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Published December 3, 2020

Big Changes for the Big 3 — FMV, CR, and the Volume or Value Standard in Physician/Hospital Relationships

On November 20, the Centers for Medicare & Medicaid Services (CMS) and the Department of Health and Human Services Office of Inspector General (OIG) issued a 627-page final rule which, among other changes, transitions what may be historically referred to as the “Big 2” (fair market value [FMV] and commercial reasonableness [CR]) to the “Big 3” (FMV, CR, and the volume or value/other business generated standard).

How did the “Big 2” become the “Big 3?” In short, until now, the definition of FMV included references to “volume and value of referral” and “other business generated” (collectively the “volume or value standard”). However, acknowledging that these two concepts are already included in several regulatory exceptions, CMS eliminated them in the definition of FMV, thus officially making FMV, CR, and the volume or value standard separate and distinct concepts.

While much has been (and will be) written about FMV and CR, many organizations are now seeking an objective answer to an equally important question: “What does taking into account the volume or value of referrals or other business generated mean?” Some commenters to the proposed Stark regulations went so far as to say they believed the greatest risk they face when structuring arrangements was whether compensation meets the volume or value standard.

To help clarify this subject, CMS developed a two-part test to determine whether an arrangement meets the volume or value standard. This test includes:

    1. Does a mathematical physician compensation formula exist that includes designated health service referrals or other business generated as a variable?
    2. If the answer to Question #1 is “Yes,” then does a physician’s compensation increase or decrease based on a positive or negative correlation with the physician’s referrals or other business generated?

As an example, and as modeled in the Stark rule commentary, suppose there is an arrangement whereby a physician compensation formula is developed that pays a physician a certain percentage of a bonus pool that includes designated health services referred by the physician to an entity. In this case, the answer to Question #1 would be “Yes,” as referrals would be the variable. The answer to Question #2 would also be “Yes,” as the physician’s compensation increases/decreases as more/fewer physician referrals are made to the entity. For these reasons, the physician compensation formula would not meet the volume or value standard.

In an important clarifying statement, CMS delineated that a unit-based (e.g., work relative value unit) compensation formula centered solely on a physician’s personally performed services in a bona fide employment arrangement, personal service arrangement, and indirect compensation arrangement would meet the volume or value standard. This would be the case even when the entity that the physician has a direct or indirect compensation arrangement with bills for designated health services that correspond to the physician’s personally performed services. Up until this point, there had been some prior precedent that questioned CMS’ position on this topic.  However, CMS also says, “The policies finalized here are prospective only and represent CMS policy regarding the volume or value standard and the other business generated standard going forward from the effective date of this final rule.” The effective date of the final rule is January 19, 2021.

Employing our extensive experience in FMV compensation, CR, 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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