Compliance with Fair Market Value Critical to Hospital-Oncologist Alignments – March 2012

Wayne Kuznar

March 2012, Vol 2, No 2 - Cancer Center Business Summit


Chicago, IL—Compliance with fair market value is critical for regulatory compliance in valuations of oncologist-hospital alignments, whether these are professional service agreements or comanagement arrangements, according to presenters at the 2011 Cancer Center Business Summit.

“Professional service agreements comanagement arrangements seem to be where the principal action is currently,” said Michael L. Blau, Esq, Chair, Health Care Venture Practice, and Partner at Foley & Lardner, LLP.

“For the physician, a professional service agreement is an economic win, because when physicians enter into a relationship with a hospital, the hospital is at least going to hold them harmless in terms of their current compensation,” he said.

Under professional service agreements, a contract is drawn up in which the purchased entity enters into a contract with the purchasing hospital to staff the hospital’s facilities in exchange for fair market compensation. Fair market value compensation in an arrangement such as this one can be paid on an aggregate fixed fee or a relative value unit (RVU) basis, Mr Blau pointed out.

The risk of reimbursement reductions would be eliminated if an RVU is locked in over a valuation period of 2 or 3 years, he said, and free care and bad debt during this period would be risks taken on by the hospital rather than the physician group.

The professional service agreements arrangement is also a win for the hospital, because it has an opportunity to capture an entire service line of business that it could not previously, he noted. "It picks up the entire business, not at the physician office rate, but at the hospital outpatient payment rate, which in most states will be between 120% and 180% of what otherwise would be paid to the physicians,” he said.

Under-arrangement transactions, in which the hospital takes lease assignment of leases of sites from landlords of the purchased entity and that entity performs the service, are now prohibited under the Stark Law, said Mr Blau. “The way to get around this is to disaggregate from the group certain assets, so the group is in a legally defensible position to say it is not performing the service, but the hospital is the entity that is performing the service,” he added.

One way to do this is to have space not provided by the group but by an independent third-party landlord. “Even if physicians own the space, they usually have a real estate trust as an entity that is separate from the practice that owns the space,” he explained.

The equipment can be sold to the hospital for fair market value “so that the hospital ends up providing the equipment,” Mr Blau said. With an unwind clause written into the contract, the physicians reserve the right to get the equipment back at the end of the transaction.

The physician group would then be left as a staffing service, which it can lease to the hospital. A 2% to 3% administrative handling fee paid to the physician group can also be worked into the agreement, he said, as well as a billing fee if the group is responsible for billing and collection.

Hiring an experienced fair market value appraiser “with an opinion you can rely on” is strongly advised to re­ceive a proper valuation and thus avoid conflict with the Stark law. Reasonable compensation will also be determined by a fair market value opinion.

“A valuation firm is not an advocate for either the physician group or the hospital,” said Darryl P. Johnson, Managing Partner, HealthCare Appraisers, Inc.

One of the misunderstood concepts about certain professional service agreements transactions is that “notwithstanding the fact that the hospital is getting a tremendous potential uptick from 340b drug pricing and its ability to bill as a facility-based provider, that value cannot be shared with the physicians,” he said.

This ability to bill as a facility-based provider is still of benefit to the physician group, he said, because it helps build the case of a win-win arrangement. “It is beneficial to show that the arrangement is economically viable from the hospital’s standpoint and from the physician group’s standpoint,” Mr Blau concluded.