Shifting Paradigms? The Potential Impact of the Medicare Access and CHIP Reauthorization Act on What Constitutes a Fair Market Value and Commercially Reasonable Physician Transaction

By William B. Eck, Seyfarth Shaw LLP, Washington, D.C.; Andrea M. Ferrari, HealthCare Appraisers Inc., Boca Raton, Florida; Tizgel K.S. High, LifePoint Health,  Brentwood, Tennessee; and David S. Szabo, Locke Lord LLP, Boston

A version of this article was previously published by the American Health Lawyers Association and the Wisconsin Bar Association.litigation support Medium

The State Bar of Wisconsin, in the most recent edition of its Health Law News periodical, re-published an article co-authored by Andrea Ferrari, JD, MPH, Director at HAI. The article, Shifting Paradigms? The Potential Impact of the Medicare Access and CHIP Reauthorization Act on What Constitutes a Fair Market Value and Commercially Reasonable Physician Transaction, was originally published by the American Health Lawyers Association in February 2017. With co-authors William Eck (Seyfarth Shaw, LLP), Tizgel High (LifePoint Health), and David Szabo (Locke Lord, LLP), Ms. Ferrari utilized the article to explore the ways in which implementation of the Medicare Access and CHIP Reauthorization Act (commonly known as “MACRA”), including the two-track Quality Payment Program (QPP) consisting of the Merit-Based Incentive Payment System (MIPS) and Alternative Payment Models (APMs), may be transforming the financial picture for healthcare providers and thereby redefining what constitutes a legally-compliant fair market value and commercial reasonable payment arrangement for a provider.

Although the future of MIPS is somewhat uncertain in light of recent recommendations by the Medicare Payment Advisory Commission and other groups, the transition from volume to to value-based payment continues regardless, and some new paradigms in healthcare arrangements and payments are a near certainty, even if their details are not. This being the case, the recommendations put forth in the article, which is excerpted below, remain timely and noteworthy.

MACRA-driven changes to health care delivery and economics may significantly affect whether and which arrangements meet the FMV and commercially reasonable standards. As payor rules change, market forces also change, and such changes are likely to affect how much and under what circumstances parties may be willing to compensate each other for items or services. As a result, longstanding assumptions about which arrangements make commercial sense and which don’t, and about what compensation is FMV and not, may need to be reconsidered.

With changing payment rules, new trouble spots may include:

  • Multiyear agreements with non-adjusting salary guarantees or fixed compensation per hour or per wRVU
  • Bonuses or penalties that are inconsistent or incompatible with – or inappropriately duplicative of – known payor quality initiatives; and
  • Financial metrics that suggest inappropriate risk (or lack of risk) for one party versus another.

Depending on the details, such arrangements may put one party in a position to experience substantial and uncontrolled losses due to the poor performance of the other party, and in some cases may be inconsistent with reasonable or prevailing business practices.

On the other hand, some types of previously-uncommon compensation arrangements have become, or may in the future become, more prevalent after MACRA, including arrangements based on gainsharing or “pay for performance” principles. Determining whether these newer arrangements provide for compensation that is FMV and commercially reasonable requires understanding the influences and effects of new market forces, and how available data may be affected by these forces.

The most commonly-utilized sources of provider compensation data are annually published compensation surveys. However, survey data, although highly useful, provide a retrospective rather than current snapshot of market practices, and, in an evolving marketplace with changing rules and rapidly shifting payment trends, the data from such surveys may need to be considered carefully and with detailed understanding of context. Compensation that was negotiated in 2014, was paid in 2015, and was reported in 2016 or 2017 publications may reflect the economics of the pre-MACRA world.  To the extent that MACRA is changing or has changed how much and under what conditions providers will be paid, currently-available survey data might not be the best basis to determine reasonable or FMV compensation for the post-MACRA era. Just as a driver cannot navigate by looking only in the rear-view mirror, health care organizations may not be able to rely solely on retrospective compensation analyses for understanding FMV and commercial reasonableness.

Recommendations for Compliant Physician Transactions During the MACRA Transition

Many of the newest and most challenging compensation questions will need to be answered with consideration for not only how and how much parties have been paid in the past, but also how and how much similarly situated parties might be paid as health care rules and economics change. To some degree, the latter may be reasonably surmised based on survey data trends and current observations of market behavior. However, even the most reasonable supposition may turn out to be wrong. This being the case, ensuring regulatory compliance may demand periodic and frequent reevaluation of compensation – perhaps once per year – until the MACRA payment transition is complete.

Focus areas for periodic reevaluations may include, but not be limited to:

  • Modification to salary guarantees;
  • Modification to compensation rates or compensation caps;
  • Modification to minimum performance standards;
  • Downside risk for poor performance or revenue reductions;
  • Allocation of increased practice expenses for information technology and care management costs; and
  • Shifting market trends and value indications, particularly those related to quality of care.

Compensation terms for periodic reevaluation during the MACRA:

  • Salary guarantees
  • Compensation rates (per hour, per wRVU, etc.)
  • Bonuses and penalties for quality achievements
  • Incentive payments based on measures other than quality
  • Aggregate annual compensation caps

Potential areas for attention as part of reevaluation:

  • Modifications to salary guarantees
  • Modifications to compensation rates
  • Allocation of risk for poor performance on key indicators