Most people have heard the term “Fair Market Value,” but far fewer truly understand what it means or how it relates to physicians and healthcare providers. In this five-part series, the MMG team breaks down the key information you should know about Fair Market Value. We’ll cover:
- An overview of Fair Market Value and Commercial Reasonableness
- The Stark Law and how it plays into Fair Market Value
- Designated Health Services and how they impact The Stark Law and physicians providing these specific services in an employment arrangement
- The Stark Law and Employed Group Practices
- Recent Amendments to The Stark Law and their impact on Group Practices
In this article, part one of the Fair Market Value Series, we’ll start from the top: what do Fair Market Value (FMV) and Commercial Reasonableness mean?
The Internal Revenue Service (IRS) defines FMV as:
“[The] price at which property would change hands between a willing buyer and willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”
FMV, in other words, represents the price that the market would be willing to pay for the services provided. The definitions from IRS Revenue Ruling 59-60 was originally written with specific reference to business valuations. Thus, Fair Market Value encompasses the value of services to be provided.
For other regulatory purposes, the term Fair Market Value means the value in arm’s-length transactions, consistent with the general market value. “General market value,” as a reminder, is:
- 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, or
- 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, on the date of acquisition of the asset or at the time of the service agreement.
The Centers for Medicare and Medicaid Services (CMS), in its December 2020 Final Rule, defined Fair Market Value from a healthcare perspective as “The value in an arms-length transaction, consistent with the general market value of the subject transaction.”
In healthcare, Fair Market Value represents one of the pinnacle regulatory compliance issues, particularly under the Stark Law and Anti-Kickback Statute. Health systems that employ providers must ensure that their provider compensation agreements are based on the services being performed by those providers, whereby both parties are well informed and are not otherwise in a position to generate business for each other.
Oftentimes in conversations around Fair Market Value, you’ll also hear the phrase “Commercial Reasonableness.” CMS, in its December 2020 Final Rule, defined Commercial Reasonableness as “Whereby a 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.”
So how do these two concepts impact healthcare entities from an operating and compliance standpoint?
When creating a physician / provider compensation model, Fair Market Value and Commercial Reasonableness regulatory requirements must be met on an individual provider, service line, department and overall system perspective. FMV is a critical component of compensation arrangements.
Failure to adhere to these regulatory requirements can result in significant legal consequences, including fines, penalties, and exclusion from federal healthcare programs such as Medicare and Medicaid. In recent years, there has been increased regulatory scrutiny of physician compensation arrangements, with several high-profile cases resulting in multi-million-dollar settlements with the Department of Justice (DOJ).
By understanding the importance of Fair Market Value and commercial reasonableness and adhering to industry standards and regulations, healthcare organizations can ensure they are meeting their responsibilities to their providers while mitigating compliance risks.
Now that you understand what Fair Market Value and Commercial Reasonableness are and how they impact healthcare compensation models, it’s time to dive further into the nuances surrounding this topic. Stay tuned for part two of our five-part series, which will focus on The Stark Law.
If you have any questions about Fair Market Value, please contact Ronnen Isakov, Managing Director Advisory Service of Medic Management Group.
Ronnen Isakov is Managing Director Advisory Service of Medic Management Group. His background includes extensive work in areas including business advisory, valuation, network optimization, transaction support, and project management.