Since the Stark Law was enacted, organizations across the country have struggled with the concepts and requirements of the law. One of the most complex areas of the Stark Law is the concept of fair market value. Under the Stark Law, many exceptions that are required for certain arrangements with physicians require the actual financial exchange and remuneration to be representative of fair market value. This article will discuss the many complexities of fair market value in hopes of providing education to our membership.
Government Guidance
The current definition utilized by the federal government is as follows:
“Fair market value means the value in arm’s-length transactions, consistent with the general market value. “General market value” means the price that an asset would bring as the result of bona fide bargaining between well-informed buyers and sellers who are not otherwise in a position to generate business for the other party, or the compensation that would be included in a service agreement as the result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party, on the date of acquisition of the asset or at the time of the service agreement. Usually, the fair market price is the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition, or the compensation that has been included in bona fide service agreements with comparable terms at the time of the agreement, where the price or compensation has not been determined in any manner that takes into account the volume or value of anticipated or actual referrals.” (42 C.F.R.§ 411.351).
As you can see, the concept in the definition leaves a lot up to interpretation. For example, the current definition states that it must be an arms length transaction. This is an important concept to ensure you understand with respect to compensation arrangements. The issue becomes further complex because the current definition requires that two parties arrive at a financial amount based upon the fact that one party cannot generate revenue for the other party. Finally, the federal government has not outlined specific benchmarking surveys or rules of thumb which are indicators of fair market value but instead states it should be based upon amounts “in a particular market at the time of acquisition”. In short, the interpretation of fair market value is much different in the context of a physician arrangement.
This is Different . . .
Why is it different? First, in many transactions there is no requirement for an arms length transaction. For example, you could be entering into a transaction with a family member and offering that individual a good deal. This happens all of the time. Second, the negotiations must occur from the standpoint that neither party can generate business for the other party. This is also different than many transactions. For example, two parties might be more willing to enter into an arrangement where the financial portion of the contract is not market value because they can generate business for one another. Above all, these factors create a situation in which two parties must act much differently than they otherwise would in other industries.
In the fall, CMS provided updated proposed regulations for the Stark Law. In those regulations, there was much discussion around the concept of fair market value. Specifically, the government stated the following:
“Extenuating circumstances may dictate that parties to an arm’s length transaction veer from values identified in salary surveys and other hypothetical valuation data that is not specific to the actual parties to the subject the transaction. ” In other words, the facts and circumstances become critical to the analysis.
“Market value is based solely on consideration of the economics of the subject transaction and should not include any consideration of other business the parties may have with one another.” In short, the economics of the actual transaction should determine what is paid, not something else.
Some of the most enlightening commentary came from the following example: “By way of example, assume a hospital is engaged in negotiations to employ a family physician. Independent salary surveys indicate that compensation of $250,000 per year would be appropriate for a family physician nationally; no local salary surveys are available. However, the cost of living in the geographic location of the hospital is very low despite its proximity to good schools and desirable recreation opportunities. Yet, due to declining reimbursement rates and a somewhat poor payor mix, the hospital’s economic position is tenuous. [T]he physician may request the $250,000 that the hypothetical physician would earn, and the hospital may believe that it is compelled to pay the physician this amount . . . In this example, the fair market value of the physician’s compensation may be less than $250,000 per year.” Finally, it appears that there continues to be focus on the need for fair market value to include actual facts and support from the scenario, not surveys alone.
While the proposed regulations have yet been finalized, it is likely that we will see some variation from the current definition of fair market value and legal interpretation will be required for organizations to have a proper handle on the new and complex nuances of fair market value. Nevertheless, it is clear that fair market value is a facts and circumstances analysis. While the analysis is rooted in financial terms, how parties arrive at those financial terms is highly dependent on the actual economics of the transaction as well as the facts and circumstances of the situation. In short, fair market value is not a financial analysis focused merely on benchmarking but is a much broader analysis that also takes into account the conduct of the parties, the actual economics of the transaction, and the facts and circumstances of the situation.
Organizational Steps for Compliance
Organizations must focus on developing a strong provider compensation and contracting process. This includes creation of departments focused solely on these matters to ensure compliance with fair market value. In addition, organizations need to focus on the individuals involved in negotiating and formulating compensation plans/transactions. While historically many organizations had deal makers, it is imperative to have individuals managing those negotiations and the development of compensation plans with the skill set and knowledge to not run afoul of the law.
