Cost Management

Approaches to Internal Audits

With the beginning of a new year, organizations have the opportunity to turn over a new leaf and get their policies and procedures in order. Your physician contracting program may be a prime candidate for review.

An internal audit can provide valuable information on contracting practices and identify opportunities to implement change. Internal audits are periodic, methodical examinations of all contracts and the approval process. They provide an excellent way to document your organization's commitment to compliance. Even if a contract was approved when it went into effect, vague language, complex formulae, lax recordkeeping, and physician relationships can make adherence to your compliance protocols and standards challenging. A periodic, objective and disciplined review of contracts is always a good idea. MD Ranger provides subscribers with web-based tools and reports to make internal audits more efficient and effective.

Approaches to Auditing

The Bottom-up Audit
The bottom-up approach is the most traditional an audit method, entailing a review of each contract for adequacy of FMV documentation, time records, and renewal/approval process.

The MD Ranger contract summary report provides subscribers with a line-by-line report of where each of their contracts fall compared to MD Ranger benchmarks. This provides a quick way to identify higher risk contracts. Several MD Ranger subscribers use this report annually to document their internal compliance review of physician contracts.

The Top-down Audit
The top-down auditing approach looks at an organization's contracts and physician contracting compliance process as a whole to assess whether there may be underlying issues with the process, such as duplicate or excessive payments to individual physicians or groups. The process can be an effective tool for financial management and budgeting, as well as providing support for negotiations through comparisons in rates across specialties, consistencies, etc.

A few suggestions if you audit in aggregate:

  • Review how much is being spent per service (Neurology, Cardiology, etc.) across all types of agreements (administrative, call coverage, leadership, etc.).

Total Spending per Medical Service

  • Determine if the number of medical directors for each specialty/service is appropriate and within market ranges.
  • Examine the combined revenues from net professional collections plus stipends for hospital-based services.
  • Review specialties where all administrative or coverage contracts are staffed by a single physician or one practice to be sure payments do not exceed market rates for actual time committed, or if the physician cannot be reasonably expected to dedicate the minimum number of hours while maintaining their clinical practice load.
  • Multi-campus deals need particular documentation for time required.Documentation of competitive bidding and a Request For Proposal process in contentious/excessive situations.

How Often Should Audits Occur?

Your organization may already have a policy for conducting periodic internal audits, thus the initial step is to document that the process is being followed. If there is no policy, investigate how other departments and business functions are audited at your organization. Depending on your facility and how your physician agreement terms are organized, audits can be annual or biennial. Whether routine or ad hoc, an internal audit is a valuable process for documenting a strong compliance process and identifying potential risks to your organization.

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This Year, Make A Resolution to Audit

With the beginning of a new year, organizations have the opportunity to turn over a new leaf and get their policies and procedures in order. Your physician contracting program may be a prime candidate for review.

An internal audit can provide valuable information on contracting practices and identify opportunities to implement change. Internal audits are periodic, methodical examinations of all contracts and the approval process. They provide an excellent way to document your organization's commitment to compliance. Even if a contract was approved when it went into effect, vague language, complex formulae, lax recordkeeping, and physician relationships can make adherence to your compliance protocols and standards challenging. A periodic, objective and disciplined review of contracts is always a good idea. MD Ranger provides subscribers with web-based tools and reports to make internal audits more efficient and effective.

Goals of an Internal Audit

An internal audit of physician contract payment rates will:

Provide oversight of organization-wide contracting practices. Conducting an internal audit can identify differences in contracting practices and rates across specialties or facilities. It is sometimes difficult to monitor the significance of differences with a large number of contracts that are negotiated by multiple parties; auditing may identify some non-compliant practices within an organization. The typical MD Ranger subscriber has 33 contracts that cost $4.4 million annually for non-employed physician services. MD Ranger provides online reports and tools that make a comprehensive review of key payment rates and hours of service easy to benchmark.Uncover potentially non-compliant agreements. An internal audit can help identify contracts which have payment rates above typical market benchmarks or reveal contracts that need better supporting documentation. An audit can bring these contracts or practices to the attention of your legal or compliance team for further review or documentation at renewal. MD Ranger's tools allow sorting of contracts by where they fall on the market benchmarks, making identification of problematic contracts simple and fast.

MD Ranger Benchmark Comparison

These numbers do not reflect real data from the MD Ranger database.

  • Ensure all agreements have appropriate documentation. Most organizations have at least a few unusual contracts that need additional documentation of FMV or a few that didn't go through the proscribed approval or documentation process. The audit will identify the need to improve documentation to show the source of FMV determination when the contract was negotiated and the timing of extensions and amendments. An audit should include a review of time records from physicians that document actual time spent.
  • Prevent duplicative services. An audit may reveal medical directorship positions than can be justified, either because multiple people provide substantially similar services or a contract calls for more hours than meets the FMV. Investigate how many directors are commercially reasonable for a service, or if some directors may have a more specific title that is not being adequately described. Unsure how many medical directors make sense per specialty? Use MD Ranger's Number of Administrative Positions per Service table for a gut check.
  • Check that approval process is working. Review the records for contract approvals to ensure that all contracts are processed appropriately.
  • Verify all contracts are current. Stark requires payment rates to be set in advance; hence it is important that contract renewals are processed prior to expiration. Be sure extensions are in place if contract negotiations are going to extend beyond the expiration date.

Check back next week for approaches to auditing.

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Physician Contracting Strategies for Rural Hospitals

Rural hospitals have unique challenges in many cases. Physician contracting is no exception.

It may be more difficult to recruit physicians to live and work in rural areas and it may seem like your only bargaining chip is to pay the physician whatever they ask for. Not is paying the physician whatever they ask for a budgeting disaster but, it could also lead to Stark law violations.

Ensure that the payments you are negotiating are compliant by using market data matched to the service with a large sample size. Be sure to document FMV of the payment, otherwise you may be at risk for Stark law or Anti Kickback Statute violations.

One alternative to paying a per diem for call coverage at facilities with a low volume in the emergency room where the burden of taking call is less would be to pay a per episode rate. This means that you only have to pay a physician when he or she is called in to the emergency room. Per episode payments may also be combined into a hybrid payment with a lower per diem amount.

If you are trying to navigate physician contracts at a rural facility and have questions, we are happy to help. Email the MD Ranger team at This email address is being protected from spambots. You need JavaScript enabled to view it..

An MD Ranger Case Study: Neurosurgery Call Coverage

We recently had a subscriber have an interesting commercial reasonableness challenge.  A community hospital that is a Level II trauma center was paying for three-deep neurosurgery call coverage. Three deep coverage means paying for two backup physicians to be on-call in addition to the restricted on-call physician.

According to the ACS, two-deep neurosurgery coverage is required for the high volume of trauma that this facility experiences, being a Level II.  However, the ACS also suggests that the simultaneous need for three physicians on-call is negligible because of the low likelihood that an additional surgeon is needed during the coverage period.

A special study conducted using MD Ranger data and a special study found that no other Level II, let alone Level I trauma center in its database had three-deep neurosurgery call coverage.  After these findings, the hospital discontinued the third slot for neurosurgery call coverage.

This case study shows the importance of not only determining if rates are fair market value, but first determining if it is necessary to pay for the service in the first place.


Multi-Campus Physician Call and Administrative Contracts: Impact on Payment Rates and Time Requirements

MD Ranger data strongly suggests the benefits of multi-facility physician contracts as an important strategy for controlling costs. Although payments to physicians whose duties span multiple facilities are higher than single facility contracts, they are less costly than separate, individual facility arrangements when the duties are assigned to a single physician.

The frequency of multi-campus arrangements with a single physician or medical group appears to be growing. In 2014, approximately 8% of multi-facility call coverage and 10% multi-facility administrative contracts among MD Ranger subscriber contracts covered more than one facility

When two facilities in the same health system are physically nearby and when the emergency department volume is such that the call burden for one physician is not overwhelming, it is possible to have one physician covering both facilities. After analyzing the MD Ranger database, we have found that adding a second campus to one coverage position increases the cost of a single agreement by 26%.

MD Ranger analysis found that although there is no significant difference in the hourly rates of pay for physicians with multi-facility administrative/medical directorship positions, there is a significant difference in the number of hours required for multi-campus arrangements and in the annual payments. These findings apply to hospitals with more than one campus, whether as a distinct licensed facility or a single consolidated license with emergency departments on different campuses. We have found that, on average, a single physician contract for the same services across two campuses costs 37% more than a single campus position. Each additional campus commands an average 10.7% increase in the number of hours up to five or more campuses.


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Physicians are Paid a Premium at Large Facilities

Last year we wrote about how physicians are paid a premium at trauma centers.  While this holds true in 2014, another hospital characteristic that has consistently influenced physician payment rates is hospital size.

Larger hospitals have a higher frequency of call based on their larger volume.  For every 100 bed increase in ADC, a physician receives 25% more for call coverage and 14% more for medical direction.

The graph below shows the difference between facilities with a general acute ADC of under 125 versus those facilities with an ADC of 125 beds and over for general surgery call coverage based on MD Ranger’s 2014 reports.


MD Ranger reports benchmarks for hospital characteristics such as trauma/non-trauma, urban/rural, number of general acute care beds, DSH percentage, and medicare days.  If you want more info on how these hospital characteristics affect payment rates, email us at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Most Costly Hospital-Based Services

Hospital-based services can be the most intricate of contracts.  Since 2010, MD Ranger has been collecting data on these arrangements.  These agreements often contain features other than just a payment rate; we collect information on incentives, compensation methods/payment structure, unsponsored care payments, and sites of services included in the contract.

These hospital-based contracts can add up to be a significant portion of a hospital’s physician expenditures.  Here are the top three highest paid based on the mean total annual payment.


Do you need help determining what fair market value for your hospital-based contracts is?  Call us today, 650-692-8873.

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Aggregate Facility Medical Director Payments

While determining the fair market value of individual contacts is important, it is also a great idea to take a step back and look at the bigger picture.  By looking at your facility’s total physician expenditure or the expenditure by type of service (i.e. call coverage, medical direction, hospital-based services) and comparing to your peers can allow you to see whether you are in the same ballpark range.  These aggregate numbers can help highlight if you have too many medical directors or if you are consistently paying on the high end.

The graph below shows the percentiles for Total Annual Payments for Medical Direction.  It seems that hospitals, especially at the higher end, are paying less in aggregate for medical directors at their facilities than in 2013


If you want access to more of these total facility benchmarks, email This email address is being protected from spambots. You need JavaScript enabled to view it..

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Physician Contracts a Growing Portion of Total Hospital Expenditure

Hospital executives have many concerns on their mind.  We understand that it can be tough to prioritize which concerns are the most important.  While we understand that physician contracting is not easy to get a handle on, it commands an increasing portion of hospitals’ total expenditure.  According to analysis done on OSHPD data, total physician expenditures have grown from 2.6% of total hospital expenditure in 2002 to 3.6% in 2012.


Smaller hospitals and trauma centers pay an even bigger slice of the total expenditure pie.  In 2012, level 4 trauma centers paid whopping 7.4% of their total expenditure on physician expenditures and hospitals with less than 25 beds paid a staggering 11.4% of their total expenditure.


Paying close attention to physician expenditure is important even if you aren’t a large hospital because while you may being paying less in terms the dollar amount, you may be paying a much higher percentage of your spending.

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MD Ranger’s 2014 Reports: Total Hospital Spending

Because of MD Ranger’s unique holistic approach to collecting a hospital’s contract data, we can report the total amount that hospitals are spending on physician compensation contracts.  While we recognize that every hospital is unique, these benchmarks allow you to identify if your facility is spending in the same ballpark as other similar hospitals.

There was only slight decrease from 2013 to 2014 in terms of the median payments across all hospitals for call coverage.  In 2013 call coverage spending represented 66.7% of spending on contracted physician spending whereas in 2014 it represented 63.3%.  Even with this decrease, we can agree that $2.4 million for call coverage contracts is no small number.

The percentage of spending on hospital-based contracts increased slightly from 11.4% in 2013 to 14.6% in 2014 while direction and administration contracts held steady at about 11%.


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Market Data or FMV Opinion? A Handy Flowchart

Click on the image below to see our Market Data or FMV Opinion flowchart.

flowchart apr2014

When you’re negotiating or renegotiating a physician contract, one of the first things to consider is the payment rate.  What’s the best way to figure out how much to pay for the particular service?

Though hiring a consultant to write a fair market value opinion is an option, it might not necessary. Using high quality market data, like MD Ranger, could be all you need to reach a fair, appropriate rate.

The flowchart above outlines how you can think about using market data for setting rates for a particular service.

Questions?  Reach out and let us know: This email address is being protected from spambots. You need JavaScript enabled to view it.


Must-Read Tips for Physician Contract Negotiations

Are you preparing for what may be a difficult negotiation with a medical group or physician for either a new service or a renewal of an existing agreement? Here are some quick tips to help things move along smoothly:


1.      Establish a negotiating objective.  Know the market range that is applicable to the service of interest.  Consider the entire market range, in particular the range between the 25th and 75th percentile.  Remember: “Not everyone can get paid at the 75th percentile.”  Enter the negotiation with a quantitative negotiating objective in mind.  The objective should be consistent with fair market value, as well as your hospital’s overall financial resources.  Data are now available to allow a hospital to see how the cost of each contract fits into its overall physician costs, which are a part of MD Ranger’s Total Hospital Spending Benchmark Reports.

2.      Take care to avoid relying on market data alone when the situation is complex.  The metrics of the service (such as intensity of workload, payer mix and professional revenue, etc.) may distinguish the contract in question from the contracts reflected in the market data.  If that’s the case, unbeknownst to you, could result in an “apples and oranges” comparison.  This could cause compliance risks—particularly if your contract has significantly less intense workload than the contracts in the market benchmarks or if your contract results in significantly more professional revenue than are in the contracts in the market benchmarks.  Not even the very best market data survey can cover all situations.  Care and experience are required to avoid this risk and to know when to undertake a different approach  with the help of a valuation consultant or an internal expert.

3.   Demonstrate and document that alternatives have been considered.  Even if you would much prefer to wrap up the negotiation quickly, advise your counterparty that you need to at least consider alternatives.  In only a fraction of agreements is there a RFP or other competitive process.  Remember that the definition of fair market value includes the provision that “the price …between a willing buyer and a willing seller, neither being under a compulsion to buy or sell…”[1]  A good fair market value evaluation will simulate what would result from an actual competitive process.

4.      Consider what scope of service you want to contract for, not just how much to pay.  Often, hospitals assume that the scope of service is either the same scope as in the expiring agreement or that it is the scope that the physician or group tells you should be provided.  In the case of a medical director position, for example, this could mean that the number of hours of service is not carefully assessed and the focus of the negotiations is on the hourly rate.  However, there are now market data available on the number of hour per year for most medical director positions.  This can provide you with objective basis to make sure the number of hours is unusually high—without a particular situation-specific exceptions.

5.      Document your process for assuring compliance.  Documenting compliance is essential for your compliance program, as our compliance materials (link to compliance page) at MD Ranger echo.  However, documentation of paying a fair market value rate can also come handy during negotiations.  By demonstrating to physicians that you take compliance very seriously and that these efforts are not only protecting your hospital but also protecting them, you will be well on your way to earning physicians’ respect (if you haven’t already).

6.      If the agreement grants exclusivity to the group, consider and estimate the economic value such a provision.  It is well established that exclusivity—effectively a limited monopoly—has economic value.  Not only is it a core principle of economics, federal regulators cite it specifically hospital physician contracting.  There are two methods to estimate the value of exclusivity.  One is to compare compensation between exclusive and non-exclusive agreements.  Data now exist to measure this, available through MD Ranger.   The second is to have a valuation expert measure cost reductions and economies of scale in a cost model of the practice of interest.

Need help before a tough negotiation?  Email me at This email address is being protected from spambots. You need JavaScript enabled to view it., and I can help.

[1] Estate Tax Reg. 20.2031.1-1(b); Revenue Ruling 59-60, 1959-1, C.B. 237


Knowing When to Pay Physicians

Before compensating a physician for taking call or serving in a leadership position, it’s important to ask if it’s reasonable to pay in the first place. Though more and more hospitals are compensating doctors for these types of services, it’s still not a given that coverage will be compensated. It’s common for hospital executives to scratch their heads when approached by a physician asking for additional compensation, especially since this information is not widely available.

MD Ranger addresses this challenge by analyzing contracts not in our database. Though at first it might seem counterintuitive, the idea is straightforward: because we collect data on our hospital partners’ physician contracts holistically, we can determine if there are services the hospital provides that do not have a contract in place (or have a contract that doesn’t compensate the physician).  From this, we calculate what percentage of our subscribers pay for a given service in the first place.

Here are the five most common positions that hospitals report paying physicians to perform:

  1. General Surgery
  2. Orthopedic Surgery
  3. Neurology
  4. Neurosurgery
  5. Otolaryngology

Curious about what percentage of our subscribers pay for these above services? Email me at This email address is being protected from spambots. You need JavaScript enabled to view it. and I’ll send you more info.


Tis the Season: Paying Physicians Holiday Coverage Rates

Does your organization pay physicians above and beyond to take call over the holidays?

According to our database, some – but not very many – do.  Out of over 1,400 current call arrangements, only 4.4% have a holiday differential that pays physicians a different rate for for holidays than for other days of the week.   In fact, the per diem for a holiday averaged 43% more than the non-holiday per diem.

These contracts represent contracts with more than five times that many doctors since MD Ranger only counts one contract rate per facility per benchmark.

In terms of total annual payments, call contracts with a holiday per diem pay out a total of 10.6% more than contracts that do not include a holiday per diem.  In other words:  holiday per diems do have an impact on your overall physician contracting costs.  Adding a holiday pay component can sometimes be a good strategy for minimizing a contract increase rather than increasing payment every day of the year.

Need help with 2014 coverage contracts?  Email me at This email address is being protected from spambots. You need JavaScript enabled to view it. and tell me how we can assist you.

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What’s The Best Benchmark To Use When Using Market Data For Physician Contracts?

When using MD Ranger data, you must decide which range of the market data is most appropriate for setting your physician contracting rates. While taking into account compliance, physician requirements, and the realities of your market, things quickly get complicated.

In general, the 75th percentile is a decent guideline for compliance and FMV. If your contract falls at or beneath this benchmark, your contract is most likely within fair market value. If your contract rates fall above the 75th percentile, you’ll need to properly document the reasons for paying this particular rate, just in case of a dispute or audit.

Establishing an overal policy that includes a particular benchmark is a good choice for many MD Ranger subscribers. Whether it’s capping physician contracts at the 50th percentile to control costs, or setting the limit at the 75th because you are in a competitive market, many options can be functional and compliant.


FMV Benchmark Range: What Percentile is Best?

Our subscribers frequently ask us where the majority of their physician contracts should fall within the market ranges. When setting standards and procedures, which rates are compliant with Stark and which ones aren’t?

While Stark doesn’t explicitly outline what market range is off limits, it is an industry-wide standard to avoid entering into a contract above the 75th percentile. Generally speaking, if you are compensating a physician at or below that level, you have little cause for concern in justifying the rates at which you pay her. Allow that payment to creep over the 75th, and you may have cause for concern if you haven’t properly justified and documented your reasons for compensating more.

However, consider the situation of your hospital. While all health care providers in the US have important things in common, each and every facility is unique in some way.  Is there are aspect of your organization, community, or region that might affect physician recruitment or compensation?  Are you attempting to reduce costs, therefore setting compensation no higher than the 50th percentile?

We’re curious: what is your standard for contracts?


Costliest Hospital-Based Services

Hospitals typically pay physicians more for hospital based services than any other contracted physician payments.  Because the contract values are so high, ensuring fair market value becomes very important.

According to our database from over 300 facilities across the US, here are the top five costliest hospital based services:


Providing physician-level inpatient care takes the cake, where the median hospital payment is over one million dollars annually. A close second is trauma surgery, which is very costly given the call coverage stipends needed in these agreements.

Let’s not forgot anesthesia, which is a significant percentage of physician payments.

Questions about how to benchmark your hospital-based agreements.  Email me at This email address is being protected from spambots. You need JavaScript enabled to view it..


Largest Hospital-Based Services Contracts

Since 2010, MD Ranger has collected hard-to-find market data on hospital-based service contracts like anesthesiology, pathology, radiology, etc.  Our data collection method is unique because we get our data directly from hospitals.

We collect data on ten different hospital services.  In addition to gathering payment rates, we also collect information on incentives, compensation methods/payment structure, unsponsored payments, and sites of service included in contract.

Here are median pay rates for the highest paid hospital-based services we collect:



Physicians are Paid a Premium at Trauma Centers

If you’re a trauma center executive, plan on paying contracted physicians more than your non-trauma peers.

According to MD Ranger data, physician contracts at trauma centers are on average at a 23% premium for services.

Why is this the case?  Trauma center physician contract values are higher in both coverage and directorship agreements because of both frequency of coverage needed, as well as the severity of cases received.  Oftentimes, trauma centers have poor payer mix, which impacts physician contracting payments.

The top five services that are paid significantly more at trauma centers are as follows, where the differential is in orange:

9 16Blog-Graph

The amount of medical directors is significantly different, too.  On average, there are 65% more medical directorships and administrative positions at Trauma Centers compared to non-Trauma facilities.


Considering Opportunity Cost for Physician Compensation

When it comes to paying physicians for non-clinical work, it is (too) easy to make mistakes that could cost your organization and could be in violation of Stark and Anti-Kickback laws.

Should you pay highly-compensated specialty physicians for non-clinical positions more than you pay a PCP or a pediatrician?  While it could be argued that their time is “worth more”, it is also true that the administrative tasks you are paying them to do shouldn’t necessarily take their clinical salaries into account.  How should your organization respond?

Considering opportunity cost is helpful.  Opportunity cost assumes that there are other alternatives to the activity you are asking the physician to perform.  It’s easy to see that a neurosurgeon might not want to be a medical director if she could use her limited time to practice medicine–and get paid more for it!  Furthermore, because medical directorships, chiefs of staff, and other administrative positions often require that a certain specialty of physician be in the role, physicians of higher paying specialties have leverage.

So, what does the government say about this challenge?  Not surprisingly, the Office of the Inspector General (OIG) is vague.  While it doesn’t forbid compensating higher-paid physicians more in non-clinical roles, it does warn that convoluted compensation structures could mask kickback payments (from Advisory Opinion No. 07-10).

Ultimately, even if you do not base payments on opportunity cost you should at least consider the physician’s perspective.  Most always, physicians who have been asked to play an administrative role have considered how else they could be spending their time, not to mention, how much more they could get paid.  Depending on your market, this could be highly significant to establishing a fair rate…or it might not.

Experts at MD Ranger recommend that every organization develop policy from their overall goals and clinical service needs.  Consistency, data, and documentation should be the backbone of your contracting process.  Curious to learn more about medical directorship compensation?  Check out our webinar on September 19th at 10:30 am PDT.


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