By: Jackie Bain
Federal fraud and abuse laws often require that arrangements between health care providers are “fair market value” and “commercially reasonable.” And while these terms look like legalese and are easy to overlook, in fact, they are important. For example, the Federal Stark law requires strict compliance with its terms. A physician may enter into a prohibited arrangement with the intention that it falls within an exception to the law. If, however, the arrangement is not fair market value, the physician’s arrangement would violate the law, subject the physician to fines and risk the physician’s ability to participate in Medicare.
Fair market value is defined in the Federal Stark Law as the value in an arm’s length transaction, consistent with compensation that may pass between two or more well-informed parties as the result of bona fide bargaining and who are not in a position to generate business for each other. Payments that exceed fair market value are viewed as payments for referrals. Fair market value compensation is required in many arrangements where involved parties are in a position to refer patients to each other, including, but not limited to, leases for space and equipment, employment arrangements, personal services arrangements and call coverage arrangements.
Providers may note that, in many cases, compensation passing between two parties must not only be fair market value, but also be commercially reasonable. It is important to make a distinction between fair market value and commercially reasonable compensation. For an arrangement to be commercially reasonable, it must be considered both sensible and prudent even if the parties are not in a position to refer patients to each other. Regulators have stated that an arrangement is commercially reasonable if it would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician of similar scope and specialty. Thus, it is possible for an arrangement to be commercially reasonable but not fair market value, and it is possible for an arrangement to be fair market value and commercially unreasonable.
How can a health care provider determine whether a proposed arrangement is fair market value and/or commercially reasonable? Engage an independent appraiser or valuation consultant who is skilled and experienced in the type of transaction you are proposing and request a written fair market value study. The final study should be a document on which a health care provider could rely if the compensation is called into question by federal or state regulators.
Appraisers are not attorneys, and their reputation in the industry is of paramount importance in the event of a regulatory investigation. The appraiser interacts with the parties regarding the services to be provided and delivers as part of the study a compensation range for those services. The final study should include a detailed description of the arrangement and the parties, and a thorough analysis leading to the appraiser’s final determination.
