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Physician Compensation: Understanding Fair Market Value

From the Mississippi Business Journal

June 2009

With recent increased government activity and potential scrutiny regarding financial arrangements between hospitals and physicians, along with the proliferation of those types of arrangements, ensuring that payments made under those arrangements represent fair market value has never been more important. Determining fair market value should be a facts and circumstances test, and should incorporate any and all relevant data and information. While ultimately subjective, the synthesis of data into a conclusion of fair market value should result in a conclusion that is defendable under scrutiny.

One of the first sources of data generally looked to for establishing fair market value physician compensation are published surveys. Surveys are a great tool for establishing fair market value, but they come with drawbacks, limitations and potential pitfalls. Drawbacks include the lack of market-specific data, the lack of certain sub-specialty data and lack of detail regarding compensation composition (clinical, administrative, call coverage or some combination).

Survey data is generally broken down by percentile, leaving it to the user to determine (and support) the appropriate quartile to apply. In addition, not all surveys report data in the same way and are not necessarily readily comparable. It is also highly important that the user understand the way that particular data is reported in each survey and the types of respondents included in the survey. Rarely should survey data be relied on in isolation for determining fair market value.

One of the best indicators of the value of a physician is that physician's historical and expected future productivity. Productivity is generally measured using any or all of several productivity indicators including, but not limited to, charges, collections, work relative value units, encounters and cases.  A great deal of care must be taken in understanding a particular physician's productivity as measured against available benchmark data (market surveys, guideline contracts, physician recruiter placement data, etc.).

Blindly comparing a physician's productivity and survey data to arrive at a result can be hazardous without fully understanding the survey data, the micro- and macro- economic factors affecting the physician's productivity and earnings, the physician's patient base and payer mix, replacement cost and the underlying arrangement under which the physician practices.

Understanding all of the factors that impact fair market value, gathering and including all of the relevant data and methods and then properly assessing and applying that information are absolute requirements for arriving at a conclusion of fair market value that can withstand intense outside scrutiny.

HORNE is one of the top 50 accounting and business advisory firms in the country, as reported by the 2008 Public Accounting Report (PAR), and one of the top 10 accounting and business advisory firms in the Southeast.  With 13 offices in Mississippi, Tennessee, Alabama, Louisiana and Arizona, the firm has more than 550 team members serving clients across the nation.

For more information on HORNE LLP, visit www.horne-llp.com.

Rud Blumentritt is a senior manager in the Hattiesburg office of HORNE LLP. Contact him at rud.blumentritt@horne-llp.com .