Frequently, HVG is asked to provide its FMV opinion, but not a commercial reasonableness (CR) opinion. We don’t include one if the client doesn’t specifically ask for a CR opinion. However, HVG has been paying more attention to the CR aspects of an arrangement and is now giving CR more relevance by adding additional support for a CR opinion.

Commercial reasonableness is crucial in the healthcare industry, particularly regarding physician compensation. CR refers to whether a transaction or arrangement is considered to be fair and appropriate based on prevailing market conditions and economic factors. On November 20, 2020, CMS published its Final Rule of the Stark Law. The final rule included an expanded/revised definition of fair market value and commercial reasonableness. The Stark Law’s commercial reasonableness standard has never been defined by statute or regulation until now. The Final Rule now defines “commercially reasonable” to mean:

“the particular arrangement furthers a legitimate business purpose of the parties to the arrangement and is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty.”

The definition also provides that an arrangement “may be commercially reasonable even if it does not result in profit for one or more of the parties.” Notably, all Stark compensation exceptions, except the value-based arrangement exceptions, that have a “commercially reasonable” element require that the compensation to the physician (or immediate family member) be paid under an arrangement that would be commercially reasonable (as defined above), even if one or more parties do not benefit financially from the arrangement. This standard represents a significant change from the government’s earlier position, where it took the position that arrangements resulting in financial losses (i.e., arrangements where a party did not benefit financially) could not be commercially reasonable.

While CMS did not offer examples of arrangements that may be commercially reasonable, it did discuss a few elements that can be instructive:

  • An arrangement with a physician does not necessarily need to be profitable.
  • To satisfy the CR standard, the economics of the arrangement remain relevant to the analysis of whether it would be commercially reasonable even if the physician made no referrals to the employer.
  • CMS has recognized there can be legitimate reasons why an employer would pay a physician-employee more in compensation than the physician’s collections.

However, CMS emphasized that medical practice “losses” incurred and tolerated by a health system remain relevant when analyzing an arrangement for commercial reasonableness.

Therefore, it is still essential to articulate a legitimate business purpose, mainly where the arrangement results in a loss. CMS did identify some examples of reasons parties might enter into an arrangement involving a loss of clinical services:

  • community need;
  • timely access to health care services;
  • fulfillment of licensure or regulatory obligations, including those under EMTALA
  • provision of charity care, and
  • the improvement of quality and health outcomes.

At HVG, we believe that a thoroughly supported CR opinion should include some consideration and possibly calculations that demonstrate an arrangement’s profit and loss and how long the loss may occur. This analysis should include significant input from management and their financial outlook or strategy for the arrangement.