Setting physician pay after a merger

The real key is aligning the incentives with the goals of both parties.

The M&A activity for physician practices shows no sign of slowing down. In 2013, around half of all healthcare facilities in the United States planned to acquire at least one practice in their community, according to research by Jackson Healthcare.

For healthcare financial executives, the integration of a new operation carries many challenges. And not the least is the question of how to compensate physicians who are joining the organization. This has to be addressed not only with the interests of the doctors and the hospital in mind, but also in compliance with legal requirements.

“At the beginning it is particularly important to look at the goals of each of the parties to the transaction,” said Ted Matthews, vice president and chief financial office of Banner Medical Group in Phoenix. “The compensation, no matter what form it takes, needs to meet those goals. While all factors need to be considered, the real key is aligning the incentives with the goals of both parties.”

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For the most part, physicians must be compensated by the hospital in a manner that isn’t tied to how many patients or how much money they bring to the hospital.

“Hospitals can build compensation and incentives around things like the level of relative value units (RVU) a physician produces,” said Rob Crigler, a partner in the Morristown, N.J., office of WithumSmith+Brown.

But he cautions that the Stark Law (which prohibits physicians from referrals of designated health services for Medicare and Medicaid patients if the physician has a financial relationship with the entity) needs to be considered.

There are two opportunities for hospitals to show direct compensation is appropriate, according to Matthews.

The real key is aligning the incentives with the goals of both parties.

One is when the compensation is consistent with what a private practitioner in the same market earns.

“The other is when a community need can be established,” said Matthews. “In this instance you can compensate a physician compared to national benchmarks. Rural settings may not have enough patients to interest a physician in compensation based on RVUs. In that case, the hospital can still pay the doctor what they would be making in a more highly populated area to meet a community need.”

Another factor will be what exactly is up for sale. In some cases, the acquirer will only be interested in the physicians themselves and the patients they can add. In other cases, ancillary services (AS) such as procedures offered by the physicians will be at issue.

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“When ancillary services are included, they are usually part of the buyout of the practice instead of direct compensation for the physician,” said Crigler. “Under Stark, hospitals cannot pay a physician based on how many procedures they do.”

They can adjust the compensation if the physician does or does not meet specific metrics going forward. However, the hospital must use historical data from the physician’s practice when determining future compensation. The formula includes interest, taxes, depreciation and amortization when setting the buyout number for the practice.