What the FMV? Do You Have a Commercial Reasonableness Problem?

August 4, 2022

By: Bartt B. Warner, CVA and Mallorie Holguin

The following article was published by the American Association of Provider Compensation Professionals

Hospitals and health systems have historically focused on fair market value (FMV) when there is a financial relationship with a physician. The reason for this is that the healthcare landscape is highly regulated and includes the Stark Law, the Antikickback Statute, the False Claims Act (FCA), and Internal Revenue Service 501(c)(3) status for tax-exempt entities whereas violations could result in exorbitant penalties, sanctions or even jail time. Meanwhile, these health systems are still reeling from the impact of COVID-19 and the recent changes to the Medicare Physician Fee Schedule (MPFS). In light of this, less focus has been placed on both defining and assessing commercial reasonableness.

As a result, hospitals and health systems may have commercial reasonableness issues that will further be exacerbated unless a fundamental shift happens and as much focus is placed on commercial reasonableness as is currently done with ensuring compensation arrangements are consistent with FMV. Part of the challenge stems from the fact that the process of determining commercial reasonableness is not as well defined and requires a thorough understanding of the specific facts, circumstances, and rationale of the arrangement. While the healthcare valuation community has refined the FMV process and determination of value over the past decade, the concepts, and methodologies for determining commercial reasonableness on its own terms have not yet been succinctly defined or standardized. However, increased government scrutiny underscores the need to understand and ensure that this requirement is met for all financial arrangements between referring parties.