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Pitfalls with Using Opportunity Cost for Medical Direction Compensation

Posted 3:27 PM by

A common question we get is whether or not a physician's clinical hourly rate is a valid starting point for determining the fair market value of medical direction services. 

The theory to support the argument is that a hospital needs to be competitive with the physician's other income producing activities to be able to attract the physician to do the work it needs a physician to do. This philosophy, of course, tends to resonate well with the physicians.

However, regardless of the type of hospital compensation study being performed, opportunity cost cannot be used as the beginning and end of a fair market value opinion.  It may in fact be that the physician's effective hourly clinical rate is similar to the medical direction rate being paid, but an appraiser will need to take the following into consideration when utilizing an opportunity cost approach:

  1. Risk - Medical direction involves no direct life or death decisions and the odds of committing malpractice are slim to none. Because part of the compensation Medicare pays is tied to the cost of malpractice, it is hard to argue that the compensation for clinical work does not involve a direct reward for the risk of touching patients.
  2. Complexity of Work - The more the specific medical director's duties replicate C-Suite activities, the more likely it is that the compensation should include data points for executive-type positions. However, when using clinical compensation as a starting point, it can be difficult to assess the relative complexity of one set of tasks versus another.
  3. Scope of Work - The amount of time necessary to commit to a medical direction appointment also impacts the data that might be used. Specifically, one may include incremental data points that resemble the costs of employment if we find a physician is spending 500 or more hours a year on a medical direction arrangement.  In fact, if items such as on-call compensation are buried within a comprehensive medical directorship, one would certainly have to bring in other data points.

How to include compensation for non-clinical services in a way that meets Stark compliance is a key part of most physician integrations. However, there are generally better technical ways to prepare a strong fair market value opinion than to use the opportunity cost approach. However, there is certainly a way to consider the above three items to reconcile the reasonableness of the medical direction compensation relative to the physician's clinical compensation.

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Katz, Sapper & Miller’s Healthcare Resources Group serves healthcare providers, including physicians, hospitals and health systems, surgery centers, and long-term care facilities. Our team of healthcare professionals has the scope and depth to meet client needs. Learn more.

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