On November 20, 2020, CMS issued a final rule to modernize and clarify the regulations that interpret the Medicare physician self-referral law (Stark law).At ECG, we want to ensure we continue to provide accurate guidance regarding the regulatory environment. CMS stated in the proposed (and final) Stark law rule that it believes clear, bright-line rules would enhance stakeholder compliance efforts and enforcement capability. The comments and responses on the final rule provide significant insights to strengthen ECG’s valuation approach and methodologies.
The Review Process for Fair Market Value and Commercial Reasonableness
In developing the final rule, the government considered three basic questions:
- Does the arrangement make sense as a means to accomplish the parties’ goals?
- How did the parties calculate the remuneration?
- Did the calculation result in compensation that is fair market value for the asset, item, service, or rental property?
These questions relate, respectively, to the definition of commercial reasonableness, the volume or value standard and the other-business-generated standard, and the definition of fair market value.
The Importance of Substantive Compliance
The government clearly stated the importance of documentation:
Where a financial relationship exists between a physician (or an immediate family member of a physician) and an entity to which the physician makes referrals for designated health services, compliance with the physician self-referral law requires substantive compliance, not merely documentary (or “paper”) compliance [all emphasis added], with the requirements of an applicable exception. An irrebuttable presumption of commercial reasonableness that ensures that parties are shielded from allegations of violation of the False Claims Act if their documentation includes specific language or their arrangement ultimately achieved its intended purpose would pose a risk of program or patient abuse.
As valuation experts, we are particularly focused on the government’s position on compensation and production surveys. Here are the key excerpts from the Medicare Program; Modernizing and Clarifying the Physician Self-Referral Regulations (Centers for Medicare & Medicaid Services), Federal Register, December 2, 2020, 85 FR 77492 final rule regarding surveys (emphasis added):
- “It appears from the comments that stakeholders may have been under the impression that it is CMS policy that reliance on salary surveys will result, in all cases, in a determination of fair market value for a physician’s professional services. It is not CMS policy that salary surveys necessarily provide an accurate determination of fair market value in all cases.”
- “Consulting salary schedules or other hypothetical data is an appropriate starting point in the determination of fair market value, and in many cases, it may be all that is required.”
- “We agree with the commenter that asserted that a hospital may find it necessary to pay a physician above what is in the salary schedule, especially where there is a compelling need for the physician’s services.”
- “In our view, each compensation arrangement is different and must be evaluated based on its unique factors. That is not to say that common arrangements, where the services required are identical regardless of the identity of the physician providing them, do not lend themselves well to the use of salary surveys for determining compensation that is fair market value.”
- “Parties do not necessarily fail to satisfy the fair market value requirement simply because the compensation exceeds a particular percentile in the salary schedule; nor are parties required to pay a physician what is shown in the salary schedule if the specific circumstances do not warrant that level of compensation.”
- “We believe that salary schedules should not be used by a physician to demand compensation that is above what well-informed parties that are not in a position to generate business for each other would agree is the fair market value of the physician’s services.”
- “We wish to be perfectly clear that nothing in our commentary was intended to imply that an independent valuation is required for all compensation arrangements.”
- “We are uncertain why the commenters believe that it is CMS policy that compensation set at or below the 75th percentile in a salary schedule is always appropriate, and that compensation set above the 75th percentile is suspect, if not presumed inappropriate. The commenters are incorrect that this is CMS policy.”
ECG recommends that each organization use an internal review framework to determine:
- Fair market value and commercially reasonable compensation. As explicitly noted in the remarks quoted above, it may not be appropriate to use a global benchmark percentile range (e.g., 25th to 75th percentiles) to document reasonable compensation levels.
- Defined survey sources should be utilized to set compensation percentile parameters. We recommend the parameters be set based on the facts and circumstances in your particular market. These parameters may vary depending on provider cohort (e.g., primary care, medical, surgical, hospital based). Furthermore, these ranges may differ depending on other conditions (e.g., community need, timely access to healthcare services, provision of charity care).
- When it is necessary to seek an independent/external reasonableness review/opinion.
With the insights gained from the CMS final rule and commentary, our valuation approach and methodologies will continue to strengthen our qualitative approach to each review.
Clarity Regarding the Big Three and Fair Market Value/Commercial Reasonableness Definitions
The CMS final rule established new exceptions to the physician self-referral law and provided additional guidance on how to better interpret the existing rules and regulations.
The rule provided modifications to the terms “fair market value” and “general market value.” It also finalized specific language on how to interpret “commercial reasonableness” and further defined the condition in which a compensation arrangement is said to take into account the volume or value of referrals.
- Per the rule, 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.”
Regarding commercial reasonableness, CMS had found that the lack of a codified definition was leading to instances in which the evaluation of an arrangement’s commercial reasonableness was being misconstrued as a fair market valuation. The commercial reasonableness of a transaction is a consideration distinct from whether the arrangement results in compensation that is fair market value.
The new definition of commercial reasonableness “means that the particular arrangement furthers a legitimate business purpose of the parties to the arrangement and is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty. An arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.”
It is important to note that the lack of profitability in an arrangement does not necessarily preclude it from being commercially reasonable, as might have been a common misconception in the past. Examples of reasons why parties would enter into an arrangement without profit include community need, provision of timely access to healthcare services, fulfillment of licensure or regulatory obligations (including those under the EMTALA), provision of charity care, and improvement of quality and health outcomes.
Lastly, CMS clarified the specific circumstances in which compensation would be considered to take into account the volume or value of referrals. Under the final rule, “only when the mathematical formula used to calculate the amount of the compensation includes referrals as a variable, and the amount of the compensation correlates with the number or value of the physician’s referrals to, is the compensation considered to take into account the volume or value of referrals.” This standard also applies to the value of “other business generated.”
The above definitions and analysis are intended to provide ECG’s clients with the additional clarity needed to maintain compliance with both Stark law and the Anti-Kickback Statute.
Published December 21, 2020