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Published January 19, 2021

January 19th Has Arrived — “Stark” Changes to Fair Market Value Compensation and Commercial Reasonableness Go into Effect Today

It’s here…It’s here…It’s finally here. Today is January 19th, the day the Stark laws are officially being modernized by the Centers for Medicare & Medicaid Services (CMS) and the Office of Inspector General of the Department of Health and Human Services. To help you understand these lengthy Stark law changes and their impact to fair market value (FMV) and commercial reasonableness (CR) on physician hospital arrangements, PYA has compiled this executive summary which includes 10 key takeaways, including:

  1. The definitions of FMV and CR have been updated and codified, respectively. FMV, and specifically as it relates to compensation arrangements, is now defined as “[t]he value in an arms-length transaction, consistent with the general market value (GMV) of the transaction.” GMV 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.” The definitions of FMV and GMV have alternative definitions when the subject being valued is a rented asset or space/ equipment.

    CR 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.”

  2. The “Big 2” have become the “Big 3.” In addition to FMV and CR (formerly the “Big 2”), CMS introduced the “volume or value standard” as a separate and distinct concept from FMV and CR (thus creating the “Big 3”), focused on how parties calculate remuneration. Specifically, CMS developed a two-part test to help determine whether compensation considers the volume or value of referrals. The first part of the test asks whether a mathematical physician compensation formula exists that includes designated health service referrals or other business generated as a variable. If the answer to the first part of the test is “Yes,” then the second part of the test asks whether a physician’s compensation increases or decreases based on a positive or negative correlation with the physician’s referrals or other business generated. If the answer to the second part of the test is “Yes,” then the arrangement is deemed to consider the volume or value of referrals.
  3. CMS clarified that using work relative value units (wRVUs) in physician compensation models are not suspect for considering the volume or value of referrals. Previously, guidance from prior court decisions and the fact that corresponding hospital services were billed in association with physician, wRVUs called into question whether the volume or value standard could be met.
  4. CMS officially established that arrangements may be CR even if they are not profitable. Specifically, CMS said, “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 also clarifies by saying, “we are not convinced that the profitability of an arrangement is completely irrelevant or always unrelated to a determination of commercial reasonableness.”
  5. Salary surveys, in and by themselves, do not constitute FMV. CMS clarified “…[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.” 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.”
  6. Compensation set at or below the 75th percentile is not always FMV. CMS conjectured it is “…uncertain why the commenters believe that it is CMS policy that compensation set at or below the 75thpercentile 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 fact, in 2015 and as another point of reference, Citizens Memorial Medical Center settled allegations where compensation was set below the median but was alleged to exceed FMV because the physicians were not making median compensation before the transaction and no one would pay them median compensation unless they considered improper remuneration.
  7. A hospital may not value a physician’s services any differently than an independent, private physician practice. Specifically, CMS explained, “a hospital may not value a physician’s services at a higher rate than a private equity investor or another physician practice…Put another way, the value of a physician’s services should be the same regardless of the identity of the purchaser of those services.” This guidance is helpful in several circumstances, such as considering how one might begin to value the incremental impact of the wRVU and reimbursement changes under the 2021 Medicare Physician Fee Schedule (MPFS). In this instance, and among other analyses to perform, it is helpful to think through how the 2021 MPFS changes will impact physician compensation in a private practice as a starting point for how to value the incremental impact of the 2021 MPFS on physician compensation in a hospital employment situation where the physician’s compensation is based on a wRVU productivity model. For more information on the 2021 MPFS and implications for physician productivity based compensation models, click here.
  8. Even when arrangements have a legitimate business purpose, they may not be CR. CMS cited an example of the need for a medical director of a service line. So if a second medical director for the same service line was added, the arrangement would not be CR because while a legitimate business need exists for a medical director, the fact that it was duplicative makes it commercially unreasonable.
  9. Now that CR has been codified, the industry will need to begin refining its methodology to assess the determination of CR. PYA’s thought leadership on this subject has been extensive and dates back many years. For a framework to begin determining CR, please refer to PYA’s CR checklist.
  10. Despite the changes identified here, CMS maintains that organizations may use any commercially reasonable methodology to determine FMV while both FMV and CR remain “facts and circumstances specific.” For example, evidence (through methods besides salary surveys, such as consulting schedules or other means) that compensation is comparable to what is paid for an item or service in a specific location, at arm’s length, and not in a position to refer to one another can determine FMV. And, ultimately, what may be FMV and CR for one type of arrangement in a specific market may not be FMV and CR in another market under a different set of facts and circumstances.

In addition to this executive summary on today’s change to FMV and CR, PYA has several articles and a webinar where you can learn more about this subject.  These articles include Stark Differences to FMV and CR are ComingDebunking FMV and CR Myths, and How the Big 2 Became the Big 3. In addition, should you desire more information on this topic and prefer a webinar, PYA has created one that is on-demand and titled, “Stark” Reality Ahead–New Rule Means Big Changes in 2021 to Fair Market Value, Commercial Reasonableness, and More.” Finally, for more information on these Stark changes, or to discuss a FMV or CR issue specific to your organization, contact a PYA executive below at (800) 270-9629.

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