Not infrequently, we see doctors on our online physician communities posting that an employer has set a ceiling on their compensation because of concerns about fair market value. Often times, this is worded in a way that implies that it is illegal to pay more than a certain percentage of a compensation database benchmark because it would violate Stark Law. Unfortunately, this can be a somewhat tricky way for an employer to word things, and physicians should be skeptical of accepting this at face value. In order for physicians to advocate for themselves, they need to understand what the concept of fair market value really means, what CMS’ intentions in having it are, and why arbitrarily setting a cap on salary based on compensation data doesn’t make sense. It’s also important to understand and relay what CMS has specifically said about how fair market value is intended to be used, and more importantly, what it says fair market value does not mean, so that you can specifically cite this when negotiating with your employer. Of course, please note that we are not attorneys, and we highly recommend speaking with a physician contract attorney for further clarification on how fair market value applies in your situation, especially as local regulations may also vary.
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What is fair market value (FMV) in the context of physician compensation, and what does it have to do with Stark laws?
Fair market value (FMV) is defined by CMS as the “value in an arms-length transaction, consistent with the general market value of the subject transaction.” This is confusing language, but essentially CMS wants to ensure that a physician is only being compensated for the services that they are providing, not for the volume or value of referrals or other revenue that they are causing to be generated by the hospital system as a result of their relationship.
For example, if you work in a hospital system and send referrals to another physician or service within your institution that generates revenue for the institution, your compensation can’t reflect the volume of referrals you make or the value of the income generated by those referrals. You can only be paid based on the work you yourself do for the patient.
This is all related to the Stark law and Anti-Kickback Statutes that physicians must stay in compliance with, which is highly regulated by the federal government and which you are likely familiar with. The reason CMS and the IRS care about physician compensation being in line with fair market value is to prevent abuse or fraud which may take the form of causing overutilization of services secondary to self-referral incentives or create issues with tax-exempt nonprofit status.
Therefore, CMS wants physician compensation to be based on market data that reflects what other physicians in a similar situation, location, and demographic would make.
Compensating physicians with a salary far outside of fair market value can lead to scrutiny by the government. If a salary is found to be in violation of fair market value, the consequences are significant for both the employer and the employed physician, including hefty fines. Not surprisingly, hospital systems and employers are rightfully cautious not to violate these guidelines.
There are additional fair market value definitions that specifically relate to the rental of equipment and of office space, but those are beyond the scope of this article in which we are focusing on contract negotiations.
How is fair market value (FMV) determined?
FMV is determined by examining compensation data on what other physicians with similar skillsets working in similar practice environments make, also taking into account things like years of experience, specialty, subspecialty, and geographic location.
Most commonly, the way that this is determined is by looking at available compensation database from some of the larger physician compensation databases out there, like MGMA, Sullivan Cotter, AAMC, AMGA, or other big databases.
The key here is that CMS has not stated that fair market value is based on these databases, but rather on “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.” They have specifically addressed that paying less than 75th percentile doesn’t make an institution compliant, and paying higher than it is not definitely suspicious.
Therefore, FMV is really supposed to take into account not what percentile a physician is being paid at, but rather whether they’re being paid a fair market rate for their particular skillset. As CMS says, FMV is circumstance dependent. In a statement, they said that fair market value will usually reflect a range established by a reasonable methodology that considers the facts and circumstances of a situation at the time of the financial relationship. As long as it can be justified, it’s okay to go outside of the norms. For example, if a physician is highly productive or has high collections, has a unique or niche skillset that others in the area don’t have, tends to treat higher complexity patients, is in a specialty where shortages make that specialty very hard to recruit, or the practice location is in a very high cost of living area, these can all be used as justification to pay them more than the mean.
Why should physicians be skeptical when fair market value (FMV) is used against them in a negotiation?
We’ve seen many instances where a physician has been told they cannot make more than a certain percentile of MGMA data for their specialty. 75th percentile has been quoted often as a ceiling. Other times institutions say they can only pay up at 50th percentile. Additionally, as there are many different physician compensation datasets out there, using different databases will yield different numbers.
The skeptics in the physician community will often state that this information can sometimes be selectively cherry picked and/or spun in the employer’s advantage in order to justify lower compensation. As discussed above, CMS has come out and distinctly made a statement against this, stating that there is in fact no rule against physicians making above a certain percentile or above a certain dollar amount, as long as the compensation is supported by other facts that show this physician’s market value is actually higher than the mean. Additionally, many physicians on our communities state that they anecdotally know of situations where an employer cited fair market value but then were somehow able to come up with a better offer when a physician threatened to walk away from the negotiating table or remove a cap if a physician said they would stop working for the rest of the year once they’d earned enough to hit their cap via their RVU based model.
All of that said, know that most large employers have done their research and generally have a team dedicated to determining fair market value that is composed not just of administrators but lawyers and representatives from HR who also want to ensure that they are in compliance with good business practices, so they will likely have some rationale to back up why they landed on the number that they did.
They may also be resistant to paying higher salaries out of pure laziness or desire to avoid complexity. If they do give a salary which is an outlier and raises eyebrows, they will be required to regularly justify that salary, as well as potentially also open themselves up to examination of other salaries, even those that are below the 50th percentile but too low or too high for the amount of work being produced. Therefore, many compensation committees will actually regularly document the rationale for why someone’s salary or total compensation package is above the 75th percentile in case they are investigated.
How can a physician contest a fair market value (FMV) assessment that feels lower than it should be?
The key here is that they are going to bring data to the table, and you should too.
You should be armed with compensation data of your own to challenge the fair market value that they have arrived at. This may be other large compensation databases, knowledge of what other physicians in similar positions and markets are being paid (check out our physician salary data from our communities or ask others in your market), or other insights you can acquire anecdotally.
It’s also important to ask questions about the data that they have and how they arrived at that number or range. For example, know what year’s data they are using. Make sure it’s not from a year where the data was significantly lower than the current year. Ask about which datapoints were used to calculate the fair market value specifically, and if they cite other people’s specific compensation, look and see if you’re different from that person in a meaningful way (do you have an additional subspecialty, do you offer a procedure that they can’t, etc.).
Lastly, enlist the help of a physician contract lawyer, who may have access to relevant data of their own or be able to advocate for you more strongly. It’s well worth the cost. They are experienced in these matters and used to navigating tricky discussions about salaries.
Conclusion
While it is true that fair market value is very highly regulated, it is not true that there are specific numbers or ranges above which you can not be paid. Fair market value is supposed to be determined based on examining relevant data that takes into account many factors specific to you, your skillset, your demographics, and your location. Work closely with your physician contract attorney to address any hard “no’s” related to fair market value, as they can help you navigate this issue and any others that occur during the contract negotiations process.