Hot Topics Regarding Fair Market Value

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Fair Market Value (FMV) assessments have become a key aspect (and sometimes stumbling block) for cardiologist compensation contracts. In 2008, 90 percent of U.S. cardiologists were in private practice. The current ratios are nearly reversed and cardiologists must now learn to navigate employment.

The Stark Law , Federal Anti-Kickback Statute and IRS guidelines mandate that physicians employed by health care organizations be compensated in a manner that does not reflect current or future referrals and stipulate compensation would "make sense" (i.e. is commercially reasonable) if no potential referrals to the organization were at stake. An FMV assessment is required to ensure compliance with these regulations.

Furthermore, FMV does not only apply to employed physicians. For physician practices that have alignment arrangements such as Professional Services Agreements or Co-Management Agreements (often focused on co-managing a service line or hospital department), the compensation provided to independent physician practices in these transactions are also subject to FMV scrutiny.

The statutes mandating an FMV determination suggest organizations reference "multiple, objective, independently published salary surveys" to help determine FMV. Health care organizations may weigh both clinical and non-clinical activities that provide value to the organization.

Typically, hospitals engage third party firms to provide an independent FMV "opinion." These firms take a number of factors into account in determining FMV, including the use of multiple survey data regarding regional and national salary trends for a particular specialty displayed as a percentile such as total compensation, work relative value units (wRVUs), $/wRVU, total charges and total collections.

A common misconception is that a physician producing high-clinical volume (i.e. 90 percentile in wRVUs) will receive a corresponding $/wRVU (90 percent), but this is not the case. For example, an electrophysiologist who generates 21,330 wRVUs in a year (Medical Group Management Association [MGMA] 90th Percentile) might assume compensation would utilize $64.12/wRVU (MGMA 90th Percentile).

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This would correlate to $1.37 million annually, a salary 62 percent higher than the 90th percentile in the survey (MGMA 90th percentile salary of $844,141). A compensation plan of this type would likely be viewed suspiciously with respect to FMV.

FMV compensation assessments should incorporate any special circumstances that add to the complexity or difficulty in arranging for the services. Clinical and non-clinical activities that are not directly associated with wRVU generation should be included. For example, higher compensation may be justified when there are severe physician shortages in a particular specialty or with special skills.

Clinical examples include the type and degree of call coverage, full day presence and availability of physician services (i.e. in hospital cardio-hospitalist program), outreach services, and non-wRVU services being performed by multiple physicians (i.e TAVR and Watchman).

Nonclinical activities include medical director duties that require a specific subspecialty, physician administrative time directed toward service line co-management duties, travel time to outreach locations and more.

Cardiologists should maintain an updated listing of all "value-added" services provided to the hospital or health system, including a list of measurable performance improvements (quality, cost or service) driven by physician involvement and instances where physicians spend time that brings tangible or intangible value to the institution.

Familiarity with four key cases will help to inform future discussions. In each of these cases, the U.S. Department of Justice (DOJ) alleged the employment arrangement between the hospital and physicians was illegal because it was above FMV and not commercially reasonable; most were qui tam (whistleblower) cases.

As a result of these cases, hospitals and health systems are increasingly concerned about avoiding Stark issues related to FMV.

U.S. ex rel. Parikh, et al. v. Citizens Medical Center, et al.

In April 2015, Citizens Medical Center agreed to pay the U.S. $21.75 million to settle allegations that it violated the Stark Statute and the False Claims Act (FCA).

In this case, the DOJ alleged that the hospital reimbursed a group of cardiologists above FMV and financially incentivized emergency physicians to refer patients for cardiac procedures in the hospital.

U.S. ex rel. Drakeford v. Tuomey Healthcare System

In July 2015, Tuomey Healthcare System lost its appeal and a $237 million FCA judgment, found to be in violation of the Stark Law by offering part-time employment to 19 affiliated specialist physicians and paying them 131 percent of their net revenues collected in return for their services and a non-compete agreement.

U.S. ex rel. Reilly v. North Broward Hospital District, et al.

In September 2015, North Broward Hospital was alleged to violate the Stark Law based on its employment of nine physicians. It was alleged that physicians were being paid too great a percentage of the monies that were collected (via professional fees).

The government's position was that counting collections from technical fees was illegal because this rewarded physician's hospital referrals and only direct patient care should be reimbursed (wRVUs). North Broward Hospital agreed to pay the U.S. $69.5 million to settle these allegations.

U.S. ex rel Barker v. Columbus Regional Health Center, et al

In this case, the DOJ claimed that Columbus Regional Health Center and Andrew Pippas, MD, submitted claims for payment to federal health care programs that misrepresented the level of service provided. Columbus Regional agreed to pay $25 million plus an additional contingent payment up to $10 million and Pippas agreed to pay $425,000.

The separate payment from Pippas was consistent with the "Yates Memorandum" released by Deputy Attorney Sally Yates on Sept. 9, 2015. This recommends the DOJ pursue both organizations and individuals.

The Yates Memorandum specifically mentions application of false claims cases as an example of where DOJ attorneys would be expected to pursue individuals such as physicians on the other side of a financial agreement with their employing organization.

It is important to know that determining FMV is not an exact science or calculation. It is not uncommon for different FMV firms to assess the exact same situation and come to different conclusions. Thus, cardiologists undergoing an FMV assessment would ideally do so under the following conditions:

  • The FMV firm is mutually agreed upon by physicians and the health care organization with optimally two to three different firms interviewed by a joint selection committee.
  • The interview process should address the firm's experience in performing FMV assessments for the given subspecialty and any unique circumstances that exist in the hospital-physician alignment model.
  • The hospital and physicians should be fully involved in the FMV determination process, including a chance to discuss relevant background information, practice design and previous compensation plan details.
  • The final report including all analysis, calculations and findings, especially the sources of all survey data used, should be transparent and available to both parties.

The FMV process is the practice's opportunity to showcase itself. The value of the practice is far more than the cumulative value of its wRVUs. Leadership both within the practice and the hospitals that it serves, the practice's attention to strategy, financial performance, attainment of quality metrics, superior access, high levels of patient satisfaction, and internal governance and physician succession planning collectively demonstrate the value of services provided that benefit the hospitals and health systems.

Presenting such a global review of the practice to the valuation firm will assist the valuation firm in assessing the practice's fair market "value" to the hospital or health system and therefore deriving the appropriate compensation level. In short, the valuation process should not assume these factors will be recognized by the FMV firm. Instead, it requires the practice's proactive communication to present its full contribution.

It is critical that cardiologists and their organizations work closely with knowledgeable legal counsel to navigate what can be very risky waters, and choose an FMV firm that has the right experience and perspective of what the organizations are trying to accomplish and factor that into their assessment.

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This article was authored by Jesse E. Adams III, MD, FACC; Alison L. Bailey, MD, FACC; Charles L. Campbell, MD, FACC; and Larry Sobal, MBA, MHA, CMPE, on behalf of the Publications Workgroup of the CV Management Section.