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Published November 30, 2020

Debunking Three Myths in the Fair Market Value and Commercial Reasonableness of 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 clarifies certain Stark Law regulations. Among other areas of clarification, the final rule helps debunk several myths regarding fair market value and commercial reasonableness in physician/hospital relationships. Three of these “debunked myths” are summarized below.

Myth #1: Benchmark Data Determines Fair Market Value

In Stark II, Phase II, CMS established a safe harbor for determining fair market value compensation based upon the average of the 50th percentile national compensation for the same physician specialty of at least four of six compensation surveys, or alternatively the average hourly rate for emergency medicine services in the relevant market. While this safe harbor was rescinded in the Stark II, Phase III regulations, CMS stated that “reference to multiple, objective, independently published salary surveys remains a prudent practice for evaluating fair market value.” For these reasons and others, some organizations believe that benchmark data, in and by itself, establishes fair market value compensation.

In the new Stark regulations, CMS responds to this belief indicating that salary surveys or salary survey percentiles may not be appropriate to use in all circumstances. Specifically, CMS says, “…[W]e 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 forth in a salary survey may not always be identical to the worth of a particular physician’s services. . . . 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.”

Myth #2: It Is CMS Policy That Compensation Set at or Below the 75th Percentile in a Salary Schedule Is Appropriate

In the past, certain hospitals or health systems have developed “compensation guardrails” based on whether compensation exceeds the 75th percentile, believing such a threshold has been approved by prior governmental representatives. In addition, certain settlements between hospitals and physicians have involved allegations that compensation exceeded fair market value, because the compensation exceeded the 75th percentile of benchmark data.

In its commentary, CMS says it “declines to establish the rebuttable presumption and ‘safe harbors’ [e.g., based on a compensation range of salary survey data] requested by the commenters. We are 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.”

In analyzing this statement further, while holding a belief that compensation arrangements at or below the 75th percentile are appropriate could be statistically challenging, even arrangements below the median have been questioned for fair market value. Specifically, in 2015, Citizens Memorial Medical Center settled allegations where compensation was set below the median, but was alleged to exceed fair market value. In this case, there was a question as to why the median level of compensation would be paid when the physicians were not earning the median level of compensation before the transaction, unless the physicians were receiving improper remuneration.

Myth #3: Arrangements Cannot Be Commercially Reasonable if They Are Not Profitable

Guidance from prior court decisions, as well as certain previous governmental representatives, calls into question commercial reasonableness if arrangements are not profitable. For example, in the past, some arrangements in which physician compensation exceeded professional collections received considerable scrutiny for commercial reasonableness. CMS is clarifying in the newly codified Stark definition of commercial reasonableness that “an arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.” Therefore, while such a situation (e.g., a non-profitable arrangement) may present a problem, CMS is not expressing a definitive opinion on the matter, as each arrangement is facts and circumstances specific. Further, CMS expresses that it could see certain arrangements with facts and circumstances whereby a non-profitable arrangement is commercially reasonable. CMS provides examples of non-profitable arrangements that may be commercially reasonable, such as those that meet community need, fulfill licensure requirements/regulatory obligations, EMTALA, charity care, and the improvement of quality/health outcomes.

Employing 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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