Last month we began to explore “fair market value,” an important and dangerous concept. FMV essentially reflects the commercially reasonable payment one would make for products or services rendered.
This concept is essential for home care companies because the government uses the idea of FMV to ensure that collaborations and financial relationships do not disguise referral payments as if they were fees for services or items supplied. FMV is the measure by which a payment may be evaluated to verify that it was truly for services or items provided and not a disguised kickback.
FMV is often more complex than one would imagine. It reflects a range of acceptable dollar amounts within the parameters of “fair value,” and is rarely a specific, single, unchanging, fixed price. Also, FMV requires that you actually get what you pay for. A consulting contract will not reflect FMV if no consulting actually occurs.
Here are three more rules that inform the concept of fair market value:
- Paying for goods or services you don't need
It is not enough for services or goods actually to be provided. They must actually be needed as well. If you are paying for space you don't really need, it doesn't matter whether you figure out some way to make use of that space. If you have a branch operation a half mile away, it may be hard to justify a second space rental in a referral source's offices. (“Why would you need that space, except to obtain referrals in exchange for the rent?”)
Similar risks arise when paying a consultant to give you information you already know, or to make recommendations you never implement. Another example would be paying setup and instruction fees to a physician for setups done in the doctor's offices, while your own personnel sit underutilized because you are paying someone else to do their work.
In all of these examples, the unnecessary services fail the fair market value test. This is a frequent problem for home care companies that pay for services they don't really need or that pay for a lot of service when only a small amount is required. If you only need hamburger but keep paying for prime rib, the government will take notice.
- Things change
Remember that fair market value is a reflection of current realities. Market comparables change within a course of a year or two. Changes must be acknowledged to ensure that this year's fair market value continues to hold up next year.
Or, perhaps you are paying a physician group to provide setup services to customers who live quite a distance away, convenient to the subcontracted physician but not to you. In this instance, it may be fair value to pay that physician for those remote setups. But, if you subsequently open a branch office or hire a rep nearby, it is no longer fair market value to pay for that physician relationship because you no longer need those services.
- Write it down
Finally, be sure to memorialize into written documents all of your financial relationships. Well-drafted documents can identify the commercial justification for the relationship as well as the evident reasonableness of the fair value between fees and items or services rendered. Further, relationships that implicate the Stark laws must be in writing, and relationships that implicate the anti-kickback statutes need to be in writing to fall into one of the safe harbors.
Establish a file memo discussing how you came up with a reasonable fair market value. Sometimes this means looking at market comparables and noting them. Sometimes this requires you to identify costs expended in offering the service, with a reasonable profit margin on top.
The memo can also identify any triggering events that may warrant renegotiation. For example, if a support services subcontract was created because of geographic inaccessibility, the opening of a new branch office might require a re-evaluation. Consequently, I also recommend that you put a copy of the internal memo into you tickler system so that it may be re-evaluated periodically.
Materials in this article have been prepared by the Health Law Center for general informational purposes only. This information does not constitute legal advice. You should not act, or refrain from acting, based upon any information in this presentation. Neither our presentation of such information nor your receipt of it creates nor will create an attorney-client relationship.
Neil Caesar is president of the Health Law Center (Neil B. Caesar Law Associates, PA), a national health law practice in Greenville, S.C. He also is a principal with Caesar Cohen Ltd., which offers compliance training, outsourcing and consulting and the author of the Home Care Compliance Answer Book. He can be reached by e-mail at ncaesar@healthlawcenter.com or by telephone at 864/676-9075.
