Charles Oppenheim (coppenheim@health-law.com) is a Partner in the Los Angeles office of Hooper, Lundy & Bookman, PC, and is Chair of the firm’s Business department. Amy Joseph (ajoseph@health-law.com) is a Senior Counsel in the Boston office of Hooper, Lundy & Bookman, PC.
Most people in the healthcare industry understand the importance of remuneration being fair market value (FMV), whether in the context of a physician services agreement, practice acquisition, or other transaction with a potential referral source, to meet many exceptions of the federal physician self-referral law, otherwise referred to as the Stark Law.[1]
Two distinct concepts
However, what can get overlooked is the concept of “commercial reasonableness,” as a separate requirement that must be met for compliance with applicable fraud and abuse laws. There is some risk in conflating the two concepts—just because something is FMV does not mean it is commercially reasonable. For example, it might be FMV to pay a medical director of a service line $150 per hour for ten hours per month, but it might not be commercially reasonable to hire fifteen such medical directors for that service line, at the rate of pay. This article discusses the differences and provides some practical tips for analyzing and documenting the commercial reasonableness of arrangements.
Under the Stark Law, many of the most common exceptions relied on to protect compensation arrangements require that the compensation be FMV. The applicable regulation defines FMV as “the value in arm’s-length transactions, consistent with the general market value,” meaning the price is the result of bona fide bargaining between well-informed parties consistent with what would be paid by parties who are not otherwise in a position to generate business for the other party.[2]
Many of the most common Stark Law exceptions relied on for compensation arrangements also require that the compensation be commercially reasonable,[3] and various safe harbors to the federal Anti-Kickback Statute (AKS) contain a similar concept. The Centers for Medicare & Medicaid Services (CMS) has defined the term commercially reasonable in various commentary to mean an arrangement that “appears to be a sensible, prudent business arrangement, from the perspective of the particular parties involved, even in the absence of any potential referrals.”[4] CMS has also stated that an arrangement is commercially reasonable “if the arrangement would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician… of similar scope and specialty, even if there were no potential [designated health services] referrals.”[5]
In short, the concepts of FMV and commercial reasonableness are distinct, and just because an arrangement is FMV does not always mean it is commercially reasonable. In the early years of compliance with the Stark Law, there was less focus on the requirement that an arrangement be commercially reasonable in addition to being FMV. However, in more recent years, there has been a recognition that commercial reasonableness requires a separate analytical step in evaluation of arrangements. For example, an agreement for call coverage could include compensation that is FMV, but it might not be commercially reasonable if a hospital already has a sufficient number of physicians on a specialty panel to provide adequate coverage.
