In Prpa v. Wheaton Franciscan Medical Group, Inc. (No. 11-3013), the Wisconsin Court of Appeals (District II) recently held that a non-profit medical group must pay a physician his contracted salary even though that salary may not have been consistent with fair market value. The medical group developed a new physician compensation plan (the “Plan”) which it implemented on January 1, 2008. The Plan used one of two compensation models: Net Collections or wRVU. The medical group hired a consultant to determine fair market value of the models. The medical group and physician eventually agreed to the Net Collections model. However, the medical group eventually found that the charity-care data it mistakenly supplied to the consultant skewed the fair market value calculation. The consultant withdrew its opinion, and the medical group had to change its compensation model.

On July 28, 2008, the medical group informed physician that it would be compensating him based on the wRVU model, as opposed to the Net Collections model, retroactively to January 1, 2008.  Also on July 28, 2008, the medical group presented the physician with a novation, which required him to assent to the wRVU model.

The Court of Appeals held that the novation was valid and, therefore, the physician was bound by the wRVU model starting on July 28, 2008. However, the Court also held that “the Plan language does not support retroactively adjusting [the physician’s] salary. He was working pursuant to an agreed-upon compensation model when [the medical group’s] error occasioned the review and modification. There must be a mutual mistake of fact to avoid one’s contractual obligations.” Based on the Court’s decision, the medical group was obligated to pay pursuant to the Net Collections model, even though it does not appear that any fair market value opinion supported the model.

Importantly, the Plan permitted periodic review of and, from time to time, revision to the Plan. However, the Court still held that the medical group was obligated to pay the physician under the Net Collections model even with this review and revision language.

As a result of this decision, non-profit medical groups and other non-profit entities employing physicians should be sure to review their compensation plans to determine if they have the necessary contractual flexibility to retroactively adjust physician salaries due to issues with compliance and fair market value determinations.

A link to the opinion can be found here.