Why is a Fair Market Value/Commercial Reasonableness Opinion Important for Value-Based Enterprises?

FMV/CR documentation ensures market and economic reasonability.

Over 450 accountable care organizations (ACOs) participated in the Medicare Shared Savings Program as of January 2021. As ACOs, clinically integrated networks (CINs), and similar value-based enterprises grow, so has the importance of ensuring effective and appropriate distribution methodologies. Value-based enterprises need to consider the following criteria when evaluating their distribution methodologies.

A Need for Fair Market Value and Commercial Reasonableness

While fair market value (FMV) and commercial reasonableness (CR) have been vital considerations within healthcare transactions for many years, the concept of pay for performance compensation programs in the context of CINs, ACOs, and other similar integrated care models is relatively new. Therefore, there is limited historical precedent as it relates to evaluating FMV/CR for such transactions. However, CMS and OIG jointly issued final rules that became effective January 19, 2021, to reform the Stark Law (Stark) and Anti-Kickback Statute (AKS) regulations and provide further guidance about the impact of value-based arrangements on physician compensation.

Further, CMS has reviewed FMV standards relative to value-based arrangements and determined a series of Stark exceptions for arrangements that facilitate value-based health care delivery and payment based on the satisfaction of various conditions. The updated standards further reduce the regulatory restrictions for compensating providers participating in such arrangements.

That said, compliance is still a primary concern. FMV/CR documentation may assist in ensuring market and economic reasonability as well as long-term success. Proper documentation is crucial to a value-based enterprise. While new regulations ease Stark and AKS concerns, this is predicated on degrees of value-based reimbursement. Thus, sufficient documentation of policies is essential to ensure an appropriate distribution methodology.

Every value-based structure and transaction is unique, and the methodologies that a party may use to evaluate these arrangements continue to evolve. Unlike traditional physician compensation arrangements, there are no independent industry surveys that provide an overall indication of market conditions, incentive compensation structures and payouts, and other related benchmarks tied to value-based arrangements. Further, given the variability in focus and composition of these arrangements, any market data would, at best, be difficult to use or apply.

Indeed, there is no single industry-wide approach to valuing the distribution models of value-based enterprises. In our view, the valuation of value-based programs should focus primarily on the structure of the arrangement and the variables that impact the payments to participating providers. Because there is no formal benchmark to compare, this heightens the need to have an expert, third-party FMV/CR opinion or appraisal of value to examine all the facts and circumstances of physician distributions.

How to Evaluate Fair Market Value and Commercial Reasonableness

In evaluating FMV/CR, we believe the primary focus should be on the structure of the distribution model, as the economics of any payments are predicated mainly on the structure. Thus, the documentation of profits generated, attribution methodologies, and quality metrics for the structure of the distribution model will influence the economic outcome and its appropriateness concerning FMV/CR.

Any economic distributions to physicians should consider the work effort rendered. While the value-based nature of these arrangements offers considerably greater flexibility than other healthcare arrangements, evaluating estimated work effort can be beneficial. Total cash compensation and hourly rates compared to survey data may serve as an appropriate reasonableness check to gauge whether a distribution model allows for distribution incentives that are not too high or too low.

As a value-based enterprise enters maturity, it should be expected to operate as a going concern with the ability for profits to fund physician distributions. It is customary for value-based enterprises to retain some portion of earnings in the form of a strategic reserve, which the enterprise can use to maintain historical distribution amounts in years when profits decline. The FMV analysis of any physician distribution model should consider the makeup and appropriateness of its funding source.

In testing for reasonableness, the following checklist may help when documenting CR:

  • Business purpose and provider necessity
  • Expected financial impact of the transaction
  • Evaluation of alternatives
  • Risk vs. return
  • Terms of the arrangement

Next Steps

As value-based enterprises become a more crucial part of the healthcare ecosystem, we learn about the best approaches to ensure effectiveness. A key economic driver of success in a value-based enterprise is its distribution methodology and associated practices. The proper assessment of reasonability and efficacy is critical.

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