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FAIR MARKET VALUE: PREVENTIVE MEDICINE FOR PHYSICIAN CONTRACTUAL ARRANGEMENTS |
Your health care organization would never knowingly pay a physician for a referral. Yet without intending to, your organization may be doing things that are seen as equivalent to just that by the Medicare Office of the Inspector General. It’s also possible that without intending it, you might be making payments to physicians that fall under the IRS “excess benefits” regulations.
Regulatory scrutiny under Stark II, Medicare anti-kickback laws and IRS private inurement regulations has increased dramatically in the last few years. Providers know that once the OIG has “slapped their hands” several times, they may be subject to ongoing compliance audits for three years. The IRS is now in the process of finalizing regulations that determine when charitable organizations subject to intermediate sanctions should also lose their tax exempt status.
It’s a good time to make sure you fully understand the Fair Market Value requirements. This article reviews key points and recommends some steps to reduce your organization’s risk.
RISK IS BROADER THAN REALIZED
Federal regulations apply to every financial arrangement you make with a physician—payments for clinical services, payments for teaching and administration, physician rent payments and more. Three sets of regulations apply, and three different sets of regulators enforce them. Fortunately, there’s just one principle you need to follow to greatly reduce your risk: all financial arrangements with physicians must be made at fair market value.
The consequences of not following this principle are serious:
- Hospitals that pay more than fair market value (FMV) for services can lose their tax exempt status under IRS regulations prohibiting “private benefit” (where a transaction or exchange between a tax-exempt organization and one of its "insiders" furthers private interest rather than the public interest). As currently proposed, the IRS’ rules for deciding whether to revoke tax-exempt status do not make any allowance for the hospital’s good faith belief that a payment arrangement is at FMV.
- The Medicare and Medicaid Patient Protection Act of 1987 (the “Anti-Kickback Statute”) provides for criminal penalties for remuneration in return for referrals or recommending purchase of supplies and services.
- The physician self-referral law (Stark and Stark II) prohibits physicians from making referrals for certain “designated health services to an entity to which they have a financial relationship (ownership or compensation)” unless that relationship is at FMV.
FAIR MARKET VALUE IS NARROWLY DEFINED
The federal government defines FMV for physician compensation as an hourly rate equal to the “average of the 50th percentile national compensation level for physicians with the same specialty, in at least four specified national surveys.” Anything beyond this definition requires explanation. All such explanations must be well-documented.
Inurement occurs when a transaction or exchange results in economic gain to an individual with a personal interest in the exempt organization through the use of funds or assets of that organization. To avoid inurement, a compensation arrangement must:
- Be consistent with exempt purposes
- Result from arm's length bargaining
- Result in “reasonable” compensation
EXAMPLES OF TRANSACTIONS REQUIRING FAIR MARKET VALUE ANALYSIS
| Category |
Illustrations |
| Hospital fully employs physicians |
Primary care physicians in primary care network
Physician specialists at academic medical center |
| Arrangements for administration, supervision and teaching (AS&T) |
Physicians providing part-time leadership for product lines
Contract with specialty groups or individuals to provide medical directorships in ancillary services, intensive care unit or hospital-owned diversified service |
| Physician-hospital arrangements for specified clinical services |
Contract with private group to provide clinical coverage of ancillary service
Joint venture between hospital and specialty group where the specialty group provides professional services
Contracts with specialists to provide on-call services |
| Hospital purchases services from an outside source |
Hospital contracts with mobile technology provider and pays providers for technical services
Hospital-physician joint ventures – all payments by venture to hospital and physicians |
| Acquisitions and divestitures of physician practices or other health care businesses |
Hospital-owned primary care network purchases practice or practice is divested from network
Development of a joint venture between a hospital and private group for the purposes of operating a separate business now operating as a department of the hospital |
| Physician purchases from hospital |
Private physicians lease space in hospital-owned facilities |
CONTROL RISKS WITH PLANNING AND POLICIES
Providers can control the regulatory risks associated with FMV issues by keeping FMV in the forefront of all decisions on compensation, buying or selling practices, or purchasing services. With the heightened regulatory focus on fair market value, it’s essential that provider organizations:
- Set a board policy that any physician compensation made by your organization will be made at FMV. This policy should also detail which physician compensation situations require that an outside opinion on FMV be obtained. This type of policy provides direction and sets guidelines for hospital management.
- When buying or selling a physician practice, consider the FMV implications before negotiating a deal. This will save a lot of time in renegotiation for deals found not to comply with FMV requirements, while controlling regulatory risk.
- When a hospital is purchasing a service from physicians, determine FMV first. What would it cost the hospital to purchase the service from alternate providers or sources? This should be considered when determining FMV.
By taking these three steps you can greatly reduce the danger of regulatory intervention.
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