How Children's Hospitals Differ from General Acute Care Facilities

Physician contracting programs at Children's Hospitals contain a number of key differences that distinguish these specialty facilties from General Acute Care hospitals. Pediatric facilities understandably have a specific set of patients and, as a result, they have different physician contracting needs than most hospitals.

MD Ranger's physician contracting benchmarks collect data on position count at hospitals, broken down by type of physician contract. As the graph shows, Children's Hospitals contract for significantly more Medical Direction positions than a general acute care facility.


One major reason for this differential is the need for medical directors of pediatric service lines. Children's Hospitals are also frequently affiliated with Academic Medical Centers, and AMCs typically contract for more administrative and direction positions to help oversee education and research programs.

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Trends in General Surgery Call Coverage

While cases where physician compensation benchmarks change rapidly from year to year certainly garner more attention, it can be insightful to examine when the opposite is true as well. Over the past 9 years of MD Ranger's physician contract benchmark reports, the call coverage rate for General Surgery has remained relatively stable amidst the broader trend of physician spending increases.

General Surgery Call Trend

Over time, the general surgery rates have not sharply risen or fallen, across all percentiles.  The 90th percentile benchmark rate has been $1500 for the last 6 years for General Surgery call coverage. While the benchmarks do change slightly year to year, none of the percentile rates have fluctuated by more than $100 between any two years since 2011.

Even with a relatively stable benchmark like General Surgery call, gradual trends can still change the rate given enough time. The 2018 median rate is up to $1000 per diem, which would have been at the 75th percentile back in MD Ranger's 2010 reports!

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Mistakes to Avoid in Hospital-Based Physician Contracts

The number of hospital-based physician arrangements has changed and grown significantly over the past decades. Ten years ago, most hospitals contracted with radiology, emergency, anesthesia, and pathology groups. Now there are a growing number of hospitalists, intensivists, laborists, trauma surgery, and specialty hospitalists contracts. While these arrangements benefit patients, physicians and healthcare organizations, they are usually complex and require careful attention to payment and service requirements. 

Prior to the 1990s, private community physicians attended most hospital patients and hospitals only contracted for anesthesiology, radiology, pathology, neonatology, and emergency to ensure continuous coverage of basic hospital services. Over the next two decades, a transition in how physicians work in and out of hospitals occurred, with more contractual arrangements to care for specific populations of inpatients, including:

  • Internal medicine/general hospitalists
  • Pediatric hospitalists
  • Critical care
  • Pediatric intensivists
  • Trauma surgery
  • OB hospitalists/laborists
  • Orthopedic, surgical, neuro and other specialty hospitalists

Negotiating these contracts is challenging since hours of coverage, payer mix, service mix, average daily census, and quality initiatives are all relevant factors in establishing a fair price for the services. Scope of services may include administrative and directorship duties, emergency coverage as well as in-house physician requirements. Here are some of the most common mistakes we see health care leaders and physicians make when entering into these partnerships.

1. Paying for a service without objective assessments.

Not every hospital-based agreement needs a collection guarantee, stipend, or payments for call coverage. Determining if payments are commercially reasonable is a crucial first step that is not always straightforward. Market data like MD Ranger’s “Percent Paying Benchmarks” allow organizations to see who else reports paying for services, which is helpful to include in commercial reasonableness assessments. Establishing commercial reasonableness of a contract before determining how much to pay isn’t just a good idea: it’s a must.

2. Ignoring the economic value of exclusivity.

Does your hospital-based contract specify exclusivity? The OIG has determined that exclusivity has economic value in certain situations:

“Depending on the circumstances, an exclusive contract can have substantial value to the hospital-based physician or group, as well as to the hospital, that may well have nothing to do with the value or volume of business flowing between the hospital and the physicians”.1

Unfortunately, there is no generally accepted way to quantify the value of exclusivity, but three good approaches are:

  1. Have FMV documentation, either internal documentation or an external valuation, that specifically recognizes the value of exclusivity.
  2. Seek to negotiate a compensation level that is lower in the FMV range of market benchmarks. Note that market ranges inherently include the discount for exclusivity while some cost approach ranges may not incorporate the discount.
  3. Include a discount over the ‘estimated cost’ of the service in the 5-10% range to reflect the value of exclusivity.

3. Not specifying level of service.

Be specific in the contract language in regards to the service and staffing levels required by your facility to ensure both parties understand the scope of resource requirements. Vague and nonspecific terms in the contract can lead to understaffing, lack of backup coverage, lower quality service, poor patient satisfaction, and unhappy, stressed staff.

4. Stacking payments.

Stacking is a hot topic, as it can be easy to miss if contract negotiations and maintenance are not centralized. To avoid this problem, identify all the payments and contracts with each physician or group, especially medical directorship and other administrative positions. While one position can be within fair market value, when more positions and payments are added, the overall payment can become commercially unreasonable and/or above fair market value. Pay special attention to services such as “Nighthawk”, malpractice insurance, certified nurse assistants, or nurse practitioners the hospital reimburses a medical group, which can add up to compensation that exceeds FMV.

5. Ignoring physician collections.

Depending on the physician group and the payer mix, the amount physicians collect while providing the contracted services may drive whether the overall payment from a hospital contract and professional fee collections are above or below fair market value. It is the combined receipts that must go into determining whether hospital payments are above fair market value. On the other hand, a hospital may be ‘underpaying’ a physician group if collections are low or service requirements are greater than needed. A good example is asking an anesthesia group to staff more operating rooms than the volume or surgeries justifies.

6. Failing to determine and document FMV.

Market data benchmarks can help hospitals scope the value of hospital-based contracts, and, in many cases, market data can be sufficient to determine and document FMV. They can also help inform negotiations when hospital characteristics such as trauma status or number of births or surgery cases is a significant variable. Complex hospital-based agreements, particularly ones with little or no comparable market data available or ones on the higher end of the market ranges, may need more analysis and an independent FMV opinion.

1“OIG Supplemental Compliance Program Guidelines for Hospitals” Published in Federal Register Vol 70, No 19. Monday January 31, 2005.

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Best Practices for Physician Contract Audits

An internal audit can provide valuable information on contracting practices and identify opportunities to implement change. Internal audits are periodic, methodical examinations of all contracts and the approval process. They provide an excellent way to document your organization's commitment to compliance. Even if a contract was approved when it went into effect, vague language, complex formulae, lax recordkeeping, and physician relationships can make adherence to your compliance protocols and standards challenging. A periodic, objective and disciplined review of contracts is always a good idea. MD Ranger provides subscribers with web-based tools and reports to make internal audits more efficient and effective.

Goals of an Internal Audit

An internal audit of physician contract payment rates will:

  • Provide oversight of organization-wide contracting practices. Conducting an internal audit can identify differences in contracting practices and rates across specialties or facilities. It is sometimes difficult to monitor the significance of differences with a large number of contracts that are negotiated by multiple parties; auditing may identify some non-compliant practices within an organization.
  • Uncover potentially non-compliant agreements. An internal audit can help identify contracts which have payment rates above typical market benchmarks or reveal contracts that need better supporting documentation. An audit can bring these contracts or practices to the attention of your legal or compliance team for further review or documentation at renewal. MD Ranger's tools allow sorting of contracts by where they fall on the market benchmarks, making identification of problematic contracts simple and fast.
  • Ensure all agreements have appropriate documentation. Most organizations have at least a few unusual contracts that need additional documentation of FMV or a few that didn't go through the proscribed approval or documentation process. The audit will identify the need to improve documentation to show the source of FMV determination when the contract was negotiated and the timing of extensions and amendments. An audit should include a review of time records from physicians that document actual time spent.
  • Prevent duplicative services. An audit may reveal medical directorship positions than can be justified, either because multiple people provide substantially similar services or a contract calls for more hours than meets the FMV. Investigate how many directors are commercially reasonable for a service, or if some directors may have a more specific title that is not being adequately described. Unsure how many medical directors make sense per specialty? Use MD Ranger's Number of Administrative Positions per Service table for a gut check.
  • Check that approval process is working. Review the records for contract approvals to ensure that all contracts are processed appropriately.
  • Verify all contracts are current. Stark requires payment rates to be set in advance; hence it is important that contract renewals are processed prior to expiration. Be sure extensions are in place if contract negotiations are going to extend beyond the expiration date.

Approaches to Auditing

The Bottom-up Audit

The bottom-up approach is the most traditional an audit method, entailing a review of each contract for adequacy of FMV documentation, time records, and renewal/approval process.

The Top-down Audit

The top-down auditing approach looks at an organization's contracts and physician contracting compliance process as a whole to assess whether there may be underlying issues with the process, such as duplicate or excessive payments to individual physicians or groups. The process can be an effective tool for financial management and budgeting, as well as providing support for negotiations through comparisons in rates across specialties, consistencies, etc.

A few suggestions if you audit in aggregate:

  • Review how much is being spent per service (Neurology, Cardiology, etc.) across all types of agreements (administrative, call coverage, leadership, etc.).
  • Determine if the number of medical directors for each specialty/service is appropriate and within market ranges.
  • Examine the combined revenues from net professional collections plus stipends for hospital-based services.
  • Review specialties where all administrative or coverage contracts are staffed by a single physician or one practice to be sure payments do not exceed market rates for actual time committed, or if the physician cannot be reasonably expected to dedicate the minimum number of hours while maintaining their clinical practice load.
  • Multi-campus deals need particular documentation for time required.
  • Documentation of competitive bidding and a Request For Proposal process in contentious/excessive situations.

How Often Should Audits Occur?

Your organization may already have a policy for conducting periodic internal audits, thus the initial step is to document that the process is being followed. If there is no policy, investigate how other departments and business functions are audited at your organization. Depending on your facility and how your physician agreement terms are organized, audits can be annual or biennial. Whether routine or ad hoc, an internal audit is a valuable process for documenting a strong compliance process and identifying potential risks to your organization.

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