Is Your Physician Contract Commercially Reasonable?

When considering Stark Law exceptions for vetting financial arrangements with physicians, we often witness a tendency to focus primarily on Fair Market Value (FMV). This is rightly so, as ensuring physician contracts comply with FMV is a critical part of risk management.

However, many of the exceptions that require FMV also stipulate, as a separate requirement, that the arrangement be commercially reasonable. These two important requirements, though linked, are not synonymous. 

Unfortunately, there is little guidance as to what actually constitutes “commercially reasonable” or how one is to evaluate whether an arrangement is commercially reasonable or not. That said, we recommend providers ask the following questions in evaluating whether a physician’s contract withstands as commercially reasonable:

What business or mission purpose does the arrangement serve?

This should be the first question one asks when considering a financial arrangement with a physician. If there isn’t a legitimate business or mission purpose, then the arrangement will likely be construed as payment for referrals under scrutiny. 

Note: pay particular attention to hospitals leasing assets or services from physicians, especially real estate.

Is the financial arrangement Fair Market Value compliant?

Another immediate consideration to make is if the arrangement is not consistent with FMV, then it will fail commercial reasonableness on its face. You can read more about managing FMV risk and compliance in our blog here.

Does the arrangement duplicate any existing services? 

It’s worth considering if you really need another medical director or another sub-specialty for call coverage. A duplicated service, even if the compensation paid meets FMV standards, will not likely withstand scrutiny as commercially reasonable.

Is the level of service being contracted for a genuine reflection of need?

For example, are you paying full-time compensation and benefits for services or duties that really only require part-time work? This was a critical issue in the now infamous Tuomey case, which defined many standard practices for both compliance and enforcement. In relationship to this level of questioning, it also helps to ask: are you paying to staff multiple FTEs when fewer are required for actual coverage and volume needs? This is also a central issue with coverage stipends. 

In basic terms, while it’s understandable that contracted services must be able to meet coverage and volume needs, it’s also important to ensure the level of services paid for are truly demand worthy.

Does the arrangement result in a net loss to the hospital?

This a complex issue that has received a lot of attention. Though it is not unusual for hospitals to lose money on employed physicians, some whistleblowers have claimed that losses on physician arrangements are definitive proof of a breach of commercial reasonableness. 

However, I argue that focusing singularly on that issue is shortsighted. In truth, this topic deserves careful consideration; it could be a lengthy topic on its own. However, for the express purposes of examining commercial reasonableness, I recommend that the key lies within evaluating the following three details of any loss:

• The size
• Any degree of preventability
• The necessity of taking such a loss

There are many situations where the answers to these questions support the arrangement as commercially reasonable. The key requirement for compliance is first to be asking these questions proactively, and then to answer them honestly, and with supporting documentation.

Summary

As you take these steps in evaluation, I whole-heartedly advise “pre-transaction” documentation of commercial reasonableness, whether done internally or via a third party. One common yet regretful mistake leading to the risk of not meeting commercial reasonableness is assuming someone has considered it when actually no one has. Thus a good compliance checklist is proactive and will include documentation of commercial reasonableness on the front end. 

Lastly, a word to the wise: most third party opinions of Fair Market Value DO NOT contemplate commercial reasonableness. This often surprises many, but it is important not to assume that an FMV report covers the question of commercial reasonableness. In most cases, in fact, it won’t. 

Again, FMV and commercial reasonableness, while interconnected, are not synonymous and in fact, as described above, an arrangement can be FMV and yet NOT commercially reasonable. Thus, whether done internally or via a third party, it’s prudent to ensure proactive and separate evaluation for commercial reasonableness.