When is Having an FMV a Good Idea?

C-Suite executives and physicians are inundated with accounts of qui tam litigation and settlements with the Department of Justice over hospital payments to physicians, which serve as a reminder of the risks of payments in excess of FMV. Without going into a detailed legal analysis, it’s safe to say that in most transactions and compensation arrangements between hospitals and physicians who have the ability to refer patients to the hospital, FMV is a requirement for compliance with the most often used exceptions under the Stark law and safe harbors provided by the federal anti-kickback statute.

Does this mean that an independent valuation is required for every transaction and compensation arrangement between hospitals and physicians? Not necessarily. Let’s consider CMS’ point in the preamble to the Stark II Phase II rules: “While good faith reliance on a proper valuation may be relevant to a party's intent, it does not establish the ultimate issue of the accuracy of the valuation figure itself.” [69 Fed. Reg. (Mar. 26, 2004), 16107] Bradford and Tuomey are notable examples of cases in which independent valuations were obtained, yet the outcome for the defendants were certainly less than favorable.

When might such independent FMV opinions be necessary? We encourage hospitals to look first to the type of transaction or arrangement and the availability of sufficient internal resources. For example, if the hospital is entering into a joint venture with physicians, acquiring a physician practice, or entering into personal services or management services agreements with specialists in the community, it is unlikely that most hospitals have the internal resources to assess fair market value in these deals. However, in assessing starting salary for new physicians or setting base and productivity incentives for existing physicians, the hospital system may employ financial personnel with sufficient training and expertise, as well as maintain sufficient market resources and tools to allow for in-house analysis of the majority of provider compensation arrangements.

We recommend that hospital systems consider their risk tolerance levels in consultation with healthcare legal counsel. Deciding the extent to which a hospital system will internally process FMV documentation should also be impacted by the significance of the deal. Moreover, the use of electronic tools as an aid in analysis and documentation may be limited based on dollar amount or other level relative to market data. The organization should also have a plan in place to address outlier arrangements that are considered to be outside the policy for internal analysis. In the shadow of the recent Citizens Medical Center settlement, however, hospital employment of physicians at amounts significantly higher than historical private practice earnings and operating practices at a loss, even if substantiated by published salary survey data, is a risk hospital systems may wish to carefully evaluate.

Does an independent appraisal absolve the contracting parties of risk? As pointed out earlier in CMS comments, that answer is a resounding “no”. However, there are important benefits to the independent appraisal process, not the least of which include the following:

  • Training and credentialing in appraisal disciplines
  • Knowledge of the market and ability to analyze data in relation to the market
  • Ability to apply multiple valuation approaches and methods
  • Experience with similar deals
  • Independence in fact and appearance and the credibility that independence lends to the analysis

Does an appraisal prevent a qui tam action? This is best answered with the adage, “an ounce of prevention is worth a pound of cure”. A well-designed, carefully followed compliance plan helps reduce the risk of non-compliant arrangements or that such arrangements will be uncovered through internal auditing to be corrected and self-reported in a timely manner.

When is having an FMV a good idea? Consider the nature of the transaction or arrangement, do a self-assessment of the organization’s internal expertise and risk tolerance relative to the deal, and seek guidance from healthcare legal counsel with experience in such matters. Should an outside FMV then be determined to be necessary, by all means, we recommend engaging consultants with significant healthcare valuation experience.


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Topics: What is Fair Market Value

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