Fair Market Value for Locum Tenens Physicians
Understanding Fair Market Value for Locum Tenens Physicians Can Mean the Difference Between Fair Compensation and Being Undervalued
Locum tenens physicians often face a unique challenge—unlike employed physicians, there are no universally accepted benchmarks for compensation. That’s why knowing how to determine the fair market value for locum tenens physicians is critical before you negotiate your next contract. As there are no widely-recognized benchmarks for locum tenens work, these physicians often find themselves drawn to the various websites sprinkled across the internet, claiming to have authoritative compensation data. Telling your potential employer that you “saw the compensation data on a website” is unlikely to persuade anyone, and while sources like MGMA make much stronger cases for themselves, MGMA does not offer compensation data for independent physicians. So how does a locum tenens physician determine their fair market value and negotiate sucessfully?
What Is Fair Market Value For Locum Tenens Physicians, Anyway?
First, we need to examine some definitions. Fair market value is referred to as “general market value” in the Stark Law; the Stark Law is important to keep in mind because that particular law is often bandied about as an excuse by the employer to not pay physicians their fair share.
With this in mind, the Stark Law defines general market value as “…the compensation that would be paid at the time the parties enter into the service arrangement as the result of bona fide bargaining between well-informed parties that are not otherwise in a position to generate business for each other [emphasis added].”
Far too often, I have found that physicians negotiating with hospitals and locums companies don’t have the information they need to help them get a reasonable deal.
“Commercial Reasonableness” is an Important Aspect of Fair Market Value for Locum Tenens Physicians
There is another, and in my mind more important, qualification in the Stark Law. Specifically, the payment to the locum tenens physician must be commercially reasonable. Allow me to quote a savory morsel from the 627-page regulations:
“The key question to ask when determining whether an arrangement is commercially reasonable is simply whether the arrangement makes sense as a means to accomplish the parties’ goals…the determination that an arrangement is commercially reasonable does not turn on whether the arrangement is profitable; compensation arrangements that do not result in profit for one or more of the parties may nonetheless be commercially reasonable.”
I think the bottom line of “commercial reasonableness” is that the fair market value of locum tenens physicians is situational: it will always be dependent on the unique circumstances of the contracting entity.
Estimating the Fair Market Value for Locum Tenens Physicians
I use the term “estimating” because there isn’t a “correct” answer. Any good appraiser will give a range of values for fair market value.
When dealing with appraisers, you must always be concerned about who the appraiser is working for. A seller’s appraiser will usually come up with a higher value than a buyer’s appraisal.
Short of hiring an appraiser, there are a few methods that I believe are valid for determining the fair market value of locum tenens physicians.
"Replacement Cost"
One obvious way of estimating the fair market value for locum tenens physicians is to determine what it would cost to employ a physician for that role. The cost of an employed physician has many components:
- Salary
- Productivity bonus
- Call compensation
- Vacation
- CME
- Health insurance
- Dental/vision insurance
- disability insurance
- Signing bonus
- Relocation allowance
The benefit cost of an employed physician is generally recognized as being 20% to 30% of salary.
When I do a locum tenens compensation “replacement cost” analysis, I incorporate MGMA benchmarks into a “bottom line” cost of an employed physician in the spot the locum tenens would fill.
Let’s look at an example of what a family medicine without O/B physician would cost the employer (these benchmarks are the medians MGMA 2024 national benchmarks based on 2023 survey data – the most recent data available when this post was published).
- Total compensation is $297,746
- Total paid time off is 216 hours, so total time worked is 1,864 hours
- This means the hourly rate of compensation for an employed physician without benefits would be $159.73
- Assuming benefits cost the employer another 30%, the hourly cost for an employed physician is $207.65
But, as noted above, an employed physician would also receive a signing bonus and relocation allowance.
The median signing bonus is $22,500, and the median relocation allowance is $10,000. Since most employers amortize forgiveness of these bonuses over some period of time, let’s cut those figures in half to obtain the first year cost of an employed physician.
Adding another $16,250 to the annual cost of the employed physician working 1,864 hours adds another $8.72 to the hourly cost, for a total cost per hour of $216.37.
Of course, there is a dirty little secret in these numbers. How many family medicine physicians really work 1,846 hours per year? I still think this is a reasonable way to calculate the cost of an employed physician, since those numbers represent medians reported by the hospitals themselves to MGMA.
For a hospital to fight this analysis, they would have to tell a dirty little (not-so) secret. “We work our physicians like dogs! They eat, sleep, see patients and chart, that’s their whole lives!” As effective as this negotiating ploy might be, I don’t think that many hospitals are going to play the “indentured servant” card.
There are a few caveats to the above calculation. First, I think the cost of an employed physician should be the absolute minimum a locum tenens physician should be paid.
Secondly, the above example used MGMA national benchmarks in all practice settings. When I perform a locum tenens compensation “replacement cost” analysis, I always use the most precise data available (e.g., this specialty employed at a hospital in the state of X).
Lastly, remember that this calculation does not address the cost to the entity if patients or referral sources start going elsewhere.
Hospital Lost Revenue
To avoid Stark Law issues, it would be prudent to keep these figures to yourself (but rest assured the hospital is acutely aware of these numbers!)
The median annual collections of the family medicine without O/B physician discussed above is $548,475. This figure does not include the addition to the hospital’s bottom line of all the admissions that physician will be making.
Hospital necessary services
There are certain services that a hospital must provide. An ER must be staffed, for example, and women who are delivering babies must be treated. Not having the appropriate specialists for these services doesn’t just tarnish the reputation of the hospital, it leads to serious quality of care issues.
If a physician is gone, is it commercially reasonable not to replace him or her? Will patients and referral sources go elsewhere if their needs can’t be met?
Does the hospital need to make money from locum tenens services, or is protecting market share reason enough to “lose money” on a replacement? This brings us back to the Stark Law issue of “commercial reasonableness.” Isn’t paying more that what an employed physician would cost commercially reasonable?
Are you replacing the only physician in that specialty in the community? How long have they been recruiting? Is this a desirable area for physicians? Does the hospital have trouble retaining physicians? All of these factors can enter into negotiations, and all can demonstrate the commercial reasonableness of increased compensation.
Key Takeaways
- Get the data to know what you are worth
- Never forget the “opportunity cost” to the hospital (lost revenue, lost referrals, lost future business) that you can spare the hospital
- Don’t let the hospital underpay you citing “Stark”
- Try and find out how desperate they are!
If you would like us to perform a locum tenens compensation “replacement cost” analysis, please click here. If you have a physician locum tenens agreement you would like us to review, you can start your review here. We can also provide a free consultation to talk about how we can help.
