During a recent webinar, an attendee asked, "If a physician is providing a service that does not implicate Stark and anti-kickback, what is the best way to define FMV? Can a "willing buyer" really pay what the "willing seller" will charge?"
We ask our Founder and EVP Michael Heil to answer the question, here's what he said:
For any hospital-physician business relationship, it is best to assume that one or more of the legal standards that require assuring consistency with fair market value are always applicable. If the hospital is a not-for-profit entity, payment for any service or product cannot be greater than fair market value without violating tax law for non-profits (private inurement). For both not-for-profits and investor-owned organizations, there is a very high likelihood that either Stark or AKS, or both, will be applicable.
For a physician who leases real estate to a hospital or a physician providing accounting services to a hospital, payment greater than fair market value would violate Stark, AKS or both. Contracts with physicians from specialties that are not normally thought of as those who “refer” patients (for example, anesthesiologists) careful review almost always shows that they do or can refer patients. In the anesthesiology example, anesthesiologists refer business when they order ECGs in during pre-op evaluation or order pharmaceuticals during surgery. In order words, it is best for the parties to any hospital-physician business arrangement to assume that compensation may not be greater than fair market value.
The broad applicability of the need to assure payments are not greater than fair market value does not mean that a formal fair market value opinion needs to be obtain from a valuation expert for every arrangement. Reasonable judgment should be used to determine how to document compliance. For simple, incidental and/or low cost arrangements, a brief memo to file citing market data or documenting a bidding process may suffice. For most common and straightforward arrangements like medical directors and call coverage a high-quality market database like MD Ranger can be used to document compliance. For arrangements that are high-cost, complex and/or unusual, it is best to obtain a fair market value and commercial reasonableness opinion from an independent valuation expert.
The fact that both the buyer and seller are willing is not sufficient to establish that the amount paid is consistent with fair market value. All of the elements of the federal definitions (as shown below) must be met and meeting that test requires both judgment, data and analysis.
“the price at which the [service] would change hands between a willing buyer and a willing seller, neither being under a compulsion to buy or sell and both having reasonable knowledge of relevant facts.1
1 Estate Tax Reg. 20.2031.1-1(b); Revenue Ruling 59-60, 1959-1
... [T]he value in arm’s-length transactions, consistent with the general market value. ‘General market value’ means ... 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 ...2
2 42 CFR 411.351 (emphasis added)
--Michael Heil, CVA
Michael Heil is EVP and founder of MD Ranger. Prior to MD Ranger, he founded consulting firm HealthWorks, Inc., where he specializes in fair market value analysis and management consulting for hospitals and health care providers. Michael has 35 years of experience in health care management and consulting. He has served as president of California Shock/Trauma Air Rescue (CALSTAR) and in management engineering positions in industry and hospitals. Michael received a B.S. in Industrial Engineering from Lehigh University and a Masters degree in Hospital and Health Services Administration with distinction from the Graduate School of Business at Cornell University. He is a Certified Valuation Analyst in the National Association of Certified Valuation Analysts.