Published by HFMA
A critical test for determining whether a pay-for-performance arrangement is effective and can pass regulatory scrutiny is to assess and document the fair market value of the arrangement.
There has been a surge in new physician alignment strategies focused on cost savings and quality—and the result is evolving compensation models for physician services, including pay for performance. With these models, careful assessment of economic, market, and regulatory factors is required to decide how much of a financial incentive to offer physicians for their efforts in achieving high-quality care or reducing costs.
Various bodies of law have indicated that pay-for-performance payments to physicians must be set in advance at fair market value (FMV), defined by the International Glossary of Business Valuation Terms as “the price, expressed in terms of cash equivalents, at which a property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s-length in an open and unrestricted market, when neither is under compulsion to buy nor to sell, and when both have reasonable knowledge of the relevant facts.”
It is important to recognize that the FMV standard applies to the myriad payment models that are emerging in the shift toward value-based business models, not just pay for performance. Healthcare leaders should consider several factors when determining what to pay physicians under these models. They also should carefully document how FMV was determined in developing the methodology for such payment models.
Why FMV Is Important
In general, if a program drives referrals, the FMV standard should be considered.
The implications of defining FMV correctly are crucial to most healthcare arrangements between hospitals and physicians. Regulatory constraints imposed by the IRS on tax-exempt organizations, by the Centers for Medicare & Medicaid Services (CMS) under the Stark law, and by the Office of Inspector General (OIG) under the antikickback statute require FMV as a standard. The OIG states that “the compensation must be set in advance, consistent with fair market value, and not determined in a manner that takes into account the volume or value of referrals or other business generated by the referring physician” (Federal Register, March 26, 2004). Furthermore, the OIG has provided guidance that creative arrangements should be carefully constructed.
