South Florida Hospital News
Sunday August 25, 2019
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November 2006 - Volume 3 - Issue 5

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Helping Healthcare Organizations Navigate the Regulatory Challenge of ‘Fair Market Value’

Whenever a hospital gives a physician anything of value, including payment for any service a doctor might provide, Federal and State laws require that the "value" given must be consistent with "fair market value." The rules apply to a laundry list of situations -- including a doctor’s professional services, medical directorships, payment for emergency room call coverage, medical office space leases, medical equipment leases and even meals provided to physicians when they are at a hospital. Failure to comply can result in severe consequences, but the real challenge presented by the various healthcare regulations is determining what is "fair market value" (FMV).

To solve the FMV dilemma, hospitals and other healthcare organizations are increasingly turning to independent valuation experts for help. Daryl Johnson, co-founder of Delray Beach based HealthCare Appraisers, says that his firm has seen "a steady rise over the last several years in the number of hospitals and healthcare organizations seeking independent expertise" to tackle the FMV problem.

"The federal government is acutely aware of compliance challenges faced by hospitals in Florida." Many states, including Florida, have additional laws that require payment to physicians to be FMV, but Florida, with its many multi-tiered and complex healthcare delivery systems, provides an additionally challenging climate. "Multi-hospital systems," Johnson says, "face greater regulatory scrutiny because of their size and have challenges in ensuring compliance across all of their facilities."

But to fully understand FMV, it is essential to consider the regulatory framework.

In 2006, healthcare costs will represent about 27% of the Federal budget, and a significant portion of many State budgets (about 26% of the Florida state budget). It is therefore not surprising to learn that healthcare is one of the most heavily regulated industries in America. In particular, two important Federal laws regulate hospital payments to physicians.

The Federal Anti-Kickback law is a criminal statute that prohibits any payments from a hospital to a physician to induce referral of patients to the hospital. The regulations have provided a set of "safe harbor" transactions to help hospitals and physicians ensure that their arrangements comply. While fitting into a safe harbor is not absolutely required, all the safe harbors require that payments for legitimate services must be consistent with FMV.

The Physician Self-Referral Law (known more commonly as the "Stark" law) prohibits any financial relationship between a hospital and a physician who also refers patients to the hospital, unless the arrangement fits into an exception. While the Stark law is considered a civil statute, its penalties are severe including substantial fines and exclusion from the Medicare program. Under Stark, arrangements must fit into an exception to be in compliance, and nearly all exceptions require that compensation be consistent with FMV.

The definition of FMV under these laws holds the key to the valuing a transaction. Under Stark, FMV is broadly defined as the value in arm’s-length transactions, consistent with 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.

The regulators, in developing this standard, recognized that the Stark definition limits the techniques a valuator can use to determine the FMV of a particular transaction or arrangement. In particular, the volume or value of referrals cannot be considered, and market data cannot be considered if that data represents other transactions between parties who are merely "in a position" to refer patients to one another.

That limits the techniques and data that healthcare valuators can use. It also makes FMV very difficult for hospitals and physicians to determine on their own or even understands. Daryl Johnson explains that "When you hire a plumber or a painter, you ask your neighbors and friends what they paid for their plumber, but under Stark, hospitals and physicians are typically not allowed to consider what other hospitals are paying their doctors for the same services." Johnson notes, "It is hard for hospitals and physicians to understand that market data they may have obtained is usually not eligible for consideration."

But what is the solution?

"While a variety of firms provide valuation services," Johnson says, "the healthcare regulatory environment is so complex that a dedicated healthcare focus is invaluable. Our valuation professionals are experts in healthcare regulation, finance, operations and reimbursement."

HealthCare Appraisers solves the problem by developing new valuation techniques that do not rely on prohibited data or considerations of referrals. For example, they have developed a proprietary method to determine the value of emergency room call coverage. Daryl Johnson explains, "Emergency room coverage presents a unique situation, in that the services being provided are different from typical medical services. Compensation cannot be determined in the same way that physicians are paid for patient care, such as performing a surgical procedure or an office visit. In effect, hospitals are paying physicians to make themselves available to respond to emergency room patients, as the particular medical emergency dictates." The value of availability, or the forbearance associated with being available, requires a sophisticated analysis of the circumstances to determine the appropriate payment structure and level.

The method used by HealthCare Appraisers was developed over several years, and has now been applied to hundreds of hospital emergency rooms not only in Florida but also across the nation. In similar fashion, HealthCare Appraisers has developed techniques to determine FMV of numerous other types arrangements for its clients, including employment arrangements, medical directorships, subsidies for hospital based physician groups, income guarantees, equipment leases, joint venture and "under arrangement" transactions, and other types of management arrangements. Johnson notes "the real expertise that an independent valuator provides is experience in determining FMV for a wide range of organizations and healthcare transactions. That enables the valuator to be very comfortable that the range of FMV determined will be consistent and defensible should it ever be challenged by the government regulators."

Daryl Johnson can be reached at HealthCare Appraisers, at (561) 330-3488 or via e-mail at djohnson@hcfmv.com. For more information, visit www.healthcareappraisers.com.
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