Category: Compensation Valuation

by Mark Spurlin, CPA

CMS recently unveiled a series of proposals for Calendar Year 2024, including the 2024 Physician Fee Schedule Proposed Rule (CMS-1784-P) and the 2024 Medicare Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment System Proposed Rule (CMS 1786-P). In this edition of FMV Friday, we focus on four key proposals released on July 13th, which hold significant implications for healthcare providers and entities. These proposals will shape the future of medical services and prompt essential discussions within the industry.

Decrease in the Physician Fee Schedule Conversion Factor 

The proposed rule for the 2024 Physician Fee Schedule which again includes a decrease in the conversion factor of $1.14 or 3.34%, from $33.89 in 2023 to $32.75 in 2024. The adjustment was primarily driven by the Budget Neutrality Adjustment of negative 2.17 and the Consolidated Appropriations Act of 2023, which included a 2.5% increase to the 2023 conversion factor and a 1.25% increase to the 2024 conversion factor.   

The budget neutrality adjustment, which is required when increases or decreases in RVUs cause the amount of Medicare Part B expenditures for the year to differ by more than $20 million from that expenditures would have been in the absence of these changes. The 2024 adjustment was driven in large part by the proposed add-on code (HCPCS) G2211, discussed below. 

While the total combined impact of 2024 proposed rates are minimal, primary care specialties are expected to come out ahead once again with projected increases of 1% to 3%, while most surgical and medical specialties are projected to decline by 1% to 3%. 

Introduction of HCPCS Add-On Code G2211 

Introduction has been floated around for years and was originally included in the CY 2021 final rule. This add-on code is meant to “better recognize the resource costs associated with evaluation and management visits for primary care and longitudinal care of complex patients.” CMS estimates that this code will be billed with 38% of all outpatient office E&M visits initially and up to 54% when fully adopted.   

Delay of Implementation of Split/Shared Billing Proposal 

Hospital based physicians and their employers can take a sigh of relief as CMS is proposing to once again delay the implementation of their previously proposed changes to billing for split/shared E&M visits provided by both a physician and APP in facility settings by maintaining the current definition of “Substantive Portion” which enables billing based on either the total time spent or one of the three key components (history, exam, or medical decision making). The proposal to delay implementation “through at least December 31, 2024“ is not entirely surprising as the proposal has faced significant pushback all along due the lack of clarity, impact to revenue, challenges in setting up systems/processes for capturing the information needed to appropriately bill for services, impact to wRVUs and production based compensation models which would have caused major disruptions to team based care delivery models.      

Increase to OPPS and ASC Payment Rates 

Nearly 3,500 hospitals and approximately 6,000 ASCs across the nation can expect a 2.8% increase in the payments they receive under the Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center (ASC) payment system, so long as they meet applicable quality reporting requirements.  The proposal also included extending the policy to update the ASC payment system using the hospital market basket update for an additional two years “in light of the impact of the COVID-19 PHE on healthcare utilization” which These rates are expected to result in an additional $170 million in payments to ASCs and nearly $6 billion for hospitals.  

Changes in CMS policies can have an enormous impact on the operations and economics of healthcare providers.  Fortunately, CMS usually gives a little notice to allow those affected to voice their concerns and sometimes they even listen.  That said, it’s hard to predict if these proposals will be accepted, modified, or even included in the Final Rule.  

At Root Valuation, we strive to stay on top of the constantly evolving landscape in order to help our clients successfully plan and navigate changes such as these. If you have any questions about the implications the CY 2024 Proposed Rules and what may mean for you or your organization contact Mark Spurlin at 720.458.3766 or mspurlin@rootvaluation.com. 

by Mark Spurlin, CPA

In the complex landscape of physician compensation, benchmark data has served as one of the most commonly used tools for evaluating fair market value (FMV). While surveys published by the AMGA, MGMA, and SCA (i.e. the “Big Three”) are well-known, there are numerous other sources of data available. Considering alternative sources of data can help you to obtain a more accurate analysis of the value of your physician practice. In this blog, we will explore some of these alternative sources of data that can potentially be used in physician compensation analyses, as well as highlight some considerations for their use.

• Professional Associations/Societies: Professional associations and societies, such as the Society of Hospital Medicine and the American Association of Medical Colleges, play a vital role in collecting and analyzing physician compensation data. These organizations often conduct surveys or collaborate with other entities to gather comprehensive data that reflects the specific needs and challenges faced by physicians in different specialties. The advantage of utilizing data from professional associations lies in their expertise and focus on specific areas of medicine and often report metrics that align more closely with the unique aspects of each specialty.
• Recruiters/Consulting Firms: Recruiters and consulting firms, such as ECG, Merritt Hawkins, and Gallagher, are deeply involved in physician recruitment and contract negotiations. As a result, they possess valuable insights into current market trends and compensation structures. These entities have access to vast networks and databases, allowing them to gather compensation data from healthcare organizations that may not participate in the larger surveys. However, it is important to consider potential biases that may exist, sources of data, statistical significance, etc.
• Web-Based Databases: The advent of the internet has led to the creation of web-based databases that provide physician compensation information. Websites such as Salary.com, Indeed.com, Doximity.com, Medscape.com, and Gasworks.com offer searchable databases with user-submitted salary data, job postings, and surveys. While these platforms can provide a wealth of information, it is essential to exercise caution when relying on self-reported data. Factors such as sample size, response bias, and data validation need to be considered to ensure the accuracy and reliability of the information obtained.
• Public Data: Publicly available data sources, such as government/VA contracts, Bureau of Labor Statistics (BLS) reports, and state contract databases, can serve as additional references for physician compensation. However, it is essential to recognize the limitations of these data sources, as they may not capture the full breadth of physician compensation arrangements.

In the preamble commentary of the new Stark regulations CMS states, “Consulting salary schedules or other hypothetical data is an appropriate starting point in the determination of fair market value, and in many cases, it may be all that is required.” So while benchmark survey data is often at least a starting point for evaluating physician compensation, it’s not necessarily the be-all and end-all. To achieve the best results with a good sense of accuracy for your physician practice, it is vital to critically evaluate the quality of the data, consider the credibility of the sources, evaluate comparability, and recognize any potential biases.

Selecting the appropriate benchmark data to use to evaluate your physician practice can be quite complex. However, following the recommendations of trusted professionals will prevent you from selecting the wrong data and making mistakes. At Root Valuation, we help physician leaders successfully navigate business and employment transactions to that their value is fully realized. If you have any questions about what benchmark data is most suitable to value your practice and hot it can best serve you , speak with Mark Spurlin at 720.458.3766 or contact us at info@rootvaluation.com.

by Mark Spurlin, CPA

In the realm of physician practice valuation, Relative Value Units (RVUs) play a crucial role in determining the worth of medical services provided by physicians. RVUs are a standardized method used to measure the relative value and complexity of medical procedures and services. Implemented in coordination with the American Medical Association (AMA), the AMA Specialty Society Relative Value Scale Update Committee (RUC) is responsible for establishing and updating RVUs. Let’s explore the three main components of RVUs, namely Physician work (Work RVUs), Practice expense (PE RVUs), and Malpractice expense (MP RVUs), and their significance in physician practice valuation.

Physician work (Work RVUs):

Work RVUs account for the level of effort, skill, and time required by a physician to perform a specific procedure or service. Numerous variables contribute to the determination of Work RVUs, including technical skills, physical effort, mental effort and judgement, stress related to patient risk, and the duration of the service or procedure. For instance, a complex surgery that demands extensive training, critical decision-making, and lengthy operating time would be assigned higher Work RVUs compared to a routine office visit. Work RVUs recognize the professional expertise and effort invested by physicians in delivering patient care.

Practice expense (PE RVUs):

PE RVUs reflect the cost incurred by a physician’s practice in providing medical services. These expenses encompass both clinical and nonclinical labor and various overhead costs. Medical supplies, office supplies, clinical and administrative staff salaries, building space, utilities, medical equipment, and office equipment are all factors considered in calculating PE RVUs. The allocation of expenses to each medical service is done based on a pro-rata basis, taking into account the relative cost associated with delivering that particular service. By including practice expenses, RVUs provide a comprehensive assessment of the economic resources required to sustain a physician’s practice.

Malpractice expense (MP RVUs):

MP RVUs account for the cost of professional liability insurance associated with each Current Procedural Terminology (CPT) code. The relative risk associated with different procedures is estimated, and the corresponding malpractice expense is factored into the RVU calculation. Medical specialties with higher malpractice risks, such as neurosurgery or obstetrics, typically have higher MP RVUs compared to specialties with lower inherent risks. By incorporating malpractice expenses, RVUs address the financial impact of potential professional liabilities, thereby aiding in fair and accurate physician practice valuation.

Modifiers for RVU’s

Modifiers play a significant role in affecting Relative Value Units (RVUs) in physician valuation. These modifiers indicate specific circumstances that alter a service or procedure without changing its definition or code. They are used to provide additional information or modify the description of the service to enhance accuracy and specificity. Modifiers can be alphabetic, numeric, or a combination of both, and they are always represented by two digits.

In the National Physician Fee Schedule Relative Value File, there are two modifiers included: TC (Technical Component) and 26 (Professional Component). The TC modifier is used when a physician performs a test but does not interpret the results, while the 26 modifier is used when a physician interprets the test results but does not perform the test.

Modifiers allow for greater flexibility and accuracy in capturing the distinct components of a medical service or procedure. They help differentiate between the work performed by the physician and other involved parties, such as technicians or specialists. By utilizing modifiers appropriately, RVUs can be adjusted accordingly to reflect the specific circumstances and contributions of the healthcare professionals involved in delivering the care. These modifiers ensure that the RVUs accurately capture the professional and technical components of medical services, allowing for fair compensation and precise evaluation of physician work.

Importance in Physician Practice Valuation

RVUs serve as a fundamental component of physician practice valuation, as they provide a standardized and objective framework for assessing the value of medical services. By considering the three main components—Work RVUs, PE RVUs, and MP RVUs—RVUs offer a comprehensive evaluation of the resources and costs associated with delivering healthcare. These valuation metrics are essential for various purposes, including reimbursement rates, negotiating managed care contracts, assessing productivity, and determining fair compensation for physicians.

The RUC, in collaboration with the AMA, periodically updates the RVUs to ensure they reflect changes in costs, technology, and medical practice. This five-year update cycle allows for adjustments in response to advancements in medical technology, changes in healthcare delivery, and shifts in the relative value of medical services.

Relative Value Units (RVUs) are a vital component in physician practice valuation, enabling a standardized approach to determine the worth of medical services provided by physicians. These metrics play a crucial role in various aspects of the healthcare industry, such as reimbursement, contract negotiations, productivity assessments, and so much more. At Root Valuation, we help physician leaders successfully navigate business and employment transactions to that their value is fully realized. If you have any questions about RVU’s, speak with Mark Spurlin at 720.458.3766 or contact us at info@rootvaluation.com.

 

by Mark Spurlin, CPA

Many people assume the concepts of Fair Market Value and Commercial Reasonableness are basically the same and/or if an arrangement is FMV it is also commercially reasonable. There was also the common belief that if an arrangement was not profitable, it was not commercially reasonable. While this may be true in some cases, this is not the general rule. There is in fact a clear distinction between Commercial Reasonableness and FMV.

Commercial reasonableness refers to whether a transaction makes sense from a business perspective, and whether it aligns with the goals of the parties involved. On the other hand, Fair Market Value is the price that would be agreed upon in a transaction between a willing buyer and a willing seller, both of whom are knowledgeable about the market and under no compulsion to act.

However, the misconceptions that Commercial Reasonableness and FMV are one in the same are understandable given that while the concept of Commercial Reasonableness has been around for decades, it wasn’t clearly defined in the regulations until 2021 when 42 CFR § 411.351 was published, providing the following definition:

“That the particular arrangement furthers a legitimate business purpose of the parties to the arrangement and is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty. An arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.”

Basically, does the arrangement in question make business sense, even if not everyone involved makes a financial profit?

One of the most common examples of how an arrangement can be FMV, but not commercially reasonable, is in regards to Medical Directorships. It may be FMV to pay a Cardiologist $250 an hour to perform medical director duties, but if a nurse can provide the services for $50 an hour, it doesn’t really make sense to pay the physician.

Nuances like the difference between Commercial Reasonableness and FMV can have a huge impact and navigating this space can be quite the challenge for physician practices. At Root Valuation, we help physician leaders successfully navigate business and employment transactions to that their value is fully realized. Have a question about physician compensation, speak with Mark Spurlin at 720.458.3766 or contact us at info@rootvaluation.com.

 

by Mark Spurlin, CPA

There are three generally recognized approaches to compensation valuation, which can be applied to any asset or service. These approaches include::

• Income Approach – A general way of determining a value indication using one or more methods that convert anticipated future economic benefits into a single present amount.
• Market Approach – A general way of determining a value indication using one or more methods that compare the subject arrangement to similar arrangements (for which the specific services and compensation amounts have been disclosed)
• Cost Approach – A general way of determining a value indication based on the principle of substitution, that is, the cost it would take to replace the service with a suitable alternative of equal utility.

As applied in the determination of FMV compensation, we generally observe the following:

Income Approach

This is not typically used for valuing physician compensation as consideration of the income generated by the services could violate the regulatory prohibition of consideration of the volume and/or value of referrals.

Market Approach

This is a commonly used method for compensation that uses the benchmark survey data for comparable arrangements. For example:

• Clinical Compensation – Often utilizes multiple reported survey metrics such as Total Cash Compensation, wRVUs, professional collections, compensation per wRVU, etc. to estimate the compensation paid based on a similar provider, in a similar market, providing similar services.
• On-Call Compensation – Often utilizes reported hourly or shift-based call coverage rates based on specialty, type of coverage (i.e. restricted, unrestricted, beeper only, acuity, etc.), collections/revenue from other sources (i.e. collections for services rendered while on call)
• Medical Director – Often utilizes reported hourly call coverage rates based on specialty.

It should be noted that while benchmark survey data is useful for valuation, the reported data has limitations and is prone to misuse. Moreover, it is almost impossible to determine a direct comparison between the reported (aggregated) data and a subject arrangement, and there are numerous variables that could impact the applicability of survey data such as, sample size, standard deviation, correlation of production to compensation, comparability of duties, burden, etc.

Cost Approach

This method is commonly used in compensation analysis, particularly for Professional Services Arrangements (“PSA”), Medical Directorship, Call Coverage, etc.

For example:

• PSA – Often considers the actual cost for alternatives such as recruiting and hiring physicians to provide the service, or obtaining locums, etc.
•  Medical Directorships – Often utilizes annual compensation rates to derive hourly rates based on the hours actually worked (i.e. a full time employee is generally considered to be 2,080 hours, but that often includes PTO hours, so the true hourly rate for hours worked is actually higher).
• Call Coverage – Also often utilizes actual hourly cost but is then adjusted to reflect the actual burden of the call coverage and any other sources of compensation. For example, you wouldn’t pay a physician the same rate to just answer a beeper as you would a physician that has to present multiple times per shift. Typically, the burden factor adjustment for unrestricted call coverage ranges from 5% to 30%.

The Cost Approach is generally utilized and considered in conjunction with the Market Approach and often serves as an upper limit for compensation.

Each of these approaches contain numerous variations, that tailor the approach to the specific nuances of the valuation assignment. No one valuation approach is appropriate in all circumstances and appraisers will typically rely on multiple valuation methodologies in arriving at their conclusion of value.

At Root Valuation, we help physician leaders successfully navigate business and employment transactions to that their value is fully realized. Have a question about physician compensation, speak with Mark Spurlin at 720.458.3766 or contact us at info@rootvaluation.com.

 

by Mark Spurlin, CPA

The answer is likely yes (and they often do).

The reason for this dichotomy in pay is multifaced, but it can be largely attributed to economies of scale. In private practice, fixed overhead costs are often shared by a smaller number of physicians, the administrative (non-billable) time burden is higher for the physicians, and a private practice generally has limited leverage with commercial insurance payors to negotiate favorable payor contracts (particularly under traditional fee-for-service models). These economic forces place constraints on the overall profitability of a private practice relative to their hospital-owned counter parts.

It should also be noted that whereas these economic constraints impose practical limitations on what a private practice doctor can earn (i.e., in private practice physician earnings are limited to available profits), a hospital may be able to subsidize employed physicians if the prevailing market rate of compensation exceeds the profit generated by the physician group. This is not without limitations, however, and it is of utmost importance that any compensation paid is compliant with the applicable healthcare regulations. Compensation must be consistent with fair market value, not calculated in a manner to takes into account to the value or volume of referrals, and the arrangement must commercially reasonable.

In an open and unrestricted market, the forces of supply and demand will ultimately determine the compensation that is paid for any good or service, including physician services. In today’s healthcare environment there are many other factors that should be considered when setting physician compensation, and prevailing market compensation often exceeds what can be earned in private practice.

At Root Valuation, we help physician leaders successfully navigate business and employment transactions to that their value is fully realized. Have a question about physician compensation, contact us at (720) 458-3777.