You’ve got patients! A case study in fair market value and commercial reasonableness: considerations for attorneys evaluating telemedicine arrangements

These developments have thrust the spotlight on telemedicine as a growing and integral modality for the provision of healthcare.  As a potent example of this reality, President Trump has made the expansion of telemedicine services a key component of his administration’s strategy for combating the opioid crisis.⁵  Accordingly, it is reasonable to expect healthcare systems to pursue new telemedicine service lines or expand existing offerings to secure coverage and foster growth. 

These initiatives often involve compensation relationships between healthcare facilities and physicians and/or advanced practice professionals.  As a result, they may implicate the Stark Law,⁶ Anti-Kickback Statute,⁷ and provisions of the Internal Revenue Code,⁸ thus requiring the compensation arrangements to have terms that are commercially reasonable and/or compensation that is consistent with fair market value. 

The goal of this article is to provide a case study for legal professionals tasked with determining the compliance of telemedicine service arrangements, specifically in relation to commercial reasonableness and fair market value.

Case Study Outline

XYZ Healthcare (XYZ) is a regional, non-profit healthcare system that operates 10 hospitals in a relatively concentrated geographic area.  XYZ is anchored by XYZ Downtown Hospital, a comprehensive stroke center that is located in the city center of the only metropolitan area in which XYZ operates healthcare facilities.  Over time, through retirement and changing practice patterns, the neurologists at XYZ’s facilities outside of the downtown area are no longer able to provide hospital coverage.   For some communities, XYZ’s facilities represent the only nearby option for healthcare in the event of a stroke.  In other communities, XYZ shares neurologist coverage with other hospitals, which are now facing similar challenges in securing neurologist availability. Without access to consistent neurologist coverage, these stroke patients may need to be transferred to distant facilities, causing substantial risk of increased brain damage. 

Accordingly, XYZ has approached its employed neurologists at XYZ Downtown Hospital regarding the potential to develop a telestroke program that would provide continuous availability to perform emergent consultations for and inpatient evaluations of patients presenting to XYZ’s outlying facilities with symptoms of a stroke.  This program would use XYZ Downtown Hospital as a “hub” and would offer its services to XYZ’s outlying facilities and to non-affiliated facilities in surrounding communities (the “spokes”).  XYZ Downtown Hospital would provide the physicians with the resources needed to provide live video connectivity to patients in the spoke hospitals.  The spoke facilities would be responsible for the cost of the technology needed to enable live video for patients in their hospital campuses. Concurrently, XYZ has also solicited bids from third-party telemedicine providers. 

One of XYZ’s attorneys, Sue Smart, Esq., has been tasked with assessing the potential in-house program and third-party bids for their compliance with healthcare regulations.

Commercial Reasonableness and Fair Market Value Background

As noted above, telemedicine service lines may implicate the Stark Law, Anti-Kickback Statute, and provisions of the Internal Revenue Code.  Accordingly, Ms. Smart should consider whether the contemplated arrangements meet one of the applicable Stark exceptions and/or Anti-Kickback safe harbors related to services arrangements, as appropriate.⁹  This includes establishing that the telemedicine service arrangements are commercially reasonable and contain compensation provisions that are consistent with fair market value. 

A “commercially reasonable” arrangement is defined as one that would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable healthcare provider of similar scope and specialty, even if there were no potential business referrals between the parties.¹⁰

The term “fair market value” is generally defined as the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.¹¹  In the context of healthcare, the general definition must be limited to comport with current healthcare regulations.  Therefore, when evaluating telemedicine arrangements, the term “fair market value” is defined as the value in arm’s-length transactions, consistent with the general market value.  “General market value” means the compensation that would be included in a service agreement as the result of bona fide bargaining between well-informed parties to the agreements who are not otherwise in a position to generate business for the other party.¹²

Finally, the Office of Inspector General of the Department of Health and Human Services (OIG) has issued Advisory Opinions related to telemedicine compensation arrangements.¹³  These opinions provide helpful insight into the factors that drive the permissibility of telemedicine service arrangements.¹⁴

Commercial Reasonableness

In evaluating the commercial reasonableness of the telemedicine service arrangement, Ms. Smart should consider the business purpose of the contemplated telestroke program.  This section highlights a few of the numerous elements that may drive the “commercial sense” of the telemedicine program. 

While telemedicine service lines are becoming more prevalent in the healthcare industry, do the specific facts and circumstances faced by XYZ support a reasonable business purpose for the telemedicine program?  In this instance, Ms. Smart may note the diminishing availability of neurologists providing hospital coverage to XYZ’s outlying facilities.  Furthermore, Ms. Smart could also research the utilization of similar telemedicine programs by other healthcare systems.  Finally, Ms. Smart should also be prepared to address why the development of a telemedicine program or use of a third-party telemedicine service arrangement represents a reasonable option to secure coverage, especially in light of alternative means of coverage (e.g., direct employment of additional neurologists, compensated on-call arrangements, locum tenens staffing arrangements).

As Ms. Smart and XYZ evaluate the options of developing an internal telestroke program or contracting with third-party telemedicine providers, they should compare and contrast the two alternatives.  First, Ms. Smart may inquire regarding XYZ’s prior experience developing telemedicine programs to determine if XYZ would face excessive start-up costs or if XYZ has the requisite experienced staff and equipment to implement a telemedicine program.  Second, Ms. Smart should review in detail the proposed terms associated with the third-party telemedicine arrangements to validate that the level of service they propose matches what XYZ requires for its facilities.  For example, there are a wide variety of compensation mechanisms used in telemedicine arrangements, some of which may not be reasonable in the context of a telestroke program.¹⁵  Finally, given the acuity of patients experiencing stroke, Ms. Smart should determine if XYZ has a sufficient pool of qualified providers to meet the coverage requirements of the outlying facilities.

Fair Market Value

As stated above, in the context of the healthcare regulatory environment, fair market value compensation cannot include consideration for the business that the parties may be able to generate for each other.  At a first glance, the potential for healthcare referrals in telemedicine arrangements may not be as clear as is the case with other types of service arrangements.  It’s relatively apparent that under the scenario where XYZ develops its own telestroke program, Ms. Smart should ensure that the compensation paid to the physicians (who are in a position to refer patients for healthcare services at XYZ Downtown Hospital) is consistent with fair market value.  Less obvious is the potential for reverse kickbacks.  If XYZ develops its own program, it may market its telemedicine services to outlying facilities that could refer patients to XYZ Downtown Hospital for specialized care, being that the facility is a comprehensive stroke center.  As a result, were XYZ to charge below-market rates for the telemedicine service line, regulators may interpret such pricing as an inducement for the outlying facilities to refer patients for care at XYZ Downtown Hospital.  Finally, for either scenario regarding the ultimate provider of telemedicine services, since XYZ is a non-profit entity, Ms. Smart must evaluate the proposals for fair market value compensation to validate that the payments do not constitute a violation of the private inurement prohibition established by the Internal Revenue Service (IRS).

As a next step, Ms. Smart may be tasked with determining the fair market value compensation for the telemedicine services.  This process must begin with firmly establishing the scope of the services to be rendered by the telemedicine provider.  The following elements may be key service components for which value may be considered:

• Schedule of availability for the telemedicine service line (e.g., continuous, outside of normal business hours, weekends only);
• Response time required of the service line;
• Setup services involved with integrating the telemedicine provider into XYZ’s health system, including the electronic health records platform;
• Technology purchased or leased from the telemedicine provider;
• Participation in quality initiatives or incentive programs related to the value and quality of care; and
• Medical direction of the telestroke service line.

Once the scope of the services has been established, Ms. Smart will need to establish the fair market value of those services.  Being at a relatively early stage of the industry life cycle, telemedicine providers are still in the process of testing various models for the delivery of care with differing compensation mechanisms within a given model.¹⁶  Additionally, current pricing may vary widely due to the strategic considerations of market participants (e.g., a desire to capture market share in a relatively young industry, in order to improve the bargaining power of the firm in the future).  As a result, Ms. Smart should exercise caution when evaluating existing market data, such as surveys of other arrangements in the marketplace.  Limited market data exists regarding the compensation paid to telemedicine firms for their services.¹⁷

Ms. Smart should also make note of the key drivers of value related to telemedicine arrangements.  As a comparison, the factors that are considered in establishing the value of compensation associated with on-call arrangements¹⁸ can generally apply to telemedicine arrangements, as well.  However, there are additional considerations, unique to telemedicine arrangements, which are important in establishing the fair market value.  In brief, the elements¹⁹ of the telemedicine service that Ms. Smart should factor in assessing fair market value include:

• Specialty of the telemedicine service;
• Type(s) of providers (i.e., physician, advanced practice professional, clinical support staff) rendering the patient care;
• Hours of availability and expected response time;
• Expected frequency of utilization of the telemedicine service (e.g., expected number of stroke telemedicine consultations);
• Level(s) of care associated with the telemedicine service (e.g., live video initial inpatient assessment of a patient who experienced a stroke, store-and-forward patient evaluation, or remote electroencephalogram monitoring of a stroke patient);
• The potential for and extent of reimbursement for the professional services, which might depend in part on whether XYZ is in one of the jurisdictions requiring insurance parity for telemedicine services; and
• Additional expenses incurred in securing telemedicine services, including:

Program setup and electronic records integration;

Hardware and software licenses; and

Information technology support.

In addition to the value drivers listed above, Ms. Smart should closely evaluate the proposed compensation mechanism used to pay for the telemedicine services.  Depending on the mechanism of payment, the dynamics of the value drivers may change.  For example, a fair market value analysis of a third-party arrangement that calls for a fixed, monthly stipend to secure availability may not appropriately scale with the extent of the telemedicine service line should actual utilization differ materially from the volume assumptions used to develop the analysis.   

Conclusion

The substantial growth and adoption of telemedicine as a tool for efficient and high-quality patient care will require attorneys and compliance personnel to understand the unique factors surrounding the commercial reasonableness of and fair market value compensation for telemedicine services.  The limited number of OIG Advisory Opinions and enforcement actions related to telemedicine arrangements make them a relatively untested segment of the healthcare marketplace.  Nevertheless, the government has taken an interest in assessing the compliance of telemedicine providers.  For example, in April of 2018 the OIG issued a report entitled “CMS Paid Practitioners for Telehealth Services That Did Not Meet Medicare Requirements,” highlighting many instances of improper billing for telemedicine services.²⁰  Furthermore, as of the date of this article, the OIG still maintains a review of Medicare payments for Telehealth Services on its work plan.²¹

This case study serves to highlight the key considerations currently influencing these issues.  As the industry continues to mature and expand, one must continue to monitor changes in market norms.  These efforts are especially important as government payors increase reimbursement for telemedicine services.  As the financial outlay associated with telemedicine services increases, so shall the scrutiny regulators apply to the financial transactions involved in the telemedicine industry. 

1.  Pub. L. 115-123.
2.  The relevant text is included in Division E Title III of the budget.
3.  Pub. L. 115-123 Division E Title III Subtitle C Section 50325.
4.  Thomas, Latoya and Capistrant, Gary, State Telemedicine Gaps Analysis Coverage & Reimbursement, American Telemedicine Association, February 2017.
5.  Argueso, Luis A. “President Trump, the Opioid Crisis, and Fair Market Value,” HealthCare Appraisers, Inc., October 31, 2017, https://www.healthcareappraisers.com/insights/president-trump-the-opioid-crisis-and-fair-market-value (last accessed May 8, 2018).
6.  42 U.S.C. § 1395nn.
7.  42 U.S.C. § 1320a-7b.
8.  26 C.F.R. § 1.501(c)(3)-1(c)(2) discusses a test to establish that an organization is operated for a tax-exempt purpose.  This test prohibits net earnings of the organization to inure to the benefit of private shareholders or individuals (the IRS doctrine relating to the prohibition of private inurement for tax-exempt organizations).    
9.  42 C.F.R. § 411.357 (Stark exceptions) and 42 C.F.R. §§ 1001.952 (Anti-Kickback safe harbors).  For example, 42 C.F.R. § 411.357(d)(1)(v) establishes an exemption to the Stark Law for personal service arrangements when the compensation is set in advance, does not exceed fair market value, and does not take into account the volume or value of referrals.  42 C.F.R. §§ 1001.952(d)(7) establishes a safe harbor to the Anti-Kickback statute for personal service and management contracts in which the aggregate services do not exceed those which are commercially reasonable to accomplish the business purpose of the arrangement. 
10.  This definition is based on guidance provided by the Centers for Medicare & Medicaid Services (CMS) in the preamble to the Stark II Phase II regulations at 69 Fed. Reg. 16093 (March 26, 2004), and is consistent with guidance provided in the “OIG Supplemental Compliance Program Guidance for Hospitals” at 70 Fed. Reg. 4866 (January 31, 2005).
11.  International Glossary of Business Valuation Terms.  The glossary was developed and adopted by the following organizations: American Institute of Certified Public Accountants, American Society of Appraisers, Canadian Institute of Chartered Business Valuators, National Association of Certified Valuators and Analysts, and The Institute of Business Appraisers.  An electronic version of the glossary can be accessed online at http://www.nacva.com/
    content.asp?contentid=166 (last accessed May 8, 2018).
12.  42 C.F.R. § 411.351 (as set forth by CMS with respect to physicians’ referrals to healthcare entities with which they have financial relationships).  Furthermore, this definition is consistent with similar fair market value guidance related to the Anti-Kickback Statute (42 U.S.C. § 1320a-7b) and with the definition relied upon by the IRS.  See, for example, “OIG Supplemental Compliance Program Guidance for Hospitals” at 70 Fed. Reg. 4866 (January 31, 2005), and Treas. Reg. 53.4958 et seq.
13.  See OIG Advisory Opinions Nos. 11-12, 04-07, 99-14, and 98-18.  These advisory opinions can be accessed online at https://oig.hhs.gov/compliance/advisory-opinions/index.asp (last accessed May 8, 2018).
14.  For example, OIG Advisory Opinion No. 11-12, published on September 6, 2011, provided helpful guidance with respect to neurology telemedicine coverage.  The opinion concluded that the arrangement would not result in administrative sanctions for the following reasons: (i) the arrangement was unlikely to generate referrals, (ii) the volume or value of any referrals/business between the parties was not a condition of participation in the agreement, (iii) the primary beneficiaries of the agreement were the stroke patients, who would not face a potentially lengthy and costly transfer to another facility, and (iv) neither party was required to engage in marketing activities or provide marketing services to the other party.
15.  Examples of payment mechanisms include: (i) fee-for-service rates, (ii) fixed monthly fees, (iii) monthly fees that are tiered based upon the volume of telemedicine events, and (iv) payment per bed covered by the telemedicine program.  Fee-for-service rates may not be appropriate for low-volume telestroke programs because volume is unpredictable and the rates may not be sufficient to cover the costs to secure telemedicine availability.  Similarly, if a facility does not have dedicated inpatient beds for stroke patients, a “per bed” payment rate would not be appropriate. 
16.  See supra note 14.
17.  For an example of existing market data, MD Ranger, Inc.’s database reports the fee paid per episode of care.  For more details, refer to its website: https://www.mdranger.com/.
18.  See Alvarez, Cindy, JD and Homchick, Robert, JD,  “Call Coverage: Version 2.0,”  HealthCare Appraisers, Inc., May-June 2017,   https://www.healthcareappraisers.com/insights/call-coverage-version-2.0 (last accessed May 8, 2018).
19.  The OIG has yet to issue an Advisory Opinion establishing the general factors that drive the fair market value of telemedicine services.  Many of the elements outlined herein are derived from OIG Advisory Opinions related to compensation for on-call coverage arrangements involving physicians who are available to promptly respond to emergencies at hospitals.  While there are important differences between telemedicine and on-call coverage arrangements, due to similarities between the services (e.g., continuous availability of a physician to respond promptly to provide professional services to hospital patients), many of the elements driving fair market value apply to both arrangement types.  For reference, the following OIG Advisory Opinions discuss fair market compensation for on-call arrangements: 12-15, 09-05, and 07-10. 
20.  This report is available at https://oig.hhs.gov/oas/reports/region5/51600058.pdf (last accessed May 8, 2018).
21.  https://oig.hhs.gov/reports-and-publications/workplan/summary/wp-summary-0000236.asp (last accessed May 8, 2018).