Many health systems and hospitals will contract with private physician groups to provide professional services to its facilities. Some of the more common specialties we see contracted for are neurosurgery, orthopedic surgery, and urology. When hospitals and physician groups enter into a professional services agreement (PSA) the contracted fee must be fair market value (FMV) to comply with the federal Anti-Kickback Statute and sometimes the Stark Law (depending on how it’s structured).
Every thorough FMV opinion and appraisal should start with some basic assumptions and theories. This FMV QuickRead will go over the three common valuation approaches and the most appropriate assumptions and theories that should be employed to develop a thorough FMV rate for a PSA.
There are 3 basic valuation approaches appraisers use to estimate value; Income Approach, Market Approach and Cost Approach. I’ll briefly discuss each approach and the proper theories applied in the application of each approach.
Income Approach – a general way of determining an FMV indication using one or more methods that convert anticipated economic benefits into a present single amount.
Under the income approach, the appraiser estimates the net income the contracting PC would earn assuming they had their own patients, their own clinic and similar reimbursements. Basically, the appraiser estimates the providers’ fair compensation and net cash flow that could be distributed to the physicians, assuming they were not under a PSA and had a stand-alone clinic.
Market Approach – a general way of determining the FMV of the professional services by using one or more methods that compare the subject professional/clinical services to similar services in the market.
Under the market approach, the appraiser calculates the professional collections and wRVUs of the average provider under the PSA and applies traditional compensation matching techniques using compensation survey data. The most common techniques being percentile matching, compensation-per-wRVU and compensation-to-collections.
Cost Approach – a general way of determining an FMV indication by quantifying the amount of money required to replace the services within the PSA.
Under the cost approach, the appraiser assumes the hospital would directly employ the providers that are a part of the PSA and estimates the hospital’s internal costs. The basic theory is; what would be the hospital’s cost-per-wRVU if they directly employed the providers rather than contact with a physician group? By applying the aforementioned approaches, assumptions and theories an appraiser is looking at the PSA fee from both the standpoint of the hospital and the standpoint of the physicians. An average or an appropriate weighing of the indications of value from three approaches usually produces an FMV fee range.