Fair Market Value of Physician Compensation

The fair market value of physician compensation is a fundamental consideration in healthcare compliance to prevent the abuse of healthcare programs and protect patients needing medical care. Specifically, fair market value is a concept relied upon in applying federal regulations such as the Physician Self-Referral Law (Stark Law) and the Anti-Kickback Statute (AKS). These laws prohibit healthcare entities from engaging in financial relationships that could lead to overutilization of healthcare services, increased costs to the government, or compromised patient care.

Specifically, the Stark Law prohibits physicians from referring patients to entities in which they have a financial interest unless an exception applies. The law also prohibits entities from billing Medicare for services that were referred in violation of the law. In addition to the Stark Law, healthcare organizations must also comply with the AKS, which prohibits the payment of any remuneration, directly or indirectly, to induce or reward the referral of federal healthcare program business. This includes any financial arrangements that could lead to improper financial gain, such as kickbacks or bribes, in exchange for referrals of patients or services. Violations of the AKS can result in significant legal consequences, including fines, penalties, and exclusion from federal healthcare programs. To avoid breaches under the Stark Law and AKS, healthcare organizations must ensure that any financial arrangements with physicians and other healthcare providers are based on fair market value and meet safe harbor guidelines established by the government.

The fair market value of physician services is defined as “the value in an arm’s-length transaction, consistent with the general market value of the subject transaction.” With respect to compensation for services, “the compensation that would be paid at the time the parties enter into the service arrangement as the result of bona fide bargaining between well-informed parties that are not otherwise in a position to generate business for each other.” The prior “volume or value” standard was removed from the definition; the Centers for Medicare and Medicaid Services (CMS) clarified that the volume or value standard was a separate concept from fair market value. However, it was noted that organizations must still affirm that compensation arrangements do not account for the volume or value of referrals or other business generated. CMS also reiterated that the value of a physician’s services should not depend on whether the employing entity is a health system, a physician-owned entity, or a private-equity firm. Fair market value determinations must not include benefits specific to a particular employer.

The importance of fair market value in physician compensation arrangements lies in ensuring that physicians are compensated fairly based on market forces and industry standards. Third-party consultants and appraisers specializing in physician compensation can provide an independent analysis of the various factors that impact fair market value, including the physician’s specialty, experience, geographic location, and market demand for their services. Such services allow healthcare organizations to more efficiently structure compensation arrangements that meet industry standards and regulatory requirements, prevent the overutilization of healthcare services, and ensure high-quality patient care.

In a coordinated effort to help ensure compliance with these regulations and to provide clarification of intent, CMS and the Office of Inspector General (OIG) recently issued the final rules “Modernizing and Clarifying the Physician Self-Referral Regulations” and “Revisions to the Safe Harbors Under the Anti-Kickback Statute and Civil Monetary Penalty Rules Regarding Beneficiary Inducements,” respectively.

The general intent of each statute and the final rules detailed above are to prevent fraud and the abuse of federally funded healthcare programs and further define violation criteria. However, while AKS is a criminal statute and requires proof of knowing and willful intent, violations of Stark Law are civil in nature and have a strict liability statute, meaning that proof of intent to violate the law is not required to impose liability.

Failure to abide by the tenets of Stark Law and AKS can result in significant legal consequences, including fines, penalties, and exclusion from federal healthcare programs. In recent years, there has been increased regulatory scrutiny of physician compensation arrangements, with several high-profile cases resulting in multi-million-dollar settlements. For example, in 2014, a Florida hospital paid $85 million to settle allegations that it violated the Stark Law by paying excessive compensation to its physicians. And in 2020, the DOJ announced a $48 million settlement with a Texas-based healthcare system over allegations of improper physician compensation arrangements.

In conclusion, fair market value is a critical component of physician compensation arrangements in the healthcare industry, and compliance with fair market value is necessary to avoid potential legal consequences. By understanding the importance of fair market value and adhering to industry standards and regulations, healthcare organizations can ensure high-quality patient care while mitigating compliance risks.

Withum’s healthcare valuation team can assist your practice with physician compensation assessments and other types of compensation agreements, such as those for advanced practice providers, medical directors, healthcare executives, etc., in relation to fair market value and provide comprehensive FMV reports as well as consulting services to determine the need for fair market value and other related compliance needs.

Author: Adam Yungmeyer | [email protected]