The Value of Understanding Physician Compensation Caps

Ed Rabinowitz

Compensation caps are a sometimes overlooked part of a physician's contract. But such caps, and the "fair market value" terms used to determine the limit, can have an impact on your compensation.

“Fair market value.” That’s a very interesting term. It can also be very ambiguous. defines it as, “The price that a given property or asset would fetch in the marketplace, subject to” specific conditions. One of those conditions is that the prospective buyers and sellers are “reasonably knowledgeable about the asset; they are behaving in their own best interests and are free of undue pressure to trade.”

Which brings us to physicians, especially those working in hospitals or employed situations. That’s because compensation caps can affect their income, especially with regard to the way fair market value is defined.

“It’s not necessarily a hard and fast term,” explains William Reiser, chief information officer for the Halley Consulting Group. “It’s more of a general guideline.”

But there are caveats to that guideline.

Variations on a Theme

Does fair market value vary from New York City to Podunk, Iowa? Most definitely, Reiser agrees. He explains that healthcare establishments will often assess fair market value by looking at compensation-based surveys conducted by organizations such as MGMA. Sometimes the regional variations of those surveys are quite interesting.

“You may see higher compensation coming out of areas that very often have a lower cost of living,” Reiser says. “You assume that New York City has very high compensations that parallel the high cost of living. But sometimes in Podunk, Iowa you may have compensation that turns out to be very favorable.”

And there are other variables too, such as the legal counsel with which the physician may be dealing. Some take a very conservative approach, meaning they view a physician’s fair market value somewhat lower. Others are more liberal. But rarely, says Reiser, is there a hard-and-fast cap where attorneys will say, for example, that they will not pay more than $250,000 for a family practice physician.

Instead, wording will be included in the contract that if at any point the provider’s total compensation rises above the 90th percentile in the region, based on surveys like those conducted by MGMA, it will trigger a review.

“The total role of the cap, as far as I can see, is to reduce legal risks and satisfy regulatory requirements,” Reiser says. “I often see caps as a clause in a contract. It’s a safety valve. And if a physician reaches a certain level it will be reviewed, either by external experts or the administration, to make certain the organization is still in compliance. But rarely do I see physicians push up against it.”

The Underlying Structure

Reiser says that when physicians think about capping their productivity, it “makes the hair on the back of your neck go up. Why are you limiting me?” But that, he adds, is a knee-jerk, emotional reaction. The more important element is how the underlying components of the compensation are structured. In other words, for what are the physicians being compensated?

“That’s where the real regulatory issues come in to play,” Reiser says.

For example, if the compensation structure says, “We’ll pay you an extra $10 for every patient you refer to get an x-ray,” that’s a real compliance problem.

“You can’t be paid for referrals,” Reiser says. “So the underlying structure, I think, is ultimately more important than the cap, as long as the cap is structured in a way that encompasses the feasible productivity level.”

Is that underlying structure impacted by the current reimbursement trend moving from volume to value? Reiser says it does raise questions about how the payment mechanism is structured. But, he adds, for most medical specialties, there still needs to be an appropriate level of volume.

“Productivity is still a huge component of the underlying value question,” Reiser says. “You still want family practice physicians to be treating people, but you want them to be treating appropriately. You still want general surgeons to be doing a lot of procedures, just not a lot of unnecessary procedures. That’s our challenge in healthcare—treating the population, but we still want people to be productive.”

The Bottom Line

Reiser says that the bottom line is still important, even for physicians in an employed situation. The physician may not have the day-to-day risk of managing the business, but in some respects still remains liable.

“If you’re in a private practice and the roof goes bad on the building, it comes out of your paycheck,” Reiser says. “On the other hand, you don’t have to worry about it if you’re an employed physician. But ultimately, the bottom line still matters. Hospitals can’t overpay in perpetuity and expect to stay in business.”