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FAIR MARKET VALUE AND COMMERCIAL REASONABLENESS BACKGROUND & DEFINITIONS
Our opinions are developed to reflect and be consistent with the Fair Market value and Commercial Reasonableness definitions below.
Fair market value (“FMV”) is defined by the IRS in Revenue Ruling 59-60 as “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”
The federal self-referral statute (commonly referred to as Stark II) further defines General Market Value (“GMV”) as “the price that an asset would bring, as the result of bona fide bargaining between well informed buyers and seller who are not otherwise in a position to generate business for the other party, or the compensation that would be included in a service agreement, as the result of bona fide bargaining between well-informed parties to the agreement, who are not in a position to generate business for the other party, on the date of acquisition of the asset or at the time of the service agreement.”
The test for commercial reasonableness is a threshold that is distinct from the standard of fair market value and can be defined as follows:
“An arrangement will be considered “commercially reasonable” in the absence of referrals if the arrangement would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician, family member or group practice of similar scope and specialty, even if there were no potential designated health service referrals.”
Commercial reasonableness assesses the overall arrangement, including qualitative considerations such as strategy, mission, community need, and operations, whereas fair market value assesses the financial components of an arrangement with a physician.
Commercial reasonableness considers the deal in aggregate. Fair market value of the compensation represents just one component of commercial reasonableness.
HSG will provide you with individual fair market value and commercial reasonableness opinion letters for each unique compensation model (or other financial arrangement) with a physician, advance practitioner, or group. The opinion letter will clearly define what is being valued, the valuation approach (sales comparison, cost, or income approach), and will acknowledge your organization’s intended use of the opinion, which is to assure compliance with federal healthcare laws, namely Stark and Anti-Kickback. Each opinion will specify an effective date a period of validity, which is the period of time for which the opinion shall remain valid. We will officially certify each opinion according to the certification statements and professional standards provided by the Uniform Standards of Professional Appraisal Practice.
Finally, HSG will deliver each individual opinion letter on a timely basis. Most opinion letters of the types described on page one take 5 to 10 business days to prepare and deliver, once all necessary data and information is provided by a client organization. Large batches of letters requested at one time may take longer.
As large groupings of opinions are requested, HSG will advise as to a reasonable delivery date. We request clients be cognizant and respectful of the time it takes to create a quality opinion letter, particularly as large quantities are requested at one time.
SCOPE OF SERVICE
Our project fees typically do not include negotiations with physicians, executives, or practice managers. If a client wishes to engage HSG to lead or participate in negotiations, associated hours are usually billed at our standard hourly rates. HSG can also provide fair market value and commercial reasonableness opinions for clients regarding financial subsidies of hospital-based specialties/services (Anesthesia, Emergency Medicine, Hospitalists, Intensivists, Pathology, and Radiology).
Pricing for our services in these areas differs based on the size of the provider group (number of provider FTEs) and the relative level of provider compensation.
In addition to provider compensation and subsidy opinions, we can also provide fair market value and commercial reasonableness opinions for clients regarding practice asset purchases, time share/overhead sharing arrangements, and clinical co-management arrangements.
All opinion letter fees will be billed in two equal installments—first at project initiation, and the last at completion. All HSG invoices are due 20 days from receipt. In the event an invoice is not paid timely, a late charge in the amount of 1.25% of the invoice total will be assessed per month, beginning 20 days after the date of invoice.
HSG is a national healthcare consulting firm that is frequently retained by hospitals and healthcare systems to render opinion on the fair market value of physician compensation arrangements. HSG utilizes its experience in the healthcare industry and relies heavily on survey data provided by industry and trade organizations in formulating its opinion of fair market value.
To begin a discussion about an FMV and Commercial Reasonableness opinions for your health system, contact Neal Barker at (502) 614-4286.