If a Service Doesn't Implicate Stark Law, How Do You Determine FMV?

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.

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Comparing Stark and the Anti-Kickback Statute

We often have users who get confused between Stark and AKS. Even those who are very familiar with the regulations sometimes forget which regulation is criminal and which is civil. Stark Law and AKS are often discussed in tandem. While the two have some similarities, there are also some key differences.

Comparing AKS and Stark

 

Anti-Kickback StatuteStark Law
Prohibits soliciting or offering anything of value for referrals to any Federal program Prohibits a physician from referring Medicare/Medicaid patients to an entity that has a financial relationship with that physician
Referrals from anyone (e.g. practitioner, supplier, facility) Referrals from a physician
Applies to a referral for any service or item Only applies to referrals for Designated Health Services1
Criminal law Civil law

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Use Other Organizations' CIAs to Create Your Processes

By using guidelines in CIAs for other healthcare entities similar to yours, you can mimic compliant program requirements.

Create a compliance committee.

A compliance committee should be an integral part of any health care organization, providing a front line of defense to ensure an adequate compliance program that is properly administered and monitored. The committee should advise the compliance officer as well as assist in compliance program implementation. Members of the compliance committee should be well informed about the regulations, legal requirements, and potential risks that may impact the organization. The compliance committee should assess current policies and procedures, develop appropriate new policies and procedures, and monitor performance.

Use the guidelines outlined in CIAs for other healthcare entities similar to yours to structure your physician contracting program.

By using the OIG’s requirements, your organization should be well positioned if it’s ever under federal scrutiny.

Physician contracting is an area where healthcare organizations are especially vulnerable to government intervention given Stark and Anti-Kickback statutes. While CIAs vary slightly from case to case, generally they require:

  • A contract management system
  • Tracking of payments and up-to-date time logs for physician services
  • A written review process for all arrangements to ensure they are not violating Stark or AKS. The process should require that each arrangement has documented the following:
    • A review by an attorney with Stark and AKS knowledge
    • Demonstration of a business need for the arrangement
    • Documentation that agreements meet FMV for all payments
  • Annual reviews of all arrangements to be completed by the Compliance Officer and submitted for review by the compliance committee
  • Training for everyone who is involved with arrangements surrounding the contract management system, internal review and approval process, and the tracking of payments corresponding to the arrangements

Evaluate stipulations of CIAs that might pose a problem for your organization.

While you are reviewing other CIAs, think about requirements that could pose an issue if they were placed upon your organization. Some aspects of a CIA are non-negotiable, but you may be able to create alternate policies that are acceptable to both your organization and the Feds. Your in-house and external counsel are key people in negotiating the terms of a CIA, but it is important for everyone to think about the reasonableness and timing of the requirements. For example, if you have an existing personnel training program that covers the requirements outlined in the CIA but requires fewer hours, your lawyers may be able to negotiate an acceptable compromise. For more on CIA negotiations, this article is a great resource.

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Avoiding a CIA: Take Steps to Prevent Violations

If you are not currently involved in an investigation or settlement for Stark or Anti-Kickback violations, don’t rest on your laurels. The OIG is actively investigating potential regulatory violations at healthcare entities. These violations may come to light through routine and programmatic auditing by the OIG or through a whistleblower allegation. By familiarizing yourself with CIAs issued for organizations similar to yours, you can take steps to reduce your organization’s potential violations. Model your compliance program after the requirements outlined in the CIAs so that you can prevent violations.

You can use existing CIAs as a template for a compliance program, as well as a roadmap of what to anticipate if your organization is found to be in violation. CIAs dealing with compliance issues with physician agreements provide insight into what you might be required to do under a CIA. We suggest reviewing several recent CIAs for entities structured similarly to yours. There are a significant number of CIAs available for review, and organizations that have built their compliance programs under a CIA have some of the most robust compliance programs in the industry. Borrow best practices from them!

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