As an administrator of a radiology practice or imagingcenter, you are certainly not expected to know as much asyour outside legal counsel about the various specific regu-lations and regulatory bodies governing physician compen-sation. However, if you train yourself to be constantlyvigilant for potential compensation pitfalls and have ageneral understanding of the need for compensation tosatisfy the big three criteria (not payment for referrals, setat fair market value, and commercially reasonable), youwill be able to sleep better since you will be in a better posi-tion to know when your healthcare attorney needs to becontacted. Of those three criteria, the referral issue andthe commercially reasonable issue are to a large degreecommon sense; the facts and circumstances of any partic-ular arrangement should allow you to make a judgmentregarding satisfaction of criteria. The remaining of thethree criterion, fair market value, is perhaps the most diffi-cult criteria to assess and judge.

It is important to note that the author is not an attorney,nor a regulatory expert. This article is not intended todiscuss the nuances between various applicable state andfederal anti-kickback and self-referral statutes. This articlewon’t educate you as to the nuances between the variousregulations and regulatory bodies. Instead, this article isintended to help you begin the process of paying closerattention to the various compensation arrangements thatplay a role in your radiology practice or imaging center.

Types of Compensation AgreementsThe types of compensation arrangements go beyond a

standard physician employment agreement. Compensationarrangements which you should pay particular attention toinclude, but are not limited to:

• Administrative services agreements• Administrative, supervisory, & teaching services(AS&T) agreements

• Call coverage services agreements• Employed physician compensation arrangements

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FairMarketValueFOR PHYSICIANCOMPENSATIONARRANGEMENTS

IntroductionThere is a heightened concern today regarding physi-

cian compensation and self-referrals, which in turn has

led to an increase in regulatory scrutiny of financial rela-

tionships between physicians and hospitals. Whenever a

physician or physician group receives compensation in

exchange for providing professional services to, or on behalf

of, a hospital, the physician is deemed to have a financial

relationship with the hospital. The compensation received

by the physician cannot represent payment for referrals.

In addition, the compensation must be based on fair market

value, and must be commercially reasonable.

B Y K I R K A . R E B A N E , A S A , C FA

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• Lease agreements (for equipment, space, or staffing)

• Management services agreements

• Medical director services agreements

• Professional services agreements

Valuation TechniquesThere are three basic approaches to determining the

fair market value of a contractual payment rate (or an

asset or a business): the income approach, the market

approach, and the cost approach. The income approach,

which focuses on the future cash flows that a contract

will generate, is typically not utilized to determine the

fair market rate to pay for a specific type of service since

there are significant regulatory concerns regarding paying

for future referrals.

The cost approach measures the investment that would

be required to create a replica or replacement of the subject

property, or the cost that would be required to create a

vehicle needed to supply a specific type of service. The cost

approach does not directly consider the amount of

economic benefits that can be achieved, the time period

over which they might continue, or the trend of the

economic benefits; therefore, regulatory concerns regarding

paying for future referrals are eliminated via this approach.

Typically, one estimates the cost to perform certain tasks

by internally-employed personnel, or applies market-

derived compensation data to a workforce suitably

constructed to perform those tasks.

The market approach provides an indication of the fair

market rate for a given service by comparing the price at

which similar services are provided in the marketplace

between willing buyers and sellers of such services. One

must look at prices paid for comparable properties, and

must make adjustments to reflect the degree of compa-

rability. The comparable transactions may exist within

the particular healthcare system in question, or they may

exist within the greater healthcare marketplace.

A variation of the market approach is the survey

approach. Various regulations originally mandated the

use of compensation surveys as the single method to

determining fair market rates. Now, updated regulations

comment that compensation surveys are a useful tool,

but should not be the sole tool utilized. There are various

firms that produce compensation surveys; each survey

analyzes different forms of compensation arrangements,

and each survey analyzes and reports the underlying data

using different criteria and quantitative measurements,

such as geography, specialty, or percentile. Some survey

data is dated, and must be inflated to a current date. Some

survey data excludes benefits and payroll taxes, while

some is fully loaded. Some survey data is indicative of

employees, while some is indicative of sub-contractors.

Different physician specialties are studied by different

surveys. Different components of the same survey may

have differing sample sizes, which certainly would impact

reliability. Therefore, if you are using survey data, it is

critical to understand how the various physician compen-

sation surveys gather and report their financial informa-

tion on compensation.

If more than one approach is utilized to assess the

fair market rate to be paid in relation to a particular

compensation arrangement, then the various results must

be correlated into a single, justifiable position. Throughout

the entire valuation exercise, it is critical to remember

that the specific facts and circumstances associated with

a given compensation arrangement must be taken into

account. Finally, as a sanity check, you should compare

the fair market rate derived via your analysis to the prof-

itability of the entity paying the fees. If the paying-entity

is left with no profit or too little profit when compared to

the industry or the marketplace, then perhaps your fair

market rate is too high or commercially unreasonable. If

the paying-entity is left with too much profit, then perhaps

your fair market rate is too low, and you have underesti-

mated some aspect of your production vehicle.

ComplianceLack of compliance with regulatory concerns by a

healthcare organization can lead to fines, disruption,

imprisonment, lost goodwill, and exclusion from govern-

ment payment programs; hence, compliance is a must.

Therefore, a practice administrator should establish a

regular compliance review process, during which all

payments to physicians are identified and justified. Ask

yourself if the services in question satisfy the big three

criteria: not payment for referrals, set at fair market value

and commercially reasonable. And if you’re not sure,

contact your healthcare attorney.

ConclusionGiven today’s heightened regulatory scrutiny of finan-

cial relationships in healthcare, it is prudent for an admin-

istrator of a radiology practice or imaging center to be

diligent with respect to compensation arrangements that

play a role in your company. Compensation arrangements

must not represent payment for referrals, must be set at

fair market value, and must be commercially reasonable.

Know when to contact your healthcare attorney, or when

to obtain a third-party opinion of value.

FAIR MARKET VALUE FOR PHYSICIAN COMPENSATION ARRANGEMENTS

KIRK A. REBANE, ASA, CFAco-founded Haverford Healthcare Advisors (www.haver-

fordhealthcare.com) in 1994 and has worked as a

financial advisor to businesses in the areas of valua-

tion and M&A for over 25 years. Kirk can be reached

at Haverford Healthcare Advisors, 43 Leopard Road,

Suite 102, Paoli, PA 19301; 610.407.4024, x-11; or

krebane@haverfordcapital.com.