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Published November 23, 2020

A “Stark” Difference in Fair Market Value and Commercial Reasonableness Is Coming in 2021

On November 20, the Centers for Medicare & Medicaid (CMS) and the Department of Health and Human Services Office of Inspector General (OIG) issued a 627-page final rule which will serve to modernize and clarify Stark Law regulations. Many of the changes in the Stark Law are aimed at eliminating regulatory restrictions that could deter or even potentially eliminate some novel arrangements as the industry continues its move towards a value-based health care system. The regulations will become effective January 19, 2021, with one exception. An extension has been granted until January 1, 2022 for compliance related to certain changes required in group practice compensation methodologies. A comprehensive, but not all inclusive, list of the items covered in the final rule follows.

  • Formally establishes a definition of commercial reasonableness, while deleting outdated Stark Law references and updating key definitions such as fair market value, designated health services, physician, referral, remuneration, and transaction.
  • Helps identify compensation formulas that take into account the volume or value of a physician’s referrals as well as those that are allowed to distribute profits from designated health services within a group practice.
  • Clarifies the period of disallowance for referrals and billing following a self-referral law violation, the satisfaction requirements for “set-in-advance” compensation, when an entity may direct a physician’s referrals to a provider, the requirement for exclusive use of office space/ equipment, and the exception for payment by a physician to an entity.
  • Allows agreement participants to reconcile payment variances in compensation arrangements without violation of physician self-referral law.
  • Limits what qualifies as an ownership or investment interest that is subject to the physician self-referral law.
  • Removes the timeframe limitations for modifications to the financial terms of a compensation arrangement.
  • Makes clear that signatures may be electronic under the same applicable federal/ state laws while allowing parties to an agreement to obtain the writing requirement documentation within 90 days.
  • Refines when a physician practice is required to sign a recruitment agreement between a hospital and a physician as well as timing issues for arrangements between a physician and non-physician practitioner (NPP) when a hospital is involved in compensating the NPP.
  • Expands the 411.357(1) exception to fair market value payments for rental office space, notably when the arrangement is for less than one year.
  • Allows the electronic health records (EHR) exception to be unending and allows limited donations of cybersecurity that are necessary for EHR, flexible physician payment schedules, and donations of replacement EHR items.
  • Provides new exceptions for value-based compensation arrangements that meet certain financial risk requirements and provides new definitions for value-based activity; value-based arrangement; value-based enterprise (VBE); value-based purpose; VBE participant; and target patient population.

While this expansive list of Stark Law changes will take some time for the industry to digest, we wanted to promptly share three changes and corresponding takeaways as it relates to fair market value and commercial reasonableness in physician/ hospital relationships.

  1. The definitions of fair market value and commercial reasonableness have been updated and established as follows:

Fair market value, and specifically as it relates to compensation arrangements, is defined as “The value in arms-length transaction, consistent with the general market value of the transaction.” General market value means “… with respect to compensation for services, the compensation that would be paid at the time the parties enter into the service arrangement as the result of bona fide bargaining between well-informed parties that are not otherwise in a position to generate business for each other.

Commercially reasonable means “… that the particular arrangement furthers a legitimate business purpose of the parties to the arrangement and is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty. An arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.”

Key PYA Takeaway: CMS is clarifying that the “Big 3” (fair market value, commercial reasonableness, and the volume or value standard) are separate and distinct concepts. Additionally, until now, there has been no codified definition for commercial reasonableness, only limited CMS discussion such as that in the proposed 1998 rule. CMS further clarifies that commercial reasonableness is whether an arrangement makes sense as a means to accomplishing the parties’ goals. An analysis to document commercial reasonableness may include, but not be limited to, whether the arrangement helps meet an organization’s mission/ vision/ and values, the importance of the arrangement to the service line(-s) affected, how the arrangement affects the cost, quality, and access to care, what other options exist to accomplish the organization’s goals, and why the arrangement entered was the best option. As it relates to the updated definition of fair market value, CMS continues to emphasize that its determination should be based on any appropriate method depending on the kind of transaction, its location, and other factors.

  1. Regarding commercial reasonableness, CMS clarified that “the determination that an arrangement is commercially reasonable does not turn on whether the arrangement is profitable; compensation arrangements that do not result in profit for one or more of the parties may nonetheless be commercially reasonable…Examples of reasons why parties would enter into such transactions include community need, timely access to health care services, fulfillment of licensure or regulatory obligations,…charity care, and the improvement of quality and health outcomes.” However, CMS does say that “we are not convinced that the profitability of an arrangement is completely irrelevant or always unrelated to a determination of commercial reasonableness.”

Key PYA Takeaway: Guidance from prior court decisions, as well as certain previous governmental representatives, have questioned commercial reasonableness if arrangements are not profitable. For example, in the past some arrangements where physician compensation exceeded professional collections have received considerable scrutiny for commercial reasonableness. CMS is clarifying here that while such a situation (e.g. a non-profitable arrangement) may present a problem, it is not expressing a definitive opinion on the matter as each arrangement is facts and circumstances specific, and it could see certain arrangements with facts and circumstances whereby a non-profitable arrangement is commercially reasonable. 

  1. As it relates to fair market value compensation, CMS clarifies several important items. First, it delineated that salary surveys or salary survey percentiles may not be appropriate to use in all circumstances. It says, “…we continue to believe that the fair market value of a transaction…may not always align with published valuation data compilations, such as salary surveys. In other words, the rate of compensation set for in a salary survey may not always be identical to the worth of a particular physician’s services.” CMS continued, “It appears…that stakeholders may have been under the impression that it is CMS policy that reliance on salary surveys will result, in all cases, in a determination of fair market value for a physician’s professional services. It is not CMS policy that salary surveys necessarily provide an accurate determination of fair market value in all cases…. Consulting salary schedules or other hypothetical data is an appropriate starting point in the determination of fair market value, and in many cases, it may be all that is required.” Finally, CMS is “…uncertain why the commenters believe that it is CMS policy that compensation set at or below the 75th percentile in a salary schedule is always appropriate, and that compensation set above the 75th percentile is suspect, if not presumed inappropriate. The commenters are incorrect that this is CMS policy.”

Key PYA Takeaway: Since the Stark II, Phase II regulations, CMS has introduced the use of salary surveys to help in determining fair market value compensation, even going so far in the Stark II, Phase III regulations to comment “reference to multiple, objective, independently published salary surveys remains a prudent practice for evaluating fair market value.” However, salary surveys by themselves may be limited in establishing fair market value. In turn, CMS is willing to accept any commercially reasonable methodology that demonstrates “compensation is comparable to what is ordinarily paid for services in an arms-length transaction”. Organizations who may have “carte blanche” physician compensation review policies set at certain thresholds should be careful that the totality of the facts and circumstances support each transaction (versus the entirety of all transactions).  In the final Stark rule, despite being asked by commenters, CMS specifically refused to establish a “rebuttable presumption” or “safe harbor” that guaranteed an arrangement was within fair market value if the arrangement’s compensation was set at a certain salary survey percentile.     

Utilizing our extensive experience in fair market value compensation, commercial reasonableness, and physician compensation planning/ strategy, PYA will continue to analyze the final Stark regulations and bring you additional updates and important information.  In the interim, for more information regarding these matters, contact a PYA executive below at (800) 270-9629.

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