Determining fair market value of consulting services

By Elizabeth E. Hogue, Esq. Burtonsville, MD

As many providers already know, the so-called "Stark law" prohibits physicians from making referrals to providers who render "designated health services" (DHS), if referring physicians have an ownership or investment interest in, or compensation arrangement with, the provider. Designated health services generally include home health, home medical equipment, infusion services, and outpatient hospital services, among others. Likewise, providers of DHS generally cannot bill for services provided to patients referred by physicians who have ownership or investment interests in or compensation arrangements with them which violate the Stark law.

Exceptions to these general rules were published in the form of final regulations on Jan. 4, 2001, the so-called "Phase I" Stark rules. On March 26, 2004, "Phase II" Stark regulations were published as interim final rules in the Federal Register. These Phase II regulations further clarified exceptions to the statute described above.

The Phase II regulations provided specific guidance regarding the use of physicians to provide consulting services to physicians who also make referrals as follows:

(1) Many providers utilize the services of referring physicians as consulting physicians to their organizations. These consulting physicians perform a wide variety of appropriate services to providers. There is an exception for personal service arrangements that may include payments to referring physicians for consulting services.

In order to meet the requirements of this exception, providers must:

  • Enter into a written agreement with physicians signed by providers and physicians that specifies the services covered by the arrangement.
  • The arrangement must cover all of the services to be furnished by referring physicians to providers.
  • Aggregate services provided do not exceed those that are reasonable and necessary for the legitimate business purposes of providers.
  • The term of each arrangement is for at least one year. To meet this requirement, if an arrangement is terminated during the term with or without cause, the parties may not enter into the same or substantially the same arrangement during the remainder of the first year of the original term of the agreement.
  • Compensation paid over the term of the agreement is set in advance, does not exceed fair market value, and is not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties.
  • The services to be furnished under each arrangement do not involve the counseling or promotion of a business arrangement or other activity that violates any state or federal law.

(2) Also, as described above, providers must pay for services from consulting physicians at fair market value. Many providers have asked how they should determine fair market value.

Currently, the Stark II rules make it clear that fees paid to referring physicians for their services will be considered to be at fair market value only if hourly payments are calculated using either of the following two methodologies:

  • The hourly rate is less than or equal to the average hourly rate for emergency room physician services in the relevant physician market, provided there are at least three hospitals providing emergency room services in the market.
  • If there are fewer than three hospitals that provide emergency room services in the geographic area where the provider operates or if providers choose to do so, they may pay physicians at an hourly rate that is determined by averaging the 50th percentile national compensation level for physicians with the same physician specialty or, if the specialty is not identified in the survey, for general practice in at least four of the following surveys divided by 2,000 hours. The surveys are:
  • Sullivan, Cotter and Associates, Inc. — Physician Compensation and Productivity Survey
  • Hay Group — Physicians Compensation Survey
  • Hospital and Healthcare Compensation Services — Physician Salary Survey Report;
  • Medical Group Management Association — Physician Compensation and Productivity Survey
  • ECS Watson Wyatt — Hospital and Health Care Management Compensation Report
  • William M. Mercer — Integrated Health Networks Compensation Survey

As of Dec. 4, 2007, the above formulas will no longer apply. Nonetheless, providers must be able to demonstrate using some reasonable basis that compensation paid to consulting physicians who also make referrals is at fair market value.

Providers could, for example, conduct what amounts to a "salary survey" of providers that operate in the same geographic area regarding the amount per hour that other providers pay consulting physicians. Such a survey is likely to produce a range of hourly rates. Providers should document the results of these surveys and pay physicians at rates that do not exceed the highest end of the range.

The above described change with regard to the use of formulas to calculate compensation at fair market value is an appropriate and very welcome change. The formulas proved difficult, if not impossible, for home care providers to use. Providers can now avoid the frustration of trying to comply and breathe a sigh of relief.