Hospital misuse of benchmarks to cap physician salaries is rampant. They do this by putting provisions in physician employment agreements that prevent the physician from exceeding some percentile of a benchmark (such as those produced by the Medical Group Management Association, or MGMA). These provisions often cap compensation no matter how productive the physician is.
The Rationale for Hospital Misuse of Benchmarks
When asked why some percentile of a benchmark is set as a physician’s maximum compensation, the hospital will often do some hospitalsplaining. They will claim that if a regulator becomes aware of a physician exceeding a high percentile (e.g., the 90th, or in some egregious contracts, the 75th percentile) of a benchmark (e.g., MGMA) , the regulator will assume that some portion of the compensation is a payment for referrals, rather than simply fair market value for the services performed.
This is a ludicrous position. In effect the hospital is claiming that either 10% or 25% of all physicians must be breaking the law. You don’t need to be a math nerd to know that 10% of all physicians’ compensation exceeds the 90th percentile, and 25% of all physicians’ compensation exceeds the 75th percentile.
Of course, there are many legitimate reasons why an employer would pay a physician more than the 90th percentile. One obvious reason for payment in excess of the 90th percentile is that a particular physician may be more productive than 90% of his or her peers. Somewhere in this country there is a physician who is the most productive physician in his or her specialty. We can certainly hope that this physician is paid more than the 75th or 90th percentile of compensation.
In addition, fair market value compensation will be more in certain areas of the country. The simple fact is that there are places that are not attractive to physicians, because of weather, lack of cultural opportunities, or other factors. This problem can only be overcome by paying physicians more to get them to relocate to these locations.
Variations in Hospital Misuse of Benchmarks
Some hospitals put a hard cap on physician compensation, and prohibit compensation in excess of the “forbidden” benchmark under any conditions. If the most productive physician in the country works for that hospital, he or she will not earn more than the benchmark under any circumstances.
Other hospitals draft employment agreements that provide that the hospital “may” do an analysis of the physician’s compensation if it appears the compensation will exceed the relevant benchmark. When negotiating physician employment agreements it is important to change a provision that the hospital “may” perform an analysis of fair market value, or a contract that is silent on review of potential earning in excess of the benchmark, to provide that the hospital is required to obtain an analysis if the benchmark may be exceeded.
But a provision regarding a required analysis of compensation is not enough. The provision should also specify how, and by whom, the analysis will be performed. Most first drafts of physician employment agreements provide that the hospital will perform the review. Can you imagine asking that the physician be responsible for performing the review of that physician’s compensation? It’s laughable. I’m sure we would be informed that one side of the transaction should not be able to dictate how much is paid.
When pointing out this seemingly obvious fact to the hospital, you may be informed that the hospital has “experts” on staff. Once I was told that the hospital had many certified coders and CPAs on their staff. Accordingly, they felt they were well qualified to analyze physician compensation. Even if the only thing needed to evaluate physician compensation were coding and tax expertise (a dubious assertion), those “experts” were obviously employed by the hospital. The hospital employees can hardly be expected to develop unbiased assessments.
A Cure for Hospital Misuse of Benchmarks
Fraud and abuse prosecution is real, so it’s hard to argue that physician compensation should be analyzed if it is higher than that physician’s peers. However to prevent hospital misuse of benchmarks, the analysis should be made by an expert. There are nationally recognized valuation companies who specialize in physician compensation. These experts should be utilized.
The analysis and the underlying statistics that the analysis was based on should be shared with the physician, and the physician should have the right to retain his or her own valuation expert to analyze the data and provide an opinion on the appropriateness of the compensation. The hospital should cooperate with the physician’s consultant, giving them any data needed.
Before the physician’s compensation is changed the hospital should be willing to negotiate for a reasonable amount of time to assure a fair adjustment to compensation that meets regulatory and legal requirements.
Why Ending Hospital Misuse of Benchmarks is Important
Hospital misuse of benchmarks has implications well beyond cheating an individual physician from earning the compensation they deserve. Next year’s benchmarks will include that physician’s productivity and the income earned. The overall effect of this trend, multiplied by numerous specialties and hospital systems, will be to lower the benchmarks (and, accordingly, the compensation) of all physicians in the future.
Allowing the insidious hospital misuse of benchmarks to continue has the effect of penalizing the most productive physicians. Given the serious physician shortage in our country, we should be working to increase the compensation of these physician super-producers. Instead, hospitals seem to be intent on cheapening the value of our most productive physicians.
Physicians should carefully consider the implications of the compensation provisions in their contracts to stop this vicious cycle.
You may wish to consider an MGMA compensation analysis to see how your compensation stacks up to benchmarks. We can also provide a free consultation to talk about how we can help. You may also find my book on physician employment agreements helpful in determining what you should be paid.
