Is it possible that 10 percent (or 25 percent) of all physicians in your field are illegally practicing?

Absolutely not! Who would ever believe that?

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

For nearly 40 years, I have been assessing physician employment contracts, and I’ve recently observed a significant rise in agreements that impose a ceiling on physician salaries. A concerning number of hospital employment contracts stipulate that the physician’s salary, along with any incentive or productivity bonuses, must not surpass a certain percentile of a compensation benchmark (e.g., MGMA) under any circumstances.

This top limit frequently corresponds to the 90th percentile, but I have encountered caps as low as the 75th percentile. When inquired about the rationale behind this cap, hospitals typically assert it is to prevent “fraud and abuse.” The reasoning appears to be that if a physician’s earnings exceed the specified percentile, regulators may perceive that there is compensation for referrals embedded within the payment, hence it cannot be regarded as fair market value remuneration.

This reasoning is absurd. Anyone with a basic understanding of math knows that 10 percent of all physicians earn above the 90th percentile, and 25 percent earn above the 75th percentile. Consequently, the hospitals’ position must imply that either 10 percent or 25 percent (depending on the cap in question) of the physicians in your specialty are breaching fraud and abuse regulations.

Numerous factors could justify a physician being compensated above the 90th percentile. The most apparent reason is that the physician ranks in the top 10 percent in terms of productivity. There’s a physician in your specialty who is the most accomplished in productivity nationwide. I believe this industrious physician deserves to earn more than the 75th or 90th percentile of compensation.

Additionally, there are various legitimate and entirely lawful reasons a physician outside the top decile or quartile of productivity might still earn above these thresholds. For instance, certain locations simply aren’t appealing to physicians due to weather conditions, lack of amenities, or other variables. Attracting physicians to such areas necessitates that the employer offers a compelling incentive to relocate rather than opting for more pleasant or culturally rich locales. Increased compensation is often employed to persuade physicians to move to places that others might shun.

Not every hospital imposes a strict cap on compensation. Occasionally, I observe a more sensible approach in which an employment agreement allows the hospital to “consider” conducting a fair market value analysis if the physician’s compensation would exceed the pertinent benchmark. Naturally, I would seek to modify any clause that suggests the hospital “may” conduct an analysis, or any agreement lacking an obligatory analysis clause, to specify that the hospital must perform an analysis if the benchmark is surpassed.

When an employment agreement necessitates a compensation analysis if the physician’s salary is set to go beyond the “forbidden” percentile, it’s crucial to clarify how that analysis will be conducted and by whom. Nearly all employment contracts I have reviewed that include a compensation review provide for the hospital to carry out this review. I’m certain that if we attempted to have the hospital agree that the physician would conduct the review of their own compensation, they would find it laughable, and rightly so. One party in a transaction should not dictate the price.

When this seemingly evident point is brought to the hospital’s attention, I’ve been informed that they have “experts” available in-house. One hospital even claimed to have “numerous certified coders and CPAs” on staff, asserting their qualifications to evaluate physician compensation. Even if we assume that coding and tax expertise is all that’s essential for assessing physician pay (a rather questionable claim), these individuals are clearly employed by the hospital, making unbiased evaluations highly unlikely.

I don’t dispute the notion that physician compensation should be scrutinized if it appears significantly higher than that of their counterparts. However, if a review of physician compensation is undertaken, it should be performed by a nationally recognized valuation firm that specializes in physician pay. The findings of this analysis, along with the underlying statistics, should be documented and shared with the physician.

Furthermore, the physician ought to have the right to engage their own valuation expert, with comparable credentials and experience, to evaluate the data and offer an opinion on fair market value. The hospital should assist in providing the physician’s evaluator with the necessary data to