Commercially Reasonable – Whose Responsibility is it?

Published by Healthcare Financial Management Association

Hospital finance executives can play an important role in assessing whether proposed transactions between their organizations and physicians meet regulatory standards for being commercially reasonable.

The healthcare industry has experienced significant growth in the number and types of physician integration strategies. Obvious reasons, such as declining payment, expensive IT, and anticipation of new payment methods based on quality and cost savings, are prompting both physicians and hospitals to consider new arrangements to work together. Some of these strategies have existed for years (e.g., medical directorships and direct employment), while others are relatively new (e.g., compensating physicians for quality). Regardless of the arrangement type, when hospital or health system executives contemplate entering into an agreement with a physician or physicians, they must be mindful of federal regulations mandating that these arrangements be commercially reasonable. Failure to do so could result in civil monetary penalties (see sidebar on page 2).

Determining whether an arrangement between a hospital and a physician is commercially reasonable can be challenging. It requires an understanding of a healthcare facility’s operational needs, clinical requirements, and
financial alternatives. Expertise in healthcare valuation and healthcare law is also needed because compensation under an arrangement deemed to be commercially reasonable must be set at fair market value (FMV) and the agreement must be structured to be consistent with regulatory guidance.

In short, healthcare executives should understand the key considerations that attorneys and valuation firms explore as they assess whether an arrangement is commercially reasonable. Following are some of these considerations.

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