Dear CMS: Fair Market Value Doesn’t Fit in a Box

Earlier this week, Modern Healthcare reported on comments made by Seema Verma at the Federation of American Hospitals' policy conference in Washington. Ms. Verma discussed CMS’ plans to roll out changes to Stark regulations that include clarifications to the regulatory definitions of volume or value, commercial reasonableness, and fair-market value. The updated regulations are expected to be released toward the end of this year.

As a physician compensation consultant and appraiser, I’m very curious about the upcoming clarifications. Efforts have been made in the past to clarify “fair market value”. Back in 2004, the newly issued Stark Phase II regulations included a safe harbor methodology for calculating hourly physician compensation rates. Under the safe harbor, one could be sure an hourly rate would be fair market value if it met one of two tests:

• Regardless of the physician’s specialty, hourly payments were less than or equal to the average hourly rate for emergency room physician services in the relevant physician market, provided there were at least three hospitals providing emergency room services in the market.

• Hourly payments were determined by averaging the 50th percentile salary for the physician's specialty using four national salary surveys and dividing the resulting figure by 2,000 hours to establish an hourly rate. The safe harbor provided a choice of six recognized, “readily-available” surveys. If the relevant specialty did not appear in the survey, the salary for general practice was used.

By the time Phase III regulations were issued in 2007, CMS had decided to eliminate the safe harbor because of flaws in its design. There were simply too many concerns about how to legitimately obtain hourly rates for emergency room physicians at competitor hospitals using the first methodology. In regard to the second methodology, limiting the safe harbor to the 50th percentile didn’t work well for brand new or highly experienced physicians. Plus, physicians in specialties not recognized in the surveys had their salaries benchmarked against general practitioner data, even if specialties were highly compensated. Another major problem with the second methodology was that several of the surveys identified in the safe harbor and deemed “readily available” by CMS were not available to purchase or were prohibitively expensive.

So, what can CMS do to help clarify what is fair market value for physician services? Personally, I’m hoping to see CMS focus its upcoming fair market value guidance on what it views as being high risk, problematic, and/or not fair market value. If there are specific guardrails not to be crossed, or benchmark levels or ratios that raise red flags, let us know. Since fair market value is driven by facts and circumstances, and so many different physician arrangements exist, I believe this approach will be more helpful than trying to draw a tighter box around what IS fair market value. Said another way, given the way things went with the Phase II safe harbor, I think it may be more helpful for CMS to roll out a list of unsafe harbors than safe harbors at the end of the year.

I’m also hoping that CMS continues to hold the position that reference to multiple, objective, independently published salary surveys is a prudent practice for evaluating fair market value. However, my fingers are crossed that it doesn’t box us in again when it comes to choosing market data for physician compensation assessments. There are numerous suitable surveys and appropriate benchmarks that can be used to establish fair market value for physician compensation arrangements. And, narrowly defining what sources can be used will be the death of many good surveys and a disincentive for anyone looking to bring a new source of data to the industry. Furthermore, it would be terrible, in my view, to see CMS put out another short list that includes surveys that aren’t available for purchase by the general public, aren’t affordable, and aren’t reliably published each year.