Redefining fair market value under Stark Law

In Part 1 of this three-part series, the laws and governmental agencies that regulate physician transactions were reviewed against the risk of non-compliance and potential of civil and/or criminal penalties.¹

Much has transpired since its publication. In addition to the challenges associated with the COVID-19 pandemic, physician practices face new compliance concerns after the Centers for Medicare & Medicaid Services (CMS) shared two major announcements in the latter part of 2020:

1. The 2021 Medicare Physician Fee Schedule (PFS)
2. New final rules under the Physician Self-Referral “Stark” Law and Anti-Kickback Statute (AKS).²

These recent changes will have a wide-ranging impact on physicians and their transactions in 2021 and beyond. It is essential that the significance of these regulatory changes — a new definition of FMV, appropriate application of survey data, and decoupling of the volume and value standard — should not be overlooked. To complicate matters, the 2021 Medicare PFS will likewise refashion FMV for physician practices.   

Redefining FMV

Determining whether compensation under a specific arrangement is within FMV is a requirement for many of the exceptions or safe harbors that may be used under the Stark Law or AKS. Understanding how FMV is defined is of utmost importance. However, for many physicians, healthcare executives and healthcare valuators, the regulations have historically generated ambiguity surrounding FMV. In the new final rules, CMS has attempted to increase clarity around the definition of FMV, its application to survey data, as well as its relationship to the volume or value standard. 

FMV: Clarifying the definition by subject transaction

To minimize confusion, CMS redefined FMV in the Stark final rule³ to be the value in an arm’s-length transaction, consistent with the general market value of the subject transaction.⁴ Furthermore, general market value is now defined in 42 C.F.R. § 411.351 to be specific to the type of the transaction as follows:

General market value means:

1. Assets. With respect to the purchase of an asset, the price that an asset would bring on the date of acquisition of the asset as the result of bona fide bargaining between a well-informed buyer and seller that are not otherwise in a position to generate business for each other.
2. Compensation. 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.
3. Rental of equipment or office space. With respect to the rental of equipment or the rental of office space (not taking into account its intended use and without adjustment to reflect any additional value the prospective lessee or lessor would attribute to the proximity to the lessor where the lessor is a potential source of referrals to the lessee)⁵, the price that rental property would bring at the time the parties enter into the rental arrangement as the result of bona fide bargaining between a well-informed lessor and lessee that are not otherwise in a position to generate business for each other.⁶

FMV is not linked to a particular survey percentile

In redefining FMV, CMS provided some useful commentary and insight into its thoughts on determining the FMV range for a transaction. Specifically, CMS highlights the need to evaluate general market value in the context of “the subject transaction” and not solely depend on the utilization of particular survey data or specific percentiles within the data for the determination of FMV.

Using survey data continues to have utility when determining FMV; however, the end value needs to be nuanced to the specific set of circumstances surrounding “the subject transaction.” CMS’ comments to this end, included the following:

…We continue to believe the fair market value of a transaction — and particularly, compensation for physician services — may not always align with published valuation data compilations, such as salary surveys. In other words, the rate of compensation set forth in a salary survey may not always be identical to the worth of a particular physician’s services.⁷

It is not CMS policy that salary surveys necessarily provide an accurate determination of fair market value in all cases. … Consulting salary schedules or other hypothetical data is an appropriate starting point in the determination of fair market value, and in many cases, it may be all that is required. … In our view, each compensation arrangement is different and must be evaluated based on its unique factors.⁸

As an example, CMS indicated that securing a sought-after physician with a unique skill set may warrant a compensation level higher than typically expected for the specialty in the particular geographic area. On the flip side, hospitals that may be in a more tenuous economic state need not feel compelled to pay higher than financially prudent simply because salary surveys would suggest such a payment.

For these reasons, CMS declined to establish a bright line rule based on a particular survey percentile. Specifically, CMS’ policy of determining appropriate compensation is not based on salary data at or below the 75th percentile, nor is it outside of FMV range for compensation set above the 75th percentile.⁹ 

Decoupling volume or value standard

Until now, the volume or value standard had not been separately defined within the regulations but linked to the determination of FMV. The final rule has now clarified that meeting the FMV requirement for an exception is separate and distinct from meeting the volume or value standard. In doing so, the rule has created a two-part mathematical formula used to determine if the volume or value standard has been met. 

To address compensation terms between an entity furnishing designated health services (DHS) and a physician, with payments made either from a physician to the entity or to a physician from the entity, a two-part rule needs to be met:

1. When evaluating compensation from a physician (or immediate family member of the physician) to an entity furnishing [DHS], does the compensation formula vary by taking into account the volume or value of referrals to the entity and/or other business generated by the physician for the entity when calculating compensation?¹⁰
2. If referrals or other business generated by the physician is used in a compensation formula, does the physician’s compensation increase or decrease based on a negative or positive correlate with the number or value of the physician’s referrals to the entity?¹¹

Should the answer be “yes” for the questions above, then the arrangement does not meet the volume or value standard. In this instance, if the arrangement fails to meet the volume or value standard, then “that determination is final.”¹²

For more insight, CMS included some additional commentary on meeting the volume or value standard:

With respect to employed physicians, a productivity bonus will not take into account the volume or value of the physician’s referrals solely because corresponding hospital services (that is, [DHS]) are billed each time the employed physician personally performs a service.¹³ 

Important for physician practices entering into professional services agreements (PSAs), CMS’ guidance “extends to compensation arrangements that do not rely on the exception for bona fide employment relationships [e.g., PSA] … and under which a physician is paid using a unit-based compensation formula for his or her personal performed services, provided that the compensation meets the conditions in the special rule [on unit-based compensation].”¹⁴

2021 Medicare PFS change: Impact on FMV

The new Stark final rules took effect Jan. 19, 2021, amidst the backdrop of a significant PFS change first shared by CMS on Dec. 2, 2020,¹⁵ and revised Dec. 27, 2020, by the Coronavirus Response and Relief Supplemental Appropriations Act 2021. Among the multiple changes under the 2021 Medicare PFS final rule, the following are some of the material ones that will have a potential impact on determining FMV:

• wRVU values for office and other outpatient services E/M codes have increased by 7% to 13% amongst new patient office visit codes 99202-99205 and by 28% to 46% amongst established patient office visit codes 99212-99215.
• Add-on codes for incremental time spent with a patient based on their complexity have been introduced but not finalized to date.
• The Medicare conversion factor for 2021 is $34.89, which reflects a 3.3% decrease from the 2020 conversion factor.

A cursory review of the impact on physician wRVUs shows a potential significant increase for medical specialties and a potential decrease for procedure-based specialties. In terms of reimbursement, the 2021 Medicare PFS governs Medicare as well as those Medicaid and commercial plans that rely on the PFS for their own rates. Therefore, the reimbursement impact from the 2021 PFS will be contingent on the practice’s payer mix and the extent to which the PFS is used to determine commercial and Medicaid rates.  

In light of the 2021 Medicare PFS, physician practices will need to consider the following:

• Figure 1 illustrates the percentage change to wRVUs and Medicare reimbursement from 2020 Medicare PFS to 2021 Medicare PFS based on Medicare utilization data by CPT code, respectively for endocrinology, family medicine, cardiology, orthopedic surgery and general surgery specialties.¹⁶ In all specialty categories, the percentage change to wRVU was greater than the percentage change to reimbursement. This variance could result in significant changes to physician compensation. Practices need to perform financial scenario analyses and pro formas to help them quantify the financial impact to the group as well as to physicians individually.
• Utilizing national surveys to support compensation as FMV will be more complicated in the coming years given the impact from the pandemic along with recent CMS commentary in the final rules.   
  1. Current published 2020 surveys contain data from 2019, prior to the pandemic. Data from the pandemic will affect surveys published in 2021. The pandemic has injected a fair degree of variability into the data across regions as well as across specialties. Combining confounding factors with the 2021 Medicare PFS changes will make it more difficult for benchmarking purposes and the assurance that one is comparing apples to apples. As a result, it is recommended that physician practices normalize their data for comparison purposes and utilize multiple analyses to ensure all aspects have been considered.
  2. CMS reiterated that there is no bright-line threshold upon which practices may rely when determining FMV, both on the upper end of the range as well as the lower end of the range. Via the new FMV definition, the final rule places increased importance on the specific circumstances surrounding the subject transaction. As a result, utilizing survey percentiles solely as the measure of FMV may result in compensation being outside of FMV range.
• Contingent upon the economic impact from the 2021 Medicare PFS, physician practices must weigh their compensation arrangements in the context of their financial sustainability, compliance risk and need for provider retention. Open communication between practice leadership and the physician team will be crucial. The challenge will be to keep the conversation centered around the practice’s ability to provide quality patient care, maintain profitability and reward physicians accordingly. 

Key takeaways

Physician practices continue to operate in a complex regulatory environment. Establishing FMV will continue to be a critical step in meeting exceptions and navigating safe harbors under Stark and AKS. Therefore, the attempt to increase clarity in this definition is a welcomed aspect of the new final rules. However, it comes with the understanding that FMV should be determined based on the specific circumstances surrounding the subject transaction and not solely on survey data at specific percentiles.

Lastly, the change to the 2021 Medicare PFS poses an additional confounding factor when determining FMV. The significant changes to the wRVUs will complicate benchmarking analyses and will require normalization of the data to ensure the appropriate use of the surveys. Physician practices need to engage this issue as they set compensation arrangements for 2021.

The final article in this series will explore specific transaction types, including value-based arrangements, along with those key value drivers used to derive the FMV compensation range.

Notes:

1. Aguilar J. “Fair market value and physician compensation: Defining the regulatory landscape.” MGMA Connection. July 2020. Available from: mgma.com/aguilar-fmv1.
2. Key to the final rules are new exemptions and safe harbors associated with value-based care arrangements. However, given the scope of this article, value-based care arrangements will be reserved for discussion in the series’ final article.
3. It is important to note that AKS and other regulatory agencies are not bound to utilize the definitions put forth under the Stark Law final rules. However, the rules do provide terminology and interpretive guidance.
4. 42 C.F.R. § 411.351.
5. Ibid.
6. Ibid.
7. FR Vol. 85, No. 232.
8. Ibid.
9. Ibid.
10. 42 CFR § 411.354(d)(2); 42 CFR § 411.354(d)(3).
11. 42 CFR § 411.354(d)(2); 42 CFR § 411.354(d)(3).
12. FR Vol. 85, No. 232.
13. Ibid.
14. Ibid.
15. CMS-1734-F.
16. This figure was based on Medicare claims utilization across specialties. The percentage change should not be used as a substitute for a specific physician coding/reimbursement analysis as these changes are sensitive to the coding distribution, payer mix, and case mix for the practice. Contingent upon the relative percentage use of outpatient E/M office visit codes, this impact could vary.