Fair Market Value and Commercial Reasonableness Applied to Healthcare Transactions

Government scrutiny around healthcare transactions has heightened in recent years due to an increase in the volume of violations of healthcare fraud and abuse laws. There are numerous regulatory statutes, such as Stark Law and Anti-Kickback Statute that need to be considered while structuring financial transactions for physicians and other staff to ensure that compensation is within fair market value (FMV) and is commercially reasonable. The best practice that a health system can adopt for establishing financial arrangements without getting penalized is consulting with a third-party valuation expert to not only rationalize the compensation rate, but to justify the community need.

The Stark Law defines FMV as “the value in arm’s length transactions, consistent with general market value”. “General market value” is the compensation that would be included in a service agreement as the result of bona fide bargaining between well-informed parties who are not otherwise in a position to generate business for the other party. 1  The payments that exceed FMV are viewed as potential referrals, which is a violation of Stark Law that can lead to penalties and a healthcare system’s exclusion from participation in federal health programs.

The Department of Health and Human Services (HHS) defines commercial reasonableness as a “sensible, prudent business arrangement, from the perspective of the particular parties involved, even in the absence of any potential referrals”. 2  Healthcare transactions must be commercially reasonable and should be comparable to what is paid ordinarily for similar services in the area. An assessment of transactions should be done to analyze if it is reasonable to pay for the services in the first place, in order to prevent violation of the Anti-Kickback Statute. The Anti-Kickback Statute is a criminal law that prohibits healthcare organizations from knowingly and willfully paying any remuneration to induce patient referrals or to generate business involving any service payable by the federal healthcare programs. 3        

Non-profit hospitals face additional requirements under the Internal Revenue Code that they must satisfy to maintain their tax-exempt status. If Internal Revenue Services (IRS) determines that the net earnings of a tax-exempt organization are used for private interests of employees, or if their payments exceed FMV, it might result in loss of tax-exempt status. They must demonstrate that the net earnings of a tax-exempt organization are not used for private interests of employees and are used for the benefit of the community as a whole.

Best Practices that Apply to Valuation of Healthcare Transactions

Healthcare organizations should consider both qualitative and quantitative components for FMV and commercial reasonableness analyses of financial transactions. A qualitative analysis of the nature and scope of services performed, necessity of services, and comparability of services should be performed. Also, a quantitative analysis of revenue cycle should be conducted to determine if the anticipated transaction acquires any referrals during the process and to ensure that healthcare organization complies with the regulatory statutes. 4

It is important to maintain documents of services provided by healthcare professionals and have agreements in writing, along with documents supporting the financial transaction at FMV, for actual duties performed to standardize financial transactions and to prevent violation of fraud and abuse laws. 5

A regular assessment should be conducted to determine if the healthcare transactions are commercially reasonable. 6  Financial arrangements are commercially reasonable if they are at FMV, services provided are documented and deemed necessary, and when the services cannot be provided at a lesser value.10 Financial arrangements should be based on comparable data and should be set in advance by members who have no conflict of interests. 7

With the increased rate of mergers and acquisitions, healthcare organizations are vulnerable to federal scrutiny. Due to a complex regulatory environment, an in-depth analysis should be performed to ensure that the healthcare transactions are legally permissible at FMV and are commercially reasonable. Therefore, the analysis is recommended to be conducted by an independent valuation expert to establish a value that is consistent with independently published surveys that are comparable for similar services. 6  Carnahan Group provides a unique platform FMVMD™, which allows healthcare organizations to analyze physician compensation arrangements for fair market value and commercial reasonableness instantly. This ensures that there is maximum compliance of regulatory statutes and prevents any violation of healthcare laws.


Compliant compensation methodologies: Advanced Stark. healthlawyers.org. https://www.healthlawyers.org/Events/Programs/Materials/Documents/PHS15/kk_homchick_hutzler_shay.pdf. Published December 2015. Accessed September 27, 2016.
R. C. Healthcare Valuation . Vol 2. n/a; 2014.
The Anti-Kickback Statute (AKS), 42 U.S.C. § 1320a-7b.
Commercial Reasonableness Analysis for an Increasingly Regulated Healthcare Environment | BDO Healthcare Industry Blog . bdo.com. https://www.bdo.com/blogs/healthcare/april-2015/commercial-reasonableness-analysis?feed=8799bc52-2237-4688-aeac-83e40e623b56. Published April 2015. Accessed October 27, 2016.
Cimasi, R. Z T. Traversing the threshold of commercial reasonableness in the healthcare industry. americanbar.org. http://www.americanbar.org/content/dam/aba/events/health_law/2015_Meetings/DocLaw/Papers/10_valuation_03.authcheckdam.pdf. Accessed September 23, 2016.
I. L. Fair market value of health care transactions. worldservicesgroup.com. http://www.worldservicesgroup.com/publications.asp?action=article&artid=2086. Accessed August 9, 2016.
T. Z, R. C. Healthcare Valuation Series: A look at fair market value and commercial reasonableness. healthcapital.com. http://www.healthcapital.com/hcc/newsletter/10_12/HCVAL.pdf. Published October 2012. Accessed September 23, 2016.