Why Can’t I Just Match a Competitor’s Offer?

There have been several times over the years when a hospital client has contacted me asking me to determine fair market value in response to an offer from a competitor attempting to hire or exclusively contract with the hospital’s physician(s) or physician group. In some cases the competitor has offered the group compensation that far exceeds existing compensation. Many times the first question the client asks is for us to prepare a FMV report that supports the competitor’s offer price, or in some cases exceed it. This is often where the problems begin. 

One of the first misconceptions in these cases is that the competitor’s offer is a “market” offer or that it has been “negotiated” and therefore is FMV. Let’s take a look at both of those assumptions.

First, a single offer in the market does not necessarily reflect fair market value, particularly as that term is used within the Stark Law. The Stark Law, in the very least, suggests the use of multiple data points. Additionally, an offer from the competitor (or facility in another state for that matter) is most likely between current or future referral sources. So to summarize, you actually have a single (not multiple) data point between referral sources. That does not sound much like market data to me, nor would it likely sound like market data to a qui tam relator. 

Second, there is usually no available evidence relative to how the competitor’s offer was conceived or “negotiated”. For instance, what kind of due diligence did the other facility employ in arriving at the offer? This is particularly suspect when the offer far exceeds existing rates in the market. A reasonable assumption is that little or no due diligence was performed and therefore the offer probably has little or no FMV support. Just because two parties “agree” on the rate does not mean that they did so availing themselves of “knowledge of the relevant facts” – which in the context of a healthcare transaction implies knowledge of the relevant healthcare regulatory environment. So, little support can be had for an “arm’s length negotiation”. Moreover, in Kosenske v. Carlisle, the Court of Appeals found that negotiations do not yield fair market value, saying “as a legal matter, a negotiated agreement between interested parties does not ‘by definition’ reflect fair market value. To the contrary, the Stark Act is predicated on the recognition that, where one party is in a position to generate business for the other, negotiated agreements between such parties are often designed to disguise the payment of non-fair-market value compensation.” [1]

Another issue of concern in these situations is the specific contract terms relative to the competitor’s offer. For example, are there additional services (that the physicians are not providing in their current contract) that factor into the higher offer? Are there certain (unknown) stipulations surrounding the offer that we are not privy to? Are there specific productivity requirements that must be met? There can be many questions like this surrounding the offer. The point is, these specifics are not known and are unlikely to be revealed; therefore knowing if you are comparing apples to apples may be impossible. 

Another question that can arise, especially when the competing offer is a “unit-based” offer, such as one based on the physician’s WRVUs, is whether or not the proposed compensation rate is going to be applied to similar patient volume. For example, a high volume (exceeds 90th percentile) physician rate of $55 per WRVU that results in FMV compensation in one market, may not produce FMV in another market. If the same physician gets an offer out of state for $75 per WRVU it may be because need exceeds volume in that market and resulting total compensation may actually be the same.

In that situation, to then say the physician should be compensated at $75 because that’s what he or she can get in the market has absolutely no merit. Of course the physician simply wants to take the offer and apply it to his existing situation (and who could blame him?), but this is problematic if the $75 can’t be supported in the existing situation to be FMV. 

Anytime a physician brings you a competing offer for consideration, it’s imperative to consider all the relevant factors surrounding that offer and be prepared to act in a way that protects the hospital long-term. 

To learn more about Complex Fair Market Value/Commercial Reasonableness Compensation Issues, don’t miss my presentation at the AHLA Annual Meeting on July 1, 2015 at 9:45 a.m. and 2:45 p.m., or contact me at Rud.Blumentritt@hornellp.com

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[1] U.S. ex rel. Kosenske Carlisle Hma Inc. (554 F.3d 88).