Posted by: Robert Markette
March 31, 2006

For those of you who contract with physicians for medical director and other services with physicians and have to work within the confines of the Stark law, the U.S. District Court for the District of Columbia recently issued an interesting opinion. 

The case involves the personal services safe harbor of Stark and the methods for determining fair market value under the Stark II regulations.  The Plaintiffs in the case specifically challenged the two methods for determining fair market value under the Stark II regulations, because the association believed that rates that result from these calculations are well below fair market value for physicians in certain specialties.

As you may recall, when discussing fair market value for physician compensation arrangements, Stark II included two methods to determine when a physician’s compensation was “fair market value.”  The first method is the hourly payment must be less than or equal to the average hourly rate for emergency room physicians in the relevant market.  The second method involves averaging the fiftieth percentile salary for the physician’s specialty from four national physician salary surveys, and dividing the average by 2000 hours to obtain an hourly rate. 

The Renal Physicians Association filed suit to challenge the validity of these methodologies.  The Association alleged that the compensation rates derived by these methods do not truly reflect “fair market value” for physician’s services.   The court found that it lacked the authority to remedy the alleged injury, because it could neither order facilities that contracted with doctors to pay a higher rate and it could not direct the government regarding the regulations. 

The basis for the Court’s decision is of far more interest to the home care and hospice community, because it addresses a concern I have heard form more than one provider.  That concern is the belief that you must use the listed methods to calculate fair market value.  In discussing the association’s claims, the Court, and CMS, noted that use of these two methodologies is voluntary.  CMS specifically stated that any harm resulting from reduced pay to physicians was the result of employer’s decisions to use the methodologies.  CMS argued that this was a completely voluntary decision by the providers.

Many providers would disagree, because they feel if CMS tells you how to calculate an amount you had better do it that way.   There are other ways to calculate fair market value.  The Stark law is concerned that the value be “the value in arm’s length transactions, consistent with general market value”.  Using the two stated methods is simply a way to guarantee that CMS will agree with you.  That does not mean if you use another method to calculate fair market value, CMS will simply dismiss it as not fair market value.  The rule remains the same-compensation must be fair market value for the safe harbor to apply.

The court discussed at length the numerous comments CMS made regarding fair market value while drafting the first and second phases of the Stark regulations. In addition to these many comments on fair market value, CMS has stated on the record again that the methods in the regulations are voluntary. 

When you are contracting with a physician, you should endeavor to reach a fair market value.  There are many ways to determine this and you should not feel that you are required to use the methods in the Stark regulation.  If you can demonstrate that the compensation for the physician is equivalent to the compensation that would be reached at “arm’s length”, it is fair market value.  Given CMS repeated statements that the methods outlined in the rule are “voluntary” it strikes me that CMS would be acting rather arbitrarily to turn around and penalize a provider for not using the voluntary methods.

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