Skip to main content

Fair Market Value for Anesthesia Practices

June 17, 2024

The notion of a fair market value (FMV) analysis is very common in real estate. The intent is to determine the price that a reasonable buyer should pay a qualified seller for a property. What does the concept have to do with anesthesia practices? The fact is that CMS guidelines require an FMV to ensure that the facility is paying the correct amount for anesthesia services. In other words, the FMV represents the cost of providing the services defined in the contract minus actual collections. FMVs need to be prepared by independent consultants who are experienced in such calculations. This is essentially a legal requirement to ensure there is no conflict of interest. In theory, the FMV is an independent and objective valuation of a practice and should prove to be a solid basis for the determination of a subsidy.

The reality is that, given all the variables involved, the calculation of FMVs is less than a perfect science. Every practice involved in a renegotiation of its contract with the facility will be asked to provide input for the FMV and should pay special attention to ensure that the data provided to the consultant supports its specific objectives.

There are five categories of information that must be considered and, as is always the case, the process is very dependent on the experience and judgement of the consultant. The practice will receive a request for information which will require careful preparation to ensure that the FMV report is complete and reasonable. The curious thing is that it is very rare for the practice to actually be given a copy of the final report submitted to administration.

Coverage Requirements

Every analysis of an anesthesia practice must begin with a clear understanding of the facility requirements. Typically, these are defined in the contract as coverage and call. Questions include the following: how many anesthetizing locations must be covered each day, what are the expectations with regard to how long each location will be covered per day, and what are the call requirements (beeper vs in house) and call back intensity? Another key issue here is how consistently the facility needs this coverage and if there are days when additional locations are required. One of the specific issues the consultant must address is O.R. utilization. Many facilities have been adding new lines of business that may be experiencing an expected ramp up. In other words, they may be underutilized for a while. Furthermore, consideration must be made for PTO and post call day off to fully account for coverage requirements. Essentially, the consultant must determine the total hours of coverage needed per week. It is particularly useful for the practice to prepare regular utilization studies and to share these with administration.

Of particular importance to the end result is the concept of scope creep. The problem with most contracts is that they define requirements at one point in time. The reality is that such requirements often evolve over time. Knowing how to plan for this is often a particularly frustrating challenge.

Staffing

There are three common models for staffing an anesthesia practice: (a) physician only, (b) physician and CRNA medically directed, and (c) physician and CRNA non-medically directed. One might assume that the objective is to use the most cost-effective model, but this is not usually the case. Many factors determine the staffing model, including history and provider preference.

Interestingly enough, the prevailing model east of the Mississippi is medical direction while the prevailing model west of the Mississippi has been physician only. The consultant’s challenge is to perform an analysis specific to the staffing model of the practice. This can be a particularly tricky part of the analysis. Ultimately, the consultant must evaluate the specific productivity of the practice and compare it to other comparable practices. Although there is a common perception that the best model is one that leverages less expensive anesthetists, this is not always the case given medical direction requirements and call intensity.

Compensation and Benefits

Perhaps the most challenging part of the evaluation of the cost of providing necessary services is determining the appropriate compensation for the various members of the team. Ideally, the calculation should be based on the average of three resources. The MGMA compensation data is typically one of these. The problem is that MGMA data is at least a year old, and the market is constantly evolving. One should also consider that the specific location of the practice can dramatically impact compensation requirements.

Benefit packages are also a vital component of compensation packages, the overall value of the benefit package [cost share for medical/life/disability insurance, employer retirement contribution, CME allocation and PTO (paid time off) allowance] all factor into the value of a package. In the current market conditions, it is not uncommon for consideration to be made for sign on/retention bonuses, as well. The reality is that the appropriate compensation is that which is necessary to recruit and retain new providers.

Provider attrition can be the most difficult piece of this puzzle to evaluate. Losing personnel is often a key factor in discussions with administration. The most common challenge for an anesthesia practice is to ensure that it is generating sufficient revenue to recruit—but also retain—an appropriate team of qualified providers. Many practices keep administration informed as to the satisfaction of its providers and details of provider attrition.

Revenue Potential

There used to be a time when actual fee-for-service collections provided sufficient revenue to cover the cost of providing the required services, but this is almost never the case in today’s market. The consultant’s challenge, then, is to determine when the actual collections are appropriate to the volume of units billed and the payer mix. Increasingly, consultants will perform an evaluation of the billing and collections process to confirm that collections protocols are reasonable and appropriate.

Since the majority of anesthesia services are paid based on units billed, key considerations must involve the volume of billed units, the payer mix and the impact of patients with no insurance. Typically, anesthesia charges are broken down into three categories: (a) time-based surgical anesthesia charges, (b) obstetric anesthesia charges, and (c) non-time-based services, such as those for invasive monitoring, nerve blocks for acute pain management and visit services. The practice is well advised to monitor performance on a regular basis to ensure that the data provided for the FMV does not raise any red flags.

Unique Requirements

Every practice has its unique characteristics. The impact of obstetrics on an anesthesia group can be particularly significant because of its unique payer mix and specific coverage requirements. Cardiac care is often a factor because of its payer mix and specific provider qualification requirements. The dramatic increase in endoscopy cases has also become an important factor. Perhaps the most important issue, however, is the migration of cases from traditional inpatient venues to outpatient facilities. Practices must ensure that they are only providing data related to the facility for which the contract is being negotiated.

In other words, once the consultant has completed the basic analysis, he or she must review the specific and unique factors related to location, payer mix, scope of services and culture of the medical community. Provider satisfaction and attrition must be carefully considered. It is this context that the practice must ensure it has consistently communicated with administration.

The Ultimate Black Box

Most practices view the independent calculation of the FMV as a black box. While there is an element of truth to this, a good working relationship with administration and a careful review of the factors identified above should ensure a positive outcome.

Get the Latest RCM News Delivered

Receive practical tips on medical billing and breaking news on RCM in your inbox.

Get in Touch