Benchmarks key in medical director pay-setting methods

Physician Compensation Report, Oct, 2003

Benchmarks are central in setting pay levels for full-and part-time medical directors and other physician nonexecutive administrative positions in hospitals and other facilities such as nursing homes and teaching hospitals--but which benchmarks to use and how to use them are questions very much up in the air.

Doug Cardinal, senior vice president of Cejka Associates/Cross Country Consulting in Atlanta, notes a substantial increase this year in interest from hospitals and other Cejka clients about appropriate pay levels and systems for medical directorships and similar positions. There have been enforcement actions in South Dakota, South Carolina and California concerning an oncology medical director's pay, the purchase price of practices bought by a hospital and the subsequent pay levels of the employed physicians, and the assistance from a hospital to a medical practice for recruiting new physicians (PCR 2/03, p. 3, and 8/03, p. 5).

Cardinal adds that compared with a decade ago, physicians are much more interested in taking on part-time medical director duties. The main reason, he explains, is the adverse reimbursement and cost environments, which create strong desires for added income outside of regular practices.

The business relationships at issue usually take one of two main forms: either a contract between the hospital and the physician or the medical group that employs him or her, or an employment agreement between the hospital and the physician. Medical directors for departments, sites or entire institutions may be involved. Benchmarks, which often play a role in operating physician pay systems, are particularly important with physician administrators because hiring institutions and medical groups need to document their compliance with several laws, including:

* The Stark anti-self-referral law, which governs referrals between the medical director's practice and the hospital.

* The anti-kickback law. Referrals to the hospital may be at stake in the choice of and payments to the medical director.

* The IRS rules against excessive compensation of key individuals in nonprofit institutions.

* Similar state laws.

You Must Follow Core Principles

There are some important disagreements, discussed below, on recommended ways to set pay levels for nonexecutive physician administrators among experienced consultants who work in this field. But Cardinal, Kim Mobley, who is a principal with Sullivan, Cotter & Associates in Detroit, and Felipe Padilla, vice president of Clark Consulting in Phoenix, strongly recommend certain bedrock principles:

* A written agreement between the institution and the physician or his or her medical group.

* A clear description in this agreement of the duties of and time expected to be needed for the position.

* Excellent records of the time spent and work done by the physician on the administrative position.

* Pay at commercially reasonable or fair-market-value levels, with those levels supported by clear documentation.

* No relationship between pay level and number or value of referrals or ancillary services.

Padilla recently supplied information to PCR's affiliated publication, Report on Medicare Compliance. Mobley and Cardinal spoke at a physician compensation conference in Chicago on Sept. 15-16.

Direct, Indirect Benchmarks Available

Clark Consulting offers direct benchmarks of medical-director pay levels for different services in hospitals and other facilities (see table, p. 6). These data are based on the firm's own recently taken survey. The pay levels are expressed as hourly rates, which should solve the problem of setting overall pay for different full-time-equivalent (FTE) percentages. Groups and hospitals have the choice of using the median pay level or the 25th, 75th or 90th percentiles.

Padilla says that for compliance purposes, pay levels should be set at commercially reasonable values for the work involved--that is, being medical director of the specific service in question. The levels should not be based, he says, on the "opportunity cost" (alternative earning power) of the physician chosen for the job, or on that physician's star power.

If the physician's specialty is taken into account, there should be documentation as to why a doctor of that specialty is needed in the job, he cautions.

Hospitals need active compliance efforts on these jobs to be sure of staying out of trouble, Padilla warns. For instance, he notes that in his survey 17% of responding hospitals do not have written agreements with their medical directors, and 43% do not review these agreements annually. Some respondents don't keep careful time and work-project records.

Cejka's Cardinal says the opportunity cost method--essentially paying an hourly rate based on the physician's specialty--was used quite often in the past but the trend is away from it as an appropriate compliance strategy. Some organizations still use the method, he says, but only as a part of setting pay for medical directors, often to set a cap on the possible pay range.