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Granting Exclusivity, What's It Worth?

September 2015

Most economists, as well as the OIG, believe that an exclusivity clause has economic value that should be considered in a valuation. When a hospital contracts with a hospital-based group to provide a service like pathology or anesthesiology, the opportunity to provide the service is often granted on an exclusive basis. This means that only the contracted group is authorized to provide the service to patients at that facility. Frequently this also means that the facility’s medical staff is “closed” to other physicians in that specialty.

When physicians with an exclusive contract seek payment for services, determining fair market value can be a challenge. In addition to volume, payer mix and scope of service considerations, it is important to consider the value of the “franchise” they have been granted.

The Value of Exclusivity

In general economic principles, as well as in those of business valuation, monopolies and therefore contract exclusivity have value--even in health care. In the case of physician contracts, the OIG has specifically noted that exclusivity has value:

Depending on the circumstances, an exclusive contract can have substantial value to the hospital-based physician or group, as well as to the hospital, that may well have nothing to do with the value or volume of business flowing between the hospitals and the physicians.1

Note the phrase “depending on the circumstances”; it signals the importance of documenting the basis for FMV determination, with particular consideration of the costs and benefits to both the hospital and the physician group of the exclusive relationship.  

What is Exclusivity Worth?

There is no consensus or official OIG guideline for determining the economic value of an exclusive physician agreement. Possible approaches to estimating and acknowledging the value of exclusivity for FMV documentation include:

  1. Negotiate a compensation level at a lower point in the market range than you might have if there were no exclusive rights to the service. Most market surveys for hospital-based specialties include contracts with exclusivity in their data. This is one of the advantages of the market approach to valuation over the cost approach. Employing a valuation assessment using the cost approach might not include the exclusive value of the arrangement; work with your valuation consultant or an expert to ensure that the exclusive nature of the contract is taken into proper consideration.
  2. Include a “rule-of-thumb” discount of perhaps 5-10% below a non-exclusive rate to specifically acknowledge and document the value in a quantitative way.

 

Documenting FMV of Exclusivity

In the contract’s FMV documentation, clearly state that consideration has been given to the economic value of the exclusivity provisions of the contract, even if a specific value is not cited. For compliance purposes, outline the process your organization took to consider the value of exclusivity in your documentation process.

Advantages and Disadvantages to Exclusive Agreements

Exclusive contracting for hospital-based services often has intrinsic value to a facility, including:

  1. establishing a single point of accountability for administrative and quality performance
  2. streamlining scheduling
  3. ensuring coverage for basic services
  4. improving continuity and quality of care

 

Exclusivity may also reduce a hospital's costs. Nonetheless, it is important to protect the facility from anti-trust challenges by physicians who may be excluded from practicing at the facility. Hence it is important to follow the guidance of legal counsel and adopt an appropriate decision-making process to close the medical staff and document of the process and FMV of the contract and all of its provisions. Furthermore, be familiar with your facility’s medical staff bylaws to ensure the proper process is followed if the intent is to close the medical staff for that specialty.

Before approaching a new or renewal negotiation for a hospital-based physician group, hospital administration, and medical staff leadership should meet to determine the need for exclusivity and the process for determining what exclusivity is worth.

1“OIG Supplemental Compliance Program Guidelines for Hospitals” Published in Federal Register Vol 70, No 19. Monday January 31, 2005

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