There is an old adage that the only constant is change. Our industry has seen many changes discussed at various depths. Not only have wRVU values seen significant changes, but Covid significantly impacted the market surveys that the industry relies so heavily upon to administer compensation plans, lessening their reliability and adding to the list of challenges. Consider the fact that market surveys do not yet reflect the new wRVU changes because survey data lags a year, and the determination of fair market value may become a challenge. Although the concept of fair market value was originally formulated when determining the value of businesses, we can apply a similar process to determine fair market value, even in times of uncertainty.
Misguided Guidelines
The recent changes to the Medicare Physician Fee Schedule (MPFS) for E&M RVU values and reductions in conversion factors for 2021 and 2022 present a helpful reminder regarding the application of survey data. Historically, we have seen several entities establish an internal policy that compensation below a certain percentile of survey data is “fair market value.” It is not uncommon for organizations to use the 75th percentile of survey data as that benchmark. However, especially regarding recent changes, this approach should be reviewed carefully. In the most recent updates to the Stark Law, the Centers for Medicare and Medicaid Services (CMS) reiterated its view that just because compensation is below a certain survey benchmark level does not mean that the compensation is fair market value. Combined with the aforementioned changes, applying survey data to determine fair market value should be done carefully.
Market Approach Basics
The use of survey data is comparable to the market approach for business valuations. In that approach, ratios derived from past transactions are applied to financial statistics for the subject entity to estimate a value. When using market data, it is important to validate the comparability of the transaction to be used. Comparability includes many considerations, including the markets in which the entity operates, expected growth, and risk profiles, among other factors. One should also look at trends in the market. Did prior year data reflect significant increases in merger and acquisition activity that has since cooled? If so, historical multiples applied without adjustment would overstate value. Of course, the reverse would be true as well. When applying the market approach, we should always consider the market context and conditions when using transaction data.
How does this apply to the use of survey data to determine fair market value? One should think about survey data in a manner consistent with the above. Each survey respondent’s data can be viewed as a historical transaction under the market approach. Remember that survey data is a consolidation of numerous respondents in different markets with potentially different market dynamics. Practices respond to various questions, and from those responses, multiple metrics (e.g., compensation per wRVU) are calculated and presented in survey tables. We should remain mindful that market conditions faced by an individual provider may be considerably different than what survey data represents.
Survey Metrics
Respondent data includes actual financial results (if reported accurately by respondent) from practice operations. Based on industry changes, the values of metrics have changed. Metrics such as professional collections per wRVU have clearly shifted from amounts reported in survey data. These impacts result from at least three significant issues, as noted below.
- The increase in outpatient E&M wRVU values.
- The decline in the Medicare conversion factor.
- The impact of COVID (e.g., when providers were “kept whole” by employers even when production had declined due to COVID).
Therefore, the use of unadjusted 2021 surveys (based on 2020 data) is problematic.
Thinking it Through: Documenting Your Thoughts
As you develop an opinion of fair market value either internally or with an external consultant, take the time to apply a thoughtful approach to factors that have changed since 2019. One key factor to consider is the future expected production for each provider. How does that compare to adjusted survey metrics?
It would be best if you also considered other dynamics. Remember that although survey data help determine fair market value, it is only one part of the fair market value process. Further consideration includes changes in payer mix. Has the manner in which services will be provided changed? Has competition changed in the local market, putting additional stresses on recruitment? The potential factors are numerous; however, a thorough thought process about the use of survey data, and other factors, contemporaneously documented would be beneficial for supporting fair market value.
Market Observations
Healthcare organizations are now faced with decisions on how to approach physician compensation. Based on our review of thousands of physician contracts across the country, the following chart summarizes our observations of wRVU increases by broad specialty category based on providers’ historical billing.
| Care Type | % ∆ in wRVU |
| Primary Care | 20.2% |
| Specialty Care | 9.0% |
| Surgical Care | 5.7% |
| Hospital-Based | 2.7% |
| Total | 9.9% |
It is important to note that a wRVU increase does not perfectly correlate to an equivalent reimbursement increase for an individual physician. Remember that CMS’ changes are intended to be budget neutral, so an increase in wRVUs has the potential to significantly outpace the change in reimbursement due to the reductions in the conversion factor. The most recent survey data is therefore based on a market context not consistent with what we currently face. Under the market approach, use of that data without adjustment will lead to an inappropriate conclusion.
Conclusions
We have seen considerable changes since the start of 2021. The next calendar year brings yet another reduction in the Medicare conversion factor. Thoughtful application of valuation approaches can provide an appropriate and defensible opinion of fair market value. Realizing the survey metrics are derived from actual practice operations, the impact of reimbursement changes should be considered when adjusting physician compensation variables and survey data to allow a commensurate change in physician compensation. Such will allow economics to balance and maintain a sound fair market value framework.
Richard Romero – Coker Group
