Ensuring 'Commercially Reasonable' Arrangements Equal in Importance to 'Fair Market Value' Financial Terms
Over the past several years, our firm has experienced a tremendous increase in the demand for fair market value assessments of physician compensation. Because of recent governmental interest, an interesting offshoot of this work has developed involving whether the underlying arrangements are “commercially reasonable.”
We have followed recent litigation and regulatory opinions [PDF], focusing almost exclusively on the commercial reasonableness of arrangements and not necessarily the value of the dollars exchanged. In one instance, the government challenged a hospital’s medical director agreement is not based on value but on the fact that the hospital did not need various separate medical directors given its circumstances. [PDF]
Because of these developments, we began to take a closer look at our clients’ physician-hospital arrangements. Simply because these arrangements may result in fair market value dollars does not indicate that they are commercially reasonable. We have encountered several examples:
- A hospital paying a cardiologist specialty compensation rates for administrative work requiring only a primary care physician;
- A health system maintaining medical director agreements at two of its facilities which contained duplicative protocols and policy responsibilities; and,
- A hospital failing to maintain proper oversight of the effectiveness and necessity of its physician services arrangements.
In each of these situations, we could easily determine fair market value rates given the specific facts and circumstances provided by our clients. But in calculating a fair market value rate, we were assessing the range of dollars only and not necessarily questioning the overall reasonableness of the arrangement. Healthcare entities should be careful of this pitfall, given that failure to ensure reasonableness may invoke liability under the False Claims Act.
Because the government has recently focused on this issue, we are starting to rethink how our clients can ensure that their arrangements meet the standard of commercially reasonable. Determining reasonableness may require our clients to consider a broad range of facts, and we have constructed a five-part analysis to help simplify the process. These clients have already begun to use this analysis including detailed discussions with legal counsel or as part of existing fair market value assessments. In our experience with commercial reasonableness evaluations, a carefully organized analysis becomes manageable even among complex circumstances. PYA's complete five-part analysis includes the following components:
- business purpose analysis
- provider analysis
- facility analysis
- resource analysis
- independence and oversight analysis
