Using Survey Data to Estimate Compensation for Physician Services as a Percentage of Medicare Compensation

A widely used practice in the healthcare industry is for hospitals to contract with physicians for certain ancillary and other services and pay them a predetermined fixed rate per procedure. A primary question surrounding such arrangements is how to structure physician compensation to ensure it falls within a fair market value (FMV) range.

Benchmarking Physician Compensation

Naturally, compensation that aligns with the reimbursement provided by Medicare for similar services makes sense to be used as a baseline and can easily be calculated using the annually updated Medicare Physician Fee Schedule (MPFS) and associated Medicare Conversion Factor (MCF). However, there is overwhelming evidence from numerous studies that the reimbursement rate provided by Medicare is often lower than the rate provided by commercial insurance. Therefore, a compensation rate higher than the corresponding Medicare reimbursement rate may be appropriate for physician services.

Comparing Medicare and Commercial Reimbursement

According to a 2020 survey, conducted by RAND Health involving over 4,000 hospitals across the U.S., private insurers paid, on average, 222% of Medicare prices for hospital facility-only services, while associated professional services, such as physician fees, averaged 163% of what Medicare would have paid for the same services. A 2022 study conducted by the same organization confirmed the continued premium of commercial reimbursement over Medicare reimbursement. RAND Health’s analysis also points out that the commercial reimbursement premium over Medicare rates varies widely by state, medical specialty and hospital location. For example, some specialties, like dermatology, have commercial rates that are close to Medicare, while others, like anesthesia and emergency care, can have commercial reimbursement rates two to three times higher than Medicare rates. Additionally, hospitals in less competitive markets, or certain localities and states, can negotiate higher rates with private insurers compared to their peers in more competitive locations.

Challenges in Establishing Fair Market Value

While healthcare valuation firms are aware of the overall reimbursement premium paid by commercial insurers, there is limited market data to benchmark a FMV compensation range for specific arrangements between a hospital and a physician (or a physician group), particularly for services in specific specialties or locations. As described previously, using average premiums would not be accurate given the large disparity of reimbursement rates across specialties. So, a logical question arises: Can survey data be used to benchmark a commercial reimbursement premium over Medicare reimbursement for a specific specialty? Compensation surveys evaluate a wide range of physician production and compensation metrics across varied medical specialties, and it turns out we can use this data. Specifically, we can use the Medical Group Management Association’s (MGMA) survey data associated with revenue per relative value unit (RVU).

Leveraging MGMA Survey Data

MGMA publishes multiple surveys annually, which include compensation and production statistics for physicians, non-physician providers and staff, as well as physician practice revenue and expense information. Leveraging MGMA’s data pool, we can use Collections per RVU from the Provider Compensation survey, as well as Medical Revenue per RVU from the Cost and Revenue survey, to evaluate FMV compensation for physician services.

Medicare reimbursement for physician services is estimated by multiplying the applicable MCF for the current period by the RVUs associated with the relevant Current Procedural Terminology (CPT) codes, derived from the MPFS published by the Centers for Medicare & Medicaid Services (CMS). Although commercial reimbursement is not directly based on a specific conversion factor, it also references the same CPT code data as Medicare reimbursement. Therefore, dividing commercial reimbursement by total RVUs (i.e., calculating revenue per RVU) can generate a pro forma conversion factor that can be compared to the MCF to evaluate the difference between commercial and Medicare reimbursement for a specific medical procedure or service. This is where the MGMA data on Collections per RVU from the Provider Compensation survey and Medical Revenue per RVU from the Cost and Revenue survey can become valuable. Although this data can only provide average information per specialty (and not specific data for specific procedures within the specialty), it does reveal the variable dynamics between average reimbursement and Medicare reimbursement across different specialties.

Given that Medicare is the largest payer for medical services, one would expect the median revenue per RVU to align closely with the MCF; the 25^th percentile (likely associated with discount payers, such as Medicaid and state insurance plans) to fall below the MCF, and the 75^th and 90^th percentiles (likely associated with commercial payers) to be higher than the MCF. Our observation from evaluating MGMA’s database is that empirical data largely support this expectation.

In Summary

When hospitals compensate physicians with a fixed rate per procedure, it is important that FMV reflects expected reimbursement from all payers—not just Medicare. This approach recognizes the diversity of the payer mix and aligns physician compensation with current market conditions.

Utilizing benchmarks such as the 75^th percentile of MGMA’s revenue per RVU data can help establish a supportable premium above the Medicare rate. This methodology ensures that physician payments remain market-driven and defensible.

To learn more about establishing FMV physician compensation, please contact a CBIZ Valuation professional today.