Healthcare Management Arrangements: FMV Compensation

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Professional healthcare management arrangements have a long history, dating back to the founding of HCA and Tenet Healthcare in the 1960s. These arrangements are now widespread. Health systems and professional management companies are managing hospitals, physician practices, and joint ventures.

The term “management” can create a fair amount of confusion in the context of business management services, clinical management and co-management, and population health management.  Professional business management arrangements in healthcare are characterized as those administrative services which do not require a licensed physician.

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Some of the most common features of business management services are:

  • A regional manager or vice-president with oversight over five to 12 business units
  • A dedicated corporate accountant who prepares monthly bookkeeping and management reports for five to 10 business units
  • Ready access to corporate directors, vice-presidents, and/or analysts in the areas of
    • Managed care contracting
    • Materials and supply chain management
    • Revenue cycle services
    • Clinical quality assurance
    • Human resources
    • Business development
    • Legal counsel

While management clients may not have a need to use all of the available management services on a regular basis, the services are always available to them.

Dictation, coding, billing, and staff leasing services are usually billed separately from management services. The management services are usually billed as a fixed percentage of the revenues of the management client business. For example, a health system-affiliated management company may charge physician practices 5% of net revenue for management services and a separate 6% of net revenue for billing services.

Demo | Physician Group Practice Management Fee Data

 

The scatterplot below illustrates the fairly linear relationship between the revenues of 293 managed healthcare businesses and the annual management fees charged to those businesses in 2014.  This sample includes managed hospitals, skilled nursing facilities (SNFs), and home health agencies (HHAs).

healthcare-management-arrangement-fees

This data indicates that market management fee rates tend to decrease for larger management clients.  So a surgical hospital with $65 million in annual revenue may only be charged a 2% management fee.  By comparison, a small home health agency with $2 million in annual revenues may be charged a 7% management fee.  This trend is evident in physician practice and ambulatory service management arrangements in the chart below.

Demo | Hospital Management Fee Data

 

Skilled nursing facilities (SNFs) demonstrate some of the most consistent professional management fees observed across healthcare sub-sectors.  As evidenced in the table below, SNF management fees are tightly clustered between 5% and 6% of total annual net patient revenues.

Demo | Skilled Nursing Facility (SNF) Management Fee Data

It is important not to undercharge or overcharge management fees when parties with referral relationships are involved (e.g., hospitals and physician practices).  Underpricing management services charged to referral sources, or overpricing management services charged by referral sources, could be construed as an inducement for referrals under the Anti-Kickback Statute.

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Healthcare organizations should carefully consider the range of management fees observed in the market for managed organizations of similar sizes, as well as the scope of the management services included in the subject arrangement.

HCTadvisor has collected compensation information for over 15,000 healthcare management compensation arrangements, including hospitals, SNFs, physician practices, renal dialysis centers, home health and hospice, and other types of healthcare organizations. This data subscription is updated quarterly.

If you would like to license the healthcare management fee data set, please contact HCTadvisor at 303-800-6444.

 

 Demo | Renal Dialysis Management Fee Data