Risk areas for hospitals abound--medical director and professional services/on-call agreements, space and equipment leases, employment agreements, management agreements, physician practice acquisitions, and other arrangements that may incur scrutiny of whether Medicare and Medicaid patients are referred in exchange for a fee.
Federal regulatory agencies and prosecutors are committed to protecting the integrity of the federal health programs and aim to prevent and punish improper financial relationships between hospitals and physicians that induce overutilization, adversely impact physicians' judgment, and/or result in funds being spent for unnecessary and expensive hospital services.
Begin with commercial reasonableness
When judging commercial reasonableness, agencies look to see that the arrangement is a sensible, prudent transaction or business situation that serves legitimate, reasonable, and necessary purposes. If your financial arrangement doesn't meet this basic test, there's no need to determine fair market value or take further steps to set up the arrangement.
To ensure your arrangements are ready, start by asking a few basic questions:
For example, consider medical director agreements and how the government's expert in a recent case evaluated the hospital's justification of the arrangements. The expert used some of the following questions and answers to make a determination:
Do the size of the hospital, number of patients, patient acuity levels and patient needs support sound business reasons for the arrangement? A small facility (fewer than 35 beds) with a relatively low patient census should need only one medical director to cover medical direction, meet licensure requirements, physician staff needs and patient care requirements.
Are the medical staff officers and committees active and involved in the direction of the hospital, or are medical directors needed to supplement the medical staff's work? Duties and responsibilities of medical directors should not be the same or similar to active staff members' requirements under the medical staff bylaws. Medical directors should not be paid for meeting attendance or work that is commonly performed by active staff members.
How many hospital committees and meetings require physician attendance? Other than meetings of the entire medical staff, the medical staff/hospital committee meetings and other meetings should require only one medical director to attend. It is questionable why a hospital needs multiple medical directors to attend committee meetings when one medical director will suffice.
Is the need for medical directors warranted if the hospital is part of a hospital chain or system that has developed patient care protocols and mechanisms to coordinate disciplines at its other hospitals? The need for numerous medical directors is not warranted in hospitals that are part of a hospital chain or system that has effective patient care management and interdisciplinary coordination mechanisms.
Are ongoing assessments of medical directors' performance conducted, and are the assessments used to evaluate whether medical director agreements should be renewed or hours reduced? Approval of monthly time sheets is insufficient as an ongoing assessment of a medical director's performance. Oversight and evaluation are ineffective if the hospital does not react to a medical director's lack of compliance or absence of need for continuing his services.
Assess fair market value
If the arrangement is deemed commercially reasonable, it must also meet FMV requirements, which can be complicated due to the affiliation of the parties through referral relationships and their economic interests.
Stark directs hospitals and physicians to determine price or compensation as if bona fide negotiations were occurring by well-informed parties "who are not otherwise in a position to generate business for the other party." Hospitals and physicians are to consider contemporaneous comparable arrangements occurring in the market "where the price or compensation has not been determined in any manner that takes into account the volume or value of anticipated or actual referrals."
Now that CMS has repealed the hourly rate determinations that were deemed FMV, you can use any evidence that demonstrates comparability to other arms-length transactions in the market. Using external salary surveys of physician specialties remains a CMS-recommended method of FMV determination, as do independent valuations/appraisals. However, any comparables that involve physicians in a position to refer and/or take into account the value or volume of referrals will not serve as a valid comparable.
The OIG is prohibited from addressing whether a particular arrangement occurred at FMV, so it has dealt broadly with FMV issues. Suspect and disfavored compensation methods include: