Fair Market Value

The anti-fraud rules require that financial relationships between independent parties be at “fair market value” (FMV). This concept is often misunderstood by home care companies, and this failure to understand can lead to big trouble for unsuspecting suppliers. If you don’t know all the different meanings for FMV, rest assured — the government does.

The reason all of this matters is because the anti-kickback rules (as well as other laws and regulations) try to ensure that providers do not disguise payments for referrals as if they were fees for services or items supplied. “Fair market value” 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, essentially, the commercially reasonable payment one would make for products and services rendered. It sounds simple, but the reality is more complex.

First, FMV rarely means a specific, single, unchanging, fixed price. Rather, there is usually a range of acceptable dollar amounts within the realm of fair value. Second, FMV requires that items or services being purchased actually be provided. Third, FMV requires that items or services actually be needed by the recipient. So, perhaps the better definition for FMV is the range of prices one would reasonably pay for items or services needed and used by the recipient.

Let’s examine the components of this definition in more detail.

FMV is actually a range of values. What would be a fair rent for office space in a physician-owned medical office building? Comparable rents range from $13 to $22 a square foot. So, technically, any rent within that range might be within fair market value.

But be careful. If you are worried about the government or a competitor challenging the reasonableness of the rent, you may want to choose a payment within the middle of the range.

If market comparables are not readily available, you may evaluate a fair rent by assessing costs plus reasonable profit. For space rental, 10 to 30 percent profit will usually pass muster.

Document your analysis in a file memo.

FMV also requires that services or goods actually be provided. In 2006, two Lincare companies agreed to pay the government $10 million and to enter into a five-year company-wide Compliance Integrity Agreement. Among the settled allegations was the contention that physicians were paid “pursuant to purported consulting agreements,” even though the physicians rarely or never actually provided any consultations.

In 2005, I was an expert witness for a cardiologist suing the University of Medicine and Dentistry in New Jersey (Newark) for unlawful termination. He alleged he was fired because he spoke against the University’s plan to offer professorships to cardiologists who did little or no work in exchange for the academic positions. He argued the salaries were disguised kickbacks for referrals.

Ultimately, the case settled for several million dollars, the feds got involved and fines, firings and heightened government scrutiny followed.

The point is that paying FMV for services means paying fair value for services actually rendered. Few suppliers would feel safe entering into a sham consulting agreement.

However, it is not uncommon for home care companies to seek a medical director relationship or some service agreement that contemplates a certain amount of use. If the anticipated utilization upon which the contract was premised does not actually occur, then the home care company is, in effect, paying for unrendered services. (This is why I recommend that service agreements be on a “pay as you go” basis.)

Other examples are paying for rental space that turns out not to be needed, or paying for more space than is needed or paying full rent for space that you only need part-time. Each of these scenarios, not uncommon, create problems under the anti-fraud rules because they do not reflect “fair market value.”

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 [email protected] or by telephone at 864/676-9075.