Valuing the Physician Hour - Converting Annual Compensation Data to Hourly Rates

There are many situations where it makes sense to pay physicians on an hourly basis for services provided. Hourly compensation arrangements work well when a relatively short or definitive amount of time is being compensated. They are also suitable for arrangements where physician time, rather than physician output or production, is the valuable resource.

Typical Hourly Compensation Arrangements

Medical Directorships

Medical directorships lend themselves well to hourly compensation arrangements. Medical director duties are generally part-time. Physicians in these roles are typically required to track their time on an hourly basis, and the number of hours compensated under medical director agreements is routinely capped.

Shift Work

Physicians who work fixed-hour shifts are often paid on an hourly basis. For example, emergency medicine physicians typically do not work a standard 40-hour work week, and they generally do not receive paid time off in their contracted arrangements. Instead, they typically work a series of shifts that are 8 to 12 hours long, then take several days off. Employers typically compensate these physicians only for the actual work hours they perform.

Coverage Arrangements

Hourly rates are ordinarily paid when physicians are contracted to provide temporary coverage for a hospital unit or medical clinic. For example, a medical group may hire a locum tenens physician to fill in for a vacationing physician. The medical group bills and collects for the services provided to patients by the locum tenens physician. The locum is paid an hourly rate for the time spent seeing patients and covering the practice.

Guidance for Converting Annual Compensation to Hourly Rates

In 2004, CMS published Phase II of the federal physician self-referral prohibition (the Stark Law). Phase II created a "safe harbor" provision in the definition of "fair market value" at §411.351 for hourly payments to physicians for their personal services. The safe harbor consisted of two methodologies for calculating hourly rates that would be deemed "fair market value" for purposes of section 1877 of the Act.

One of the methodologies called for averaging the 50th percentile national compensation level for physicians in the same specialty, using at least four of six specified salary surveys, and dividing the result by 2,000 hours to establish an hourly rate. If the relevant physician specialty did not appear in one of the recognized surveys, the parties were required to use the survey's reported compensation for general practice in order to be within the safe harbor based on this method.

The safe harbor methodology identified 2,000 hours as the appropriate denominator for determining an hourly rate. The safe harbor was repealed in 2007 when the Phase III regulations were issued. However, the approach and the 2,000-hour standard are still commonly used by many participants in the healthcare industry.

Best Practices and Important Considerations to Make When Calculating Hourly Rates

Given the impact the annual hours assumption has on a calculated hourly rate, the following practices are prudent when converting annual compensation to hourly equivalents.

1. Assess the numerator to ensure that physicians responding to the survey are providing services comparable to those being valued. Not all services have the same value, even when they are performed by the same physician. The same hourly rate may be used to compensate physicians for both administrative and clinical work only when the rate paid for clinical work is fair market value for the clinical work performed, and the rate paid for administrative work is fair market value for the administrative work performed. CMS has noted in Phase III comments that the fair market value of administrative services may differ from the fair market value of clinical services.

   
   

2. Ensure that the annual physician compensation data reflects compensation for full-time equivalents. If the data does not reflect full-time work, adjust the denominator appropriately.

   
   

3. Consider whether the position being evaluated offers compensated holiday, vacation, and/or sick days (i.e., PTO). If physicians are paid only for actual hours worked, consider a denominator that reflects the actual work hours for a full-time physician.

   
   

4. Research how many hours physicians in the specialty typically work in a year. Determine if the denominator needs to reflect lower or higher-than-standard work hours.

   
   

5. Check the calculated results against data from available sources reporting rates on an hourly basis. These most commonly include surveys for medical director/administrative services. There are also surveys for locum physicians that work on a fee-for-time basis (see our 2025 Cost of Physician Staffing Services Report), although care must be taken to appropriately interpret the services and resources being purchased in these arrangements.

   
   

6. There may not be a clearly best divisor. In the absence of reliable, specialty-specific data, using a 2,000-hour denominator, consistent with the rescinded Stark safe harbor, may be an appraiser's best option when converting annual physician compensation data to an hourly rate. With all matters involving physician compensation, however, the appropriate FMV conclusion will be dependent on the specific facts and circumstances of the individual arrangement at hand.

BFMV is experienced in reviewing and designing fair market value and commercially reasonable hourly healthcare arrangements that meet the volume or value standard. Contact us for hourly consulting or FMV opinion engagements.

This article has been updated from a previous publication.