Are 10 percent (or 25 percent) of all the physicians in your specialty breaking the law?

Of course not! Who would think such a thing?

Your friendly neighborhood “nonprofit” hospital, that’s who!

I have been reviewing physician employment agreements for almost 40 years, and in the last few years I have noticed a spike in the number of agreements that “cap” physician salary. A shocking number of hospital employment agreements provide that the physician employee’s salary, together with incentive or productivity compensation, cannot exceed some percentile of a compensation benchmark (e.g., MGMA) under any circumstances.

This top percentile is often the 90th percentile, but I have seen as low as the 75th percentile as a cap. When pressed as to why this cap was put in place, the hospital will generally claim that it is done for “fraud and abuse” reasons. The thinking seems to be that if a physician is earning more than the given percentile, regulators will assume that there is a payment for referrals lumped into the compensation, so it is not really fair market value compensation.

This is a ludicrous position. Anyone with the slightest background in math can tell you that 10 percent of all physicians’ compensation exceeds the 90th percentile, and 25 percent of all physicians’ compensation exceeds the 75th percentile. Therefore, the position of the hospitals must assume that either 10 percent or 25 percent (depending on which level is being utilized as the maximum) of the physicians in your specialty are violating fraud and abuse laws.

There are many reasons why a physician may be paid more than the 90th percentile. The most obvious reason is that the physician is in the top 10 percent of productivity. There is a physician in your specialty who is the most productive physician in the country in your specialty. I would like to think that this hard-working physician is paid more than the 75th or 90th percentile of compensation.

In addition, there are many legitimate and completely lawful reasons why a physician who is not in the top decile or quartile of productivity may still be paid above these benchmarks. For example, there are places where physicians just don’t want to live, because of the weather, lack of amenities, or other factors. Recruiting physicians to these locations requires the employer to give the physician a reason to move there instead of more hospitable or culturally vibrant locations. Higher compensation is frequently used to induce physicians to move to places that other physicians are avoiding.

Not every hospital has a hard cap on compensation. The slightly more reasonable approach that I sometimes see is an employment agreement that provides that the hospital “may” do an analysis of fair market value if the physician’s compensation would exceed the relevant benchmark. Obviously, I would attempt to change any provision that the hospital “may” perform an analysis, or a contract without the requirement for an analysis, to provide that the hospital is required to do an analysis if the benchmark will be exceeded.

When the employment agreement does require an analysis of the compensation if the physician’s compensation would exceed the “forbidden” percentile, it’s important to specify how that analysis will be performed, and by whom. Almost all the employment agreements that I have reviewed which do provide for a review of the compensation also provide that the hospital will perform the review. I’m sure if we tried to get the hospital to agree that the physician will perform the review of the physician’s compensation they would laugh in our face, and rightly so. One side of the transaction should not be able to dictate the price.

When this seemingly obvious fact is pointed out to the hospital, I have been told that the hospital has “experts” on staff. One hospital went so far as to tell me that they had “many certified coders and CPAs” on staff, so they were eminently qualified to evaluate physician compensation. Even assuming that coding and tax expertise were all that is required to evaluate physician compensation (a rather dubious assertion), these individuals obviously are employed by the hospital, and so can hardly be expected to be unbiased in their assessments.

I don’t quarrel with the assertion that physician compensation should be examined if it seems objectively higher than the physician’s peers. However, if an analysis is made of physician compensation, it should be made by a nationally recognized valuation company specializing in physician compensation. The results of the analysis, as well as the statistics on which the analysis was based, should be shared in writing with the physician.

Moreover, the physician should have the right to retain his or her own valuation consultant, with similar credentials and experience, to analyze the data and provide an opinion as to fair market value. The hospital should cooperate in providing the physician’s valuator with data needed to perform the review. Before amending the physician’s compensation, the hospital should be willing to negotiate for a reasonable amount of time to develop a fair adjustment to compensation, if any is required, to assure legal and regulatory compliance.

The random capping of physician compensation at some percentile of a benchmark has insidious effects well beyond the impact on the individual physician who is not being appropriately compensated for his or her productivity. Next year’s benchmarks will reflect that physician’s productivity and “capped” compensation. The overall effect of this lowering of compensation, when multiplied across multiple specialties and health systems, will be to lower the benchmarks applicable to all physicians in future years.

Ironically, allowing this process to continue will penalize the most productive physicians in the country. With the critical physician shortage we are facing, we should be trying to increase the compensation of these physician workhorses, not to artificially cheapen the value of their services. Physicians should carefully consider the implications of their compensation provisions to stop this vicious cycle.

Dennis Hursh is a veteran attorney with over 40 years of experience in health law. He is founder, Physician Agreements Health Law, which offers a fixed fee review of physician employment agreements to protect physicians in one of the biggest transactions of their careers. He can also be reached on Facebook and LinkedIn.

Dennis is a frequent lecturer on physician contracts to residency and fellowship programs and has spoken at events sponsored by numerous health systems and physician organizations, including the American Osteopathic Association, the White Coat Investor, the American College of Rheumatology, the Pennsylvania Medical Society, the Pennsylvania Society of Cardiology, and the American Podiatry Association.

Dennis has authored several published articles on physician contractual matters on forums such as KevinMD and Medscape. He is also the author of The Final Hurdle – A Physicians’ Guide to Negotiating a Fair Employment Agreement which is considered the go-to resource on physician contract negotiation.