entire range, we recommend targeting rates between the 25th and 75th percentiles of market data. It is important to remember that statistically someone must be paid above the 90th percentile and someone must be below the 25th – and there should be reasons and documentation for those payment levels. You should enter the negotiation with quantitative evidence of the range you can support, as well as how your institution and the particular physician(s) compare to the ‘typical’ provider. Factors such as hospital size and trauma status can make a difference in the appropriate payment rate, as can national reputation and the credentials of a particular physician.

Consider alternatives

In many negotiations, you will encounter pushback. Think about alternative payment options and how you can compromise. Prepare several alternatives for obtaining and paying for the service that satisfy your goals and objectives. Discussing alternative approaches can often yield savings or more efficient ways of achieving the same objectives, and provides an opportunity to discuss each party’s objectives and challenges.

Document compliance

Documenting compliance is essential for your compliance program; however, fair market value rate documentation can also facilitate negotiations. Demonstrating that you take compliance seriously and reminding physicians that they too can be investigated and fined for Stark and Anti-Kickback violations, can earn the respect of your physicians, administration, and board.

Review your organization’s contracting and compliance guidelines

If your organization has written compliance guidelines for payment rates, review them so that both you and the physicians with whom you negotiate know the ground rules. If your organization doesn’t have written guidelines, consider creating them. Many organizations don’t pay above the 50th or 75th percentile without a rigorous approval process. Having guidelines creates an objective standard of payment and limits feelings of favoritism among physicians.

Gather all documents you may need in one place

Depending on the size of your organization or the time of year, you may be preparing for many contract negotiations. By keeping all the documentation and notes for each contract together, you can stay organized and reduce confusion and unnecessary missteps. Since many of these documents also support compliance, keeping them centralized can streamline the compliance process after the contract is signed.

Have a draft job description and contract prepared

Creating or reviewing the job expectations internally with staff who will be involved in the program helps to define expectations and parameters for effective leadership. It helps the physician to understand what the position entails and can preclude conflicts during negotiations or later when time records are reviewed.

If you would like to learn more about physician contracting best practices, we have many more resources here.

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Commercial Reasonableness: Testing and Documentation

Even though she isn’t as popular, FMV’s little sister commercial reasonableness is a crucial consideration when determining payment for a physician service. Many recent settlements for Stark and Anti-Kickback violations stem from failure to meet commercial reasonableness standards or from lack of documentation of an agreement’s commercial reasonableness.

What does "commercially reasonable" mean?

The Department of Health and Human services has defined the term as "a sensible, prudent business agreement, from the perspective of the particular parties involved, even in the absence of any potential referrals"1. In the preamble to the Stark interim final rule, Phase II, CMS noted that 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 (or family member or group practice) of similar scope and specialty, even if there were no potential DHS [Designated Health Services] referrals.2

This second definition, which is most frequently cited, implies a need to look to the market to identify other entities with similar arrangements, not just the internal needs of the negotiating parties.

Testing for Commercial Reasonableness

Determining commercial reasonableness for a physician service involves asking a series of questions about a payment for the service under consideration.

Business considerations

Determine whether the position makes sense from a business perspective, without consideration of the referrals the particular physician might have to your organization. If the position doesn’t make good business sense for the organization, it probably isn’t commercially reasonable. If instead the position relates to the number or type of referrals this physician or her affiliates make to your organization or its affiliates, it is time to rethink the arrangement.

Ask yourself:

  • Is the service to be provided essential to the operation of your healthcare organization?
  • Is the arrangement reasonably necessary for the healthcare organization from a business or quality perspective?
  • What are the specific benefits to be derived from the position? 

Facility considerations

Not all services are needed at every healthcare facility. A critical access hospital probably doesn’t need a director of bariatric surgery. Step back and think about whether the proposed position is justifiable, necessary, and appropriate for your specific facility.

Ask yourself:

  • Does the volume of patients justify the service?
  • Does the proposed position duplicate other services covered by other physicians or administrative staff under contract? 

Provider considerations

Consider the candidate and be sure the particular physician meets the requirements and is the best fit for the proposed position.

Ask yourself:

  • Do the services covered by the arrangement require a physician or could a midlevel provider or administrator perform the services?
  • Does the specialty of the physician matter for performing the services?
  • Is the amount of time outlined for the services both reasonable for providing the services and reasonable to demand of the physician within the context of her clinical practice? 

Payment considerations

Determining whether or not a service warrants payment is the most important aspect of determining commercial reasonableness. Ensuring that the payment rate is appropriate is also key.

Ask yourself:

  • Does your organization’s market necessitate paying a physician for the position?
  • Are there less costly or more creative payment solutions that may serve be more appropriate for your organization? 

MD Ranger’s percent paying statistic helps organizations determine how often other facilities pay for specific positions.

Percent of MD Ranger Subscribers Who Report Paying for Service
General Surgery Call Coverage
Pathology/Clinical Lab Medical Direction
General Cardiology Call Coverage
Family Practice Medical Direction
Plastic Surgery Medical Direction
Podiatry Call Coverage

Documenting Commercial Reasonableness

Documentation of the steps you take to determine commercial reasonableness is important. Carefully document conversations and research/data surrounding the decision. Keep supporting documentation with the contract. In the event that you are audited, you will need to demonstrate that commercial reasonableness was carefully considered along with FMV. Types of documentation that have helped in commercial reasonableness audits include:

  • Information and statistics about the hospital and the surrounding community that indicate the appropriateness of the position under consideration
  • Benchmarks from published market data or other surveys
  • Analytical reports that document difficulties in meeting hospital obligations or quality initiatives that cannot be met without the proposed resources
  • Meeting minutes
  • Email threads
  • Memos between negotiating parties

Commercial reasonableness is just as important as fair market value when documenting contracts for compliance. Although a ‘gut check’ is a good place to start, documentation of market rates and organization needs is key to a strong compliance program. Commercial reasonableness doesn't have to be a mystery; using tools like MD Ranger's percent paying tables and carefully analyzing physician payments will help solve even the most difficult situations.

1Medicare and Medicaid Programs; Physicians' Referrals to Health Care Entities with Which They Have Financial Relationships 63 FR 1700 (January 9, 1998)
269 FR 16093 (Mar. 26, 2004)

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Multiple Payment Methods for Call Coverage

According to MD Ranger's database of more than 33,000 physician contracts, more than 70% of call coverage contracts are paid by a per diem rate. Per diem contracts are typically the most straightforward type of call coverage agreements and as a result are usually the simplest to pay compliantly. However, despite the advantages of per diem rates, nearly 30% of call coverage contracts include multiple payment methods.


In most cases, the additional payment type is a payment for unsponsored patients, typically paid as a percent of medicaid rates. While it does not create a significant difference in per diem rates, physician contracts with multiple payment methods on the whole do pay slightly less than those contracts solely paying a per diem rate. Even though these mixed payment method contracts have marginally lower per diem rates, depending on patient volume, the additional payments for unsponsored care or from per activation and per episode fees may actually end up increasing the overall physician payments.

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Coverage Spending by Facility Size

When it comes to physician contracting expenses at hospitals and health systems, call coverage contracts often make up a significant percent of the total spending. As common sense would suggest, larger facilities pay more for call coverage than smaller facilities.
CoverageSpendingBlogGraphThe smallest facilities (fewer than 50 beds and typically critical access hospitals) pay significantly less than all other sizes of hospital. The largest hospitals (more than 450 beds) pay significantly more than other facilities for call coverage, since these facilities will typically have more emeregency department service lines to cover.

Interestingly, the spending trend of increased bed count correlating to increased call coverage spending is most fluid with midsize hospitals, those facilities with around 100 to 200 beds. One possible reason the trend doesn't follow a completely linear path in this instance may be due to the perception that being close to the 100 or 200 bed mark means contract negotiators round to the nearest hundred beds when considering rates to pay.  This rounding adjustment may overshoot what is actually necessary to compensate physicians for the true number of beds needing coverage.

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