How One Client Built Internal Defenses Around Fair Market Value
April 30, 2019
Transaction Advisory
An increase over the past couple of years in high-profile settlements from possible Stark Law violations has raised concern from medical group leaders about whether their compensation structure meets fair market value (FMV) standards. Unfortunately, the rules of FMV and commercial reasonableness (CR) are far from black and white. In drafting physician agreements, most organizations—even those with defensive policies—still find themselves in a grey area. I recently discussed this issue with a client who has one of the most rigorous review processes I’ve seen. Rarely a week goes by when I don’t hear from them (the organization will be unnamed), and they’ve built impressive checks and balances throughout their system to protect against unintentional fair market value violations. Here is what their Chief Legal Officer and Chief Compliance Officer shared with me about their process—and why it works so well.
High Scrutiny, Zero Exceptions
Whether it’s an employment agreement, a contract renewal, a payment for call, a medical directorship fee, or any other arrangement between the hospital and a physician, this organization undertakes a meticulous internal review process, every single time. No exceptions.Here’s the journey that each contract takes before signatures hit the page:
- Recruiter presents a proposal to key executive stakeholders, including the general counsel and compliance officer. The group reviews recruiting incentives, potential bonus compensation, and other benefits, and highlights potential issues, such as:
- What is the basis for the offer?
- How does the offer compare to other compensation arrangements in the same specialty or similar relationships?
- How does the offer benchmark with market survey data?
- What are the physician’s unique credentials, and how do they meet market needs?
- How does the offer relate to our recruitment policy?
- General counsel gets into the legal weeds, checking the agreed-upon compensation package to make sure the proposal passes muster from a legal standpoint. If anything stands out as needing further probing, the GC asks for clarification from the recruiting team. On occasion, the GC will request input from outside legal counsel, which also can bolster the organization against potential scrutiny.
- A third party examines the proposed agreement, providing feedback on both FMV/CR. The third party may recommend seeking a formal opinion depending on the overall terms. This organization completes the independent review before the contracts are signed. (Too often, I get called in by other organizations as an external reviewer after the contracts are signed, which is an unfortunate time to find red flags).
- Board acts as the final line of defense. After the proposed arrangement is confirmed as commercially reasonable and within fair market value, a disinterested board of directors committee reviews the agreement. This final step affords the organization the rebuttable presumption of reasonableness under the internal revenue code. As you can see, from start to finish, the board and executive team are highly engaged in the decision-making process, creating a culture of compliance from the top down.
Factoring Other Considerations
This unnamed organization also evaluates its agreements through a business and strategic lens. We have helped them assess candidates against qualitative factors, including geographic needs, the ease or difficulty in recruiting certain specialists, likelihood of turnover by specialty, historical productivity of physicians, and more. These standards are high, indeed. In a regulatory area that’s greatly scrutinized and rarely well-defined, this organization has shown that there are concrete and efficient ways to manage compliance.
Contact us to better understand how Coker Group can help you maintain fair market value standards and commercial reasonableness.
