PYA Principal Tynan Olechny and Senior Manager Annapoorani Bhat provided important information for rural providers related to fair market value and commercial reasonableness considerations during a National Rural Health Association webinar, “Valuations: What Rural Providers Need to Know."

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Valuations: What Rural
Providers Need to Know
Tynan Olechny, MBA/MPH, AVA
Annapoorani Bhat, ASA

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Agenda
1
2
3
4
Overview of Healthcare Regulatory Considerations
Special Considerations for Rural Healthcare Providers
Fair Market Value (FMV) and Commercial Reasonableness (CR) Defined
5 FMV Enforcement Cases
Key Industry Trends

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Key Industry Trends

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Times Are Changing…
• Overall theme is consolidation and
integration.
• Significant trend of
hospital/physician alignment.
• Increased focus on reducing
healthcare costs while also
improving quality of patient care.
• Changes in healthcare delivery
system from healthcare reform
package.
• Continued government focus on
fraud and abuse.

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Rural Health Differentiators
• About 10% of physicians practice in rural areas, yet rural areas account for
about 25% of the patient population.
– There are 2,157 Health Professional Shortage Areas (HPSAs) in rural and frontier
areas of all states and US territories compared to 910 in urban areas.
• Rural patients tend to be poorer, are less likely to have insurance coverage,
and are more likely to have a chronic illness than patients in urban areas.
• Medicare payments to rural hospitals are much lower than to hospitals in
urban areas for the same services.
• Rural hospitals tend to be much smaller, with lower patient volume than those
in urban areas, but are still faced with providing the same broad range of
services and high-quality care.
• More than 470 rural hospitals have closed within the past 25 years.
Source: National Rural Health Association; American Hospital Association.

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Key Rural Health Issues
• Insufficient patient volumes to cover high-fixed costs
– Problem: Maintaining healthcare access for rural residents comes with a high
price tag, but low patient volumes do not generate sufficient revenues for
providers to cover those costs.
– Band-Aid: Special Medicare and Medicaid payment enhancements to rural
providers to cover the gap.
– Pain Point: Potential elimination of payment enhancements.
– Cure: Providers across multiple communities within a region work
collaboratively to spread costs while maintaining services by strategically
allocating resources.
– Prescription: Inclusive governance structure to foster trust relationships
among providers: no trust, no spread.

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Key Rural Health Issues
• Insufficient patient population over which to spread risk
– Problem: Rural providers are unable to pursue risk-based contracts because
there is insufficient patient population over which to spread risks.
– Band-Aid: Exclude rural providers from value-based contracting opportunities.
– Pain Point: Growing pressure from payers to purchase value instead of
volume; demand from rural communities for quality and efficiency.
– Cure: Providers serving multiple rural primary care service areas form network
to aggregate populations for contracting purposes.
– Prescription: Sufficient clinical integration among network providers to
survive antitrust scrutiny: no integration, no aggregation.

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Trends in Rural Areas
• Professional Service Agreement (PSA)
– Rural hospitals contract with physicians from urban areas to hold clinics and
perform procedures.
• Medical Directorships
– Provide clinical and administrative leadership to a specific service line of the
hospital.
• Clinical Co-management Arrangements
– Align physicians and hospital to achieve greater efficiencies and improve
patient outcomes.
Key Concept: FMV is critical to determination of payment
for transactions between physicians and hospitals.

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Overview of Healthcare
Regulatory Considerations

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• Regulatory concerns affecting physician-hospital
transactions, such as employment, can be daunting.
• Physicians are constrained by laws not applicable to other
industries.
• Primary legal concerns are Stark Law, Anti-Kickback Statute,
and False Claims Act.
• Transactions with 501(c)(3) hospitals bring heightened
scrutiny from OIG and IRS.
Bottom Line: Physicians cannot receive compensation
based on their referrals when reimbursed by federal (or
state) healthcare dollars.
Key Regulatory Considerations

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Stark Law
• Also called the “Physician Self-Referral Law.”
• Prohibits a physician from making referrals for designated
health services to entities in which the physician (or a family
member) has a financial relationship.
• Designated Health Services (DHS):
- Currently 12 health services
- Includes hospital inpatient and outpatient services, as well as
clinical lab, physical and occupational therapy, radiology,
certain imaging, DME, home health, and various other
services and supplies

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Stark Law (continued)
• Is a “strict liability” law
• Contains various “exceptions”
 Rural provider exception applies to physician ownership
interests
• Enforced by the Centers for Medicare & Medicaid Services
(CMS), although Department of Justice adjudicates false
claims arising from violations of the Stark Law

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Anti-Kickback Statute (AKS)
• Prohibits the payment or receipt of remuneration to induce
or reward referrals for Medicare or Medicaid services.
• Criminal statute that requires proof of “intent,” i.e.,
knowingly and willfully paying for referrals.
• If one purpose of the payment is to induce referrals, then
AKS is violated, even if there are other legitimate business
reasons for the payment.
• Contains various “safe harbors.”
• Enforced by the Office of the Inspector General (OIG) and
the Department of Justice (DOJ).

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False Claims Act
Imposes liability on any person who submits a claim to the
federal government that the person knows (or should know)
is false.
Civil statute.
Often “piggy-backed” with the AKS and Stark.
Subject to qui tam (“whistle-blower”) suits.

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IRS 501(c)(3) Anti-Inurement Rules
501(c)(3) tax exempt entities
must avoid “excess benefit”
transactions.
Transactions must be at FMV
and must be consistent with the
entity’s charitable mission.
Violations can result in loss of tax
exempt status.
Rules

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Penalties for Violations of Key
Healthcare Regulations
Penalties for violation can include:
• Denial of payment.
• Refund of payment.
• Civil monetary penalty up to $15,000 per claim.
• Civil monetary penalty up to $100,000 for each
“scheme” designed to circumvent the law.
• Civil monetary penalty of up to three times the
amount of claims.
• Possible criminal penalties, including jail time.
• Exclusion from the Medicare or Medicaid program.

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Fair Market Value and Commercial
Reasonableness Defined

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What is Fair Market Value?
$
Willing
Seller
Willing
Buyer
$“Ground Rules”
• Arm’s length transaction
• Bona fide bargaining
• Neither is under compulsion
• Reasonable knowledge of relevant
facts

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• Determined from the perspective of hypothetical buyers and
sellers without the ability to refer business to one another.
• No consideration for synergies. However, such synergies
often exist!
• The financial terms of the transaction must make economic
sense based on the services being provided.
• Determination of FMV involves both quantitative and
qualitative analyses.
Fair Market Value – Key Concepts

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Importance of FMV Opinions
• Many regulatory exceptions require employment
arrangements to be at fair market value.
• FMV opinions ensure transactions are compliant with key
regulatory considerations and serve to protect hospital and
physicians from government scrutiny.
• Nearly two-thirds (65%) of organizations have established
governance policies regarding physician compensation
arrangements that may require an external review for FMV.
-Of these, more than half (53%) conduct an external FMV
review of physician compensation levels annually.
Source: Sullivan, Cotter and Associates, Inc. 2013 Physician Compensation and Productivity Survey.

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What Are the Key Steps and Factors
in the FMV Process?
• A comprehensive understanding of
all aspects surrounding the
proposed arrangement.
• Examples include:
– Hospital staffing needs/full-time
equivalents (FTEs) required
– Physician/practice specialty
– Community-specific factors
– Exclusivity of services
– Coverage details
– Billing specifics
Step 1:
Ascertain
Key Facts
Surrounding
the
Arrangement

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What Are the Key Steps and Factors
in the FMV Process?
• Physician experience
• Provider productivity
• Market comparables
• Quality measures
• Reimbursement trends
• Payer mix
• Practice performance
• Supply/demand
• Compensation trends
• HPSA and MUA/P
designation
Step 2:
Determine
Factors that
May Impact
FMV

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What Are the Key Steps and Factors
in the FMV Process?
• Medical Group Management
Association
• Sullivan, Cotter & Associates, Inc.
• Hospital & Healthcare Compensation
Service
• American Medical Group Association
• The Delta Companies
• Merritt Hawkins & Associates
• Modern Healthcare
• Other “Objective” Survey Benchmarks
Step 3:
Identify
Multiple
Objective Data
Sources for
Benchmarking

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What Are the Key Steps and Factors
in the FMV Process?
• Compensation survey data
• Cost to replace/build
• Locum tenens
• Market comparable analysis
• Productivity analyses
• Time studies
• Compensation per wRVU
• Collections per wRVU
• Other relevant analyses
Step 4:
Identify
Analyses for
Determining
FMV
Compensation

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What is Commercial Reasonableness?
• Defined by the Department of Health and Human
Services (HHS) as an arrangement which appears to be
“a sensible, prudent business agreement from the
perspective of the particular parties involves, even in the
absence of any potential referrals.”
• Many Stark exceptions require payment to be
commercially reasonable.
Key Concept: In the absence of a referral relationship, is
the arrangement one that makes “good business sense?”

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Example Factors in Determining CR
• Is each component of the proposed arrangement (as well as
the entire arrangement):
- A reasonable necessity that is essential to the functioning of the entities
involved?
- Reasonably necessary to accomplish a rational business purpose?
• Does any specialized training and/or experience of the
provider exist that should be taken into account?
• Are the particular nature of the duties and the corresponding
amount of accountability under the proposed arrangement
clearly defined and reasonable?
• Are patient demand, the number of hospital patients, and/or
the community need sufficient to justify the services?

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FAIR MARKET
VALUE
COMMERCIAL
REASONABLENESS
Overall
Arrangement
“WHY?”
SENSE CENTS
Range of
Dollars Only
“HOW
MUCH?”
Scope
Key Question
Differentiating Between FMV and CR

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Special Considerations for
Rural Healthcare Providers

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When To Obtain a Third-Party Valuation
• FMV opinions can be expensive due to the time
spent in research and discussion of difficult issues.
• May not make practical business sense for rural
healthcare providers to obtain an FMV opinion for
every proposed arrangement.
Key Concept: Seek outside assistance on riskier or
more complex arrangements.

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Evaluating Risk
• Is the arrangement commercially reasonable?
• Are you offering to pay at the median or at the 90th
percentile of national survey benchmarks?
• Are there multiple components to the compensation
arrangement? Could the physician be getting paid
twice for the same services?
• Is there potential for a productivity or other bonus to
push total compensation above the 90th percentile?

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Proceeding Without an FMV Opinion
• Though an FMV opinion will be your best defense if the
arrangement is ever called into question, rural healthcare
providers may choose not to obtain a formal report for various
reasons. Without an FMV report, it’s still important to:
– Document your clear, objective methodology in determining
compensation for arrangement
– Establish and document appropriate need for services
– Document any other important factors – i.e. location in a Health
Professional Shortage Area (HPSA) or Medically Underserved
Area/Population (MUA/P), or recruiting difficulties

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FMV Enforcement Cases

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Contact Information:
TOlechny@pyapc.com
ABhat@pyapc.com
(404) 266-9876
www.pyapc.com
Thank You!