The following is the first of a regular series of contributions to Park Place Live by Mark E. Reagan, the managing shareholder of Hooper, Lundy & Bookman. He is one of the nation’s most respected strategic problem-solvers of complex issues in the post-acute and long-term care industry. Reagan counsels trade associations, including serving as the general counsel for the California Association of Health Facilities and the Massachusetts Senior Care Association and working with the American Health Care Association in multiple capacities. He likewise represents long-term care facilities and companies, hospitals, physician groups, home health agencies, hospices, rehab companies, medical product suppliers, and others.

The concept of paying “commercially reasonable rates” consistent with “fair market value” for medical director services is something that most post-acute and long-term operators have likely heard about at least once, if not many times. Also, it is also accompanied by mystical language about something called “Stark Law” and other more worrisome language of the “Anti-Kickback Statute.”

In the best situation, they’ve heard about this from their lawyer or their compliance officer. In the worst, they’ve heard it from law enforcement, namely the Office of Inspector General (OIG) or the Department of Justice (DOJ).

This article is designed to demystify the conundrum of “fair market value” in this context, what it means and why it is important. After doing so, it will offer some thoughts about approaches to stay compliant and out of trouble.

The Challenge

Providing healthcare services is a unique and complicated business. In many other sectors outside of healthcare, one can freely compensate individuals in return for directing business their way. Not so in healthcare. Paying for referrals is a hard and clear “no” in healthcare world.

However, residents don’t just show up at nursing centers. Operators work hard to build strong reputations and relationships with referral sources, demonstrating the quality and efficiency of our services to physicians, hospitals, and health plans. And they should.

Of course, the challenges associated with referrals arise given the legal requirement that operators contract with physicians to serve as medical directors to:

(1) to coordinate medical care in the facility and provide clinical guidance and oversight regarding the implementation of resident care policies;

(2) collaborate with the facility leadership, staff, and other practitioners and consultants to help develop, implement, and evaluate resident care; and

(3) help operators identify, evaluate, and address/resolve medical and clinical concerns, issues that affect resident care, medical care, quality of life as well as the provision of services by physicians and other licensed healthcare practitioners.

Moreover, depending on the size and scope of services that operators provide, there is often the need to utilize other physician consultants to assist with utilization review, quality assurance, and the special needs of unique resident populations.

Often, the best candidates for all of these positions are physicians who are already “part of the daily life” of facilities through referring and serving residents as part of their clinical practices. That experience often produces relationships founded upon, on the one hand, respect for facility administration and staff and, on the other, the physician expertise and practice acumen.

And this brings us to the conundrum. How can we utilize the expertise of the best physicians that we encounter in a clinical setting for medical direction or other essential services and not get in trouble?

The answer is by compensating them with “commercially reasonable rates” within “fair market value” for these services so that there can no doubt that operators apaying them for these services and not for their referrals.

But how do operators go about figuring out how to do this in an effective and compliant way?

The Solution

By way of introduction, the “Stark Law” is the federal Physician Self-Referral Law, named about the author of the legislation, Pete Stark.

Generally speaking, the” Stark Law” restricts the circumstances under which physicians are allowed to make referrals for certain designated healthcare services and financially benefit from those referrals.

However, the law recognizes an exception for “personal services arrangements” which, to be effective, requires, among other things, that:

(1)   The aggregate services covered by the arrangement do not exceed those that are reasonable and necessary for the legitimate business purposes; and

(2)   The compensation to be paid over the term of each arrangement is set in advance and does not exceed fair market value.

The regulations implementing the Stark law define “commercially reasonable”:

They also define “fair market value”:

These rules place the burden on operators to establish that an exception is met, so it is important to document the basis for compliance related to contracts with medical directors and other physicians. Although attorneys are not qualified to opine on commercial reasonableness and/or fair market value; there are consulting firms who will do both, and the safest course is to obtain an opinion from one of them.

However, there is no requirement for an expert opinion – the services just need to be demonstrably reasonable, and the compensation just needs to be demonstrably fair. Typically, these kinds of arrangements pay an hourly rate, require reporting of hours, and cap the number of hours at something reasonable. However, the rules do not prescribe a particular method of assuring commercial reasonableness or fair market value, and other methods should work, as long as they are demonstrably effective.

So, for example, if an operator is paying a physician a flat monthly rate that assumes a minimum commitment of time, but doesn’t require monthly reporting of hours, the physician should periodically provide a written report on their activities to ensure that the expectations are being met. There is no firm guidance for this – something such as one week each quarter should be sufficient – but it should be whatever the operator believes is necessary to provide assurances for itself and, if necessary, a regulator that the operator is receiving sufficient value.

Similarly, if there is no cap on the medical director or other consultants’ hours, time sheets should be completed and reviewed, with the operator conferring with the medical director/physician in order to confirm that the time appears accurate given the level of the physician’s activities. Accordingly, the operator should meet with the physician if the time appears excessive in order to discuss whether there are issues with such accuracy.

Fair Market Value

The determination of “fair market value” would typically look to comparable rates at SNFs generally to determine general market value. If the operator doesn’t receive an opinion from a qualified consultant, it is essential to document the basis for the rate.

Ideally, it would be the result of an arm’s-length negotiation, in which the operator begins with something readily supportable, and documents the negotiation that results in the final rate. Also, if there is available market information on rates paid by other facilities, that would be helpful, although one would want to be careful with these, because there’s no assurance that the process used by competing facilities would be compliant.

Operators should also consider conducting annual reviews of facility quality metrics to evaluate whether they are getting value in terms of improved quality and reduced incidents. While the standard “fair market value” analysis looks to comparable hourly rates rather than outcomes, a demonstration that the arrangements are achieving measurable results may well positively impact a regulator’s point of view on the arrangement.

In addition to the “Stark Law,” payments made to medical directors and other physician consultants in excess of “fair market value” could also result in potential liability under the federal “Anti-Kickback Statute” and any comparable state versions of the law. However, compliance with the “Stark Law” should generally afford protections from this exposure as well. Of course, for all of these risks, operators should consult with qualified legal counsel to receive specific advice for their particular market and situation.

Although this is a high-risk area for operators, some careful attention can go a long way to maintain compliance and avoid against serious inquiries from OIG or DOJ.

Disclaimer: This article is solely for general educational purposes and does not constitute any form of legal advice. Although the information contained in the article concerns potential legal issues, it is not a substitute for specific legal advice from qualified counsel. The publication of this article does not create any attorney-client relationship between the reader and Hooper, Lundy & Bookman, P.C. You should not act upon this information without seeking your own independent professional advice.