Tsoules, Sweeney, Martin & Orr, LLC Physician Compensation Models Medical Group Management Association May 5, 2011 Susan B. Orr, Esquire Tsoules, Sweeney, Martin & Orr, LLC 29 Dowlin Forge Road Exton, PA 19341 Tel.: (610) 423-4200 Fax: (610) 423-4201 E-mail: sorr@tshealthlaw.com

Outline of Presentation Marketplace Trends in Physician Compensation Regulatory Requirements Overview and Analysis of Popular Compensation Models Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Trends in Physician Compensation Performance Based Incentive Plans are on the rise* 92% of Groups offer incentive plans 63% of Hospitals 67% of Integrated Health Systems Increase with payouts tied to quality Accountable Care Organizations Patient Centered Medical Home Productivity remains the most common * Hay Group, 2010 Physician Compensation Survey Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Regulatory Framework for Analysis of Physician Compensation Anti-kickback Statute Physician Anti-referral (Stark Law) False Claims Act Tax-exempt Organization Law Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Anti-Kickback Statute Criminal offense to knowingly and willfully solicit, receive, offer, or pay any remuneration to induce referrals of items or services paid for by a federal health care program Government must prove intent to induce referrals The Statute is violated even if one purpose of remuneration paid under a business arrangement is to induce referrals Violation of Anti-kickback = violation of False Claims Act Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Anti-Kickback Statute Safe Harbors Statute contains certain “safe harbor” exceptions Protect certain payment and business practices from prosecution if all elements of a particular safe harbor are met Transactions that do not fit within a safe harbor are not necessarily illegal, depends upon particular facts and circumstances Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Bona Fide Employment Safe Harbor Any amount paid by an employer to an employee (who has a bona fide employment relationship with such employer) for employment in the provision of covered items or services is not considered remuneration What is “bona fide employment”? W-2 employee for tax purposes No FMV required Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Personal Services Safe Harbor Applicable to Independent Contractors Written Agreement for at least one (1) year Specifies services to be provided FMV compensation Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC Stark Law Prohibits a physician from making referrals for “designated health services” to an entity with which physician (or immediate family member) has a direct or indirect financial relationship, unless a specific statutory exception applies Also prohibits entity and physician from billing for services provided pursuant to a prohibited referral Any violation of Stark, even unintentional, results in liability Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC Stark Law What is a Financial Relationship? Broadly defined to include any direct or indirect ownership or investment in an entity furnishing DHS Or compensation arrangement with an entity furnishing DHS Financial arrangement is protected if activity falls within an exception Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Bona Fide Employment Exception Employment is for identifiable services; Amount of compensation is consistent with fair market value for the services; Compensation is not determined in a manner that takes into account (directly or indirectly) the volume or value of any referrals by referring physician; and Agreement is commercially reasonable (even if no referrals) Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

How to Determine Fair Market Value? Identify comparable data that reflects the services performed CMS states: “Reference to multiple, objective, independently published salary surveys remains a prudent practice for evaluating FMV.” Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

In-Office Ancillary Services Exception Physicians Must qualify as a “Group Practice” Must meet Performance, Location and Billing Requirements Solo practitioners can refer and receive compensation from in-office ancillaries Physicians can refer DHS within their “Group Practice” (even if group is Hospital-owned) and can receive compensation indirectly related to DHS under certain specified criteria Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Federally Tax Exempt Organizations No Private Inurement No part of net earnings or other charitable assets of a Section 501(c)(3) organization may inure to the benefit of any private shareholder or individual No “de minimis” exception for private inurement May pay “reasonable” compensation for services Total compensation package for physician services must be reasonable for the geographic market and physician specialty Total Compensation = salary, bonus, fringe benefits, deferred compensation and other forms of compensation Benchmark physician compensation using comparable information Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC Third Party Surveys* Sullivan, Cotter & Associates, Inc. – Physician Compensation and Productivity Survey http://www.sullivancotter.com Hay Group – Physicians Compensation Survey www.haygroup.com Hospital and Healthcare Compensation Service – Physician Salary Survey Report www.hhcsinc.com Medical Group Management Association – Physician Compensation and Productivity Survey www.mgma.org ECS Watson Wyatt – Hospital and Health Care Management Compensation Report www.watsonwyatt.com William M. Mercer – Integrated Health Networks Compensation Survey www.mercerhr.com *Cited in March 26, 2004 Federal Register as data sources for determining physician compensation Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC Compensation Models Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Goals of Compensation Arrangements Comply with complex regulatory requirements Comply with strategic business decisions Be Competitive based on physician labor market Physician satisfaction Incentivize/Motivate Physicians Match compensation with services provided Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Steps in Designing a Compensation System Articulate what you want the Compensation System to accomplish Look backwards to see how well the prior system accomplished the goals Brainstorm how to better measure behavior that supports new goals Reform the model until all are in agreement Evaluate the effectiveness of the new system Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC Design Variances Single Specialty Group Most homogenous Spread between producers is narrow Multi-Specialty Group Most challenging/tension among specialties Each specialty must carry its own weight Hospital-owned Practices Trust building Physicians take risk for production Academic settings Issue of non-clinical activities Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC Compensation Models Equal Division of Revenue Fixed salary Base Plus Incentive/Bonus Pure Productivity Other responsibilities Medical Director Managing Partner Supervision of ancillary staff Non-clinical activities Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC Equal Compensation Generally found in single specialty practices (radiology, general cardiology) Applicable to owners After expenses paid, revenues are allocated equally among owners Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC Equal Compensation Pros: Simple Promotes idea of one united group and team behavior Avoids Stark issues Cons: High produces not incentivized Low produces allowed to coast Can result in conflicts among physicians – based on varying volume Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC Fixed Salary Income guaranteed regardless of productivity Common for new physicians just out of Residency How to Determine Salary? Use objective data: salary surveys Formula: Estimated Gross Revenue, less expenses attributable to Physician and profit margin (Continued) Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC Fixed Salary Pros: Worry free – sense of security for Physicians Simple, easy to understand and administer Cons: Offers little long-term incentives Encourages minimum work effort Discourages entrepreneurship Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Base Salary Plus Incentive Fixed Base Salary (75% of total Compensation) Based on survey data/historical data May be an advance against total compensation Incentive tied to: Productivity (Revenues vs. wRVU’s) Non-productivity related measures, i.e., patient satisfaction, quality meeting evidence based guidelines Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Incentive Compensation To Determine Available $ for Incentive Compensation: Collect Data Expenses By Physician Ancillary Overhead allocation Productivity Information Charges Net collections RVU’s Encounters Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC Incentive Issues % as Reserves for future Practice development Allocation between Owners vs. Employed Physicians Allocation of DHS Revenue Productivity Bonus based on personally performed DHS services Ancillary revenue pool to be distributed equally to all physicians % Equal Distributions % Physician Productivity % Qualitative Factors Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Copyright © 2010 Tsoules, Sweeney, Martin & Orr, LLC Productivity Defined Gross Professional Charges Gross Revenue Net Collections RVU’s Days Worked Patient Encounters Points Customized System Copyright © 2010 Tsoules, Sweeney, Martin & Orr, LLC

Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC Physician wRVU Components: Physician time required for each service Technical skill and physical effort Mental effort and judgment Psychological stress associated with Dr’s concern about treatment risk to patient Based on CPT code Fixed compensation rate per wRVU Base future compensation on current RVUs Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Productivity Based on Collections (Proportional Overhead) Dr. A Dr. B Dr. C Dr. D Practice Total Productivity % 19% 21% 28% 32% 100% Revenue 475,000 525.000 700,000 800,000 2,500,000 Overhead 242,630 268,170 359,560 408,640 1,279,000 Net Income $232,370 $256,830 $340,440 $391,360 $1,221,000 Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Productivity Based on Collections (Equal Overhead) Dr. A Dr. B Dr. C Dr. D Practice Total Productivity % 19% 21% 28% 32% 100% Revenue 475,000 525.000 700,000 800,000 2,500,000 Overhead 319,750 1,279,000 Net Income $155,250 $205,250 $380,250 $480,250 $1,221,000 Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Productivity Plus Equal Share Dr. A Dr. B Dr. C Dr. D Practice Total Productivity % 19% 21% 28% 32% 100% Equal Compensation (50%) 152,625 610,500 Productivity (50%) 115,995 128,205 170,940 195,360 Net Income $268,620 $280,830 $323,565 $347,985 $1,221,000 Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Non-Productivity Related Measures Medical Home Model/Accountable Care Organization Reimbursement tied into quality/meeting certain outcomes Performance outcomes are more likely to be achieved when: Compensation is tied to the achievement of those outcomes Programs rolled out gradually, with considerable education prior to linking measurements with payment Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC Quality Measures Participation in quality performance program Adherence to evidence based guidelines, clinical protocols; reporting performance Clinical outcomes Patients up-to-date for needed services Cost control Use of EHR/CPOE Patient satisfaction Leadership, participation, citizenship Call Coverage Peer Chart Review Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Base Salary Plus Incentives Pros: Rewards for hard work Continues to offer some security Directs behavior Rewards achievements that promote goals/objectives of group Cons: Can place a large amount of income at risk Cause minimum work standards Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Pure Productivity Model Most complex Range from complex formula for multiple factors to a simple model based on amount billed, or amount collected for physician services or quantity of RVUs Goal = enhanced productivity, but can result in competitive work environment Encourage overutilization of Services Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

A Good Compensation Plan Must: Work for the entire group Clearly understood Be equitable/fair: define physician’s work Data and contribution reliability Promote trust among physicians Promote Group Incentives/objectives (New Partners/Non-clinical activities) Copyright © 2011Tsoules, Sweeney, Martin & Orr, LLC

Copyright © 2011 Tsoules, Sweeney, Martin & Orr, LLC QUESTIONS? QUESTIONS ANY QUESTIONS 38 38 38 Copyright © 2011 Tsoules, Sweeney, Martin & Orr, LLC