Fraud and Abuse Update: Understanding “Fair Market Value” in Physician Compensation

Of the “fraud and abuse” laws, the three decades old Ethics in Patient Referrals Act, 42 U.S.C. § 1395nn, dubbed “Stark Law” after Congressmen Pete Stark who sponsored it, can often be the most challenging to properly interpret and apply, easily leading to head scratching. The law as originally enacted was simple in concept: to remove any financial motivation for doctors to send their patients for unnecessary testing that could raise health care costs and/or result in bad health care.  Now often subject to much criticism and even calls for repeal, Stark Law’s is often viewed as confusing, which is ironic because Congressman Stark intended for the law to create “bright line” tests that would provide clear guidance to physicians about what self-referral arrangements are unlawful.  Instead, the evolution of the law over the years, including implementing regulations, advisory opinions and court cases have rendered proper interpretation and application of the law debatable and unpredictable in some circumstances.

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Stark Law prohibits physicians from referring patients to entities with which the physician has a financial relationship for “designated health services” (or “DHS,” which is a list of CPT codes complied by CMS) paid for by Medicare or Medicaid, unless a Stark “exception” applies.  The OIG provides a summary of the fraud and abuse laws, including Stark Law, on its website.  Stark Law is a strict liability statute, meaning that wrongful intent is not an element that must be proven to establish a violation.  The penalties for violating Stark Law can be substantial.

Of the Stark Law concepts of importance is “fair market value,” which may appear in Stark Law analysis in several contexts.  Generally speaking, when Stark Law applies to a transaction, a physician cannot be incentivized to make referrals of DHS by more compensation than what is fair market value.  “Fair market value” is specifically defined by CMS as follows:

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 a 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 a 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. Usually, the fair market price is the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition, or the compensation that has been included in bona fide service  agreements with comparable terms at the time of the agreement, where the price or compensation has not been determined in any manner that takes into account the volume or value of anticipated or actual referrals. With respect to rentals and leases described in §411.357(a), (b), and (1) (as to equipment leases only), “fair market value” means the value of rental property for general commercial purposes (not taking into account its intended use). In the case of a lease of space, this value may not be adjusted to reflect the additional value the prospective lessee or lessor would attribute to the proximity or convenience to the lessor when the lessor is a potential source of patient referrals to the lessee. For purposes of this definition, a rental payment does not take into account intended use if it takes into account costs incurred by the lessor in developing or upgrading the property or maintaining the property or its improvements. (42 C.F.R. § 411.351)

This definition is intended to provide a specific, objective standard for determining value, namely, value determined at arms-length, consistent with general market value and not without regard to the volume or value of referrals from the physician.  Generally speaking, compensation to a physician should (most of the time) be viewed as consistent with fair market value if, when compared to compensation paid to similarly situated physicians, the compensation is reasonable.  There are exceptions to every general rule, however.  If you have questions or concerns about physician compensation as it relates to any fraud and abuse laws, it is important to consultant with your own healthcare counsel.

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Our business and healthcare attorneys advise and represent hospitals, medical practices, physicians and other healthcare providers. If you have questions about this post, contact us at (404) 685-1662 (Atlanta) or (706) 722-7886 (Augusta), or by email, info@hamillittle.com.

Source: United States Department of Health & Human Services, A Roadmap for New Physicians, Fraud & Abuse Laws

** Disclaimer: Thoughts shared here do not constitute legal advice. Please consult with an attorney to discuss your legal issue.