PYA Principals Lyle Oelrich and Darcy Devine presented “Commercial Reasonableness in Hospital-Physician Transactions” to the Health Care Fraud Working Group in Memphis, TN, April 10, 2013.

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Commercial Reasonableness
in Hospital-Physician Transactions
The Health Care Fraud Working Group
April 10, 2013
Lyle Oelrich, Principal
Darcy Devine, Principal

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PYA Background
• Founded in 1983
• Top 20 healthcare management consulting firm
• National focus with offices in Knoxville, Atlanta,
Kansas City and Tampa
• 200 professionals with audit, tax, valuation,
management, compliance, and strategy expertise
• 700 valuation engagements each year

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Definitions
Commercial
Reasonableness…
Generally
In theory, most business
transactions must be commercially
reasonable or there would be no
reason for them to occur
In Healthcare
Compensation arrangements for
physicians‟ services (clinical &
administrative) must be both
commercially reasonable and at
FMV to avoid liability (Stark, Anti-
Kickback, False Claims Act)

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Definitions
HHS has
interpreted
“commercially
reasonable”
Stark II Phase II also
suggests
Additionally, OIG
has stated
“An arrangement that
appears to be a
sensible, prudent
business agreement,
from the perspective
of the particular
parties involved, even
in the absence of any
potential referrals”
“An arrangement will be
considered
„commercially
reasonable‟ in the
absence of referrals if the
arrangement would make
commercial sense if
entered into by a
reasonable entity of
similar type and size and
a reasonable physician
of similar scope and
specialty, even if there
were no potential DHS
referrals”
In order to meet the
threshold of
commercial
reasonableness,
compensation
arrangements with
physicians should be
“reasonable and
necessary”

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Definitions
CR = Prerequisite to FMV
If a financial arrangement is
determined to be commercially
unreasonable, there is no need to
determine fair market value or take
further steps to set up the
arrangement.

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Commercial Reasonableness vs.
Fair Market Value
Commercial reasonableness is slightly different than
fair market value
Does the transaction make cents sense?
Was this a good business arrangement to enter into in
the first place?
Is there a legitimate business reason to enter into this
agreement?
Was it commercially reasonable even if there are no
referrals between the parties?
Do the underlying economics of the transaction make
sense?
Fair Market Value
(NARROW)
Commercial Reasonableness (BROAD)
What is the range of
dollars you are going to
pay for the
space/services?

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Commercial Reasonableness vs.
Fair Market Value
Thus, FMV assesses the reasonableness of the
“range of dollars” while CR looks to the
reasonableness of the business arrangement
generally
Because of this differentiation
• A compensation arrangement may be at fair
market value, but not the commercially reasonable

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PYA Analysis
Refer to Commercial Reasonableness Outline Handout
PYA
Analysis
Business Purpose Analysis
Provider Analysis
Facility Analysis
Resource Analysis
Independence & Oversight Analysis

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Business Purpose Analysis
Does the proposed arrangement represent a reasonable necessity that is
essential to the functioning of the hospital or other healthcare provider?
Is the proposed arrangement reasonably necessary to accomplish a rational
business purpose?
Is the specific purpose of the arrangement clearly identifiable and
appropriately defined?
Do the proposed services relate to the business and/or clinical plans and
strategies of the healthcare provider?
Do the proposed services contribute to the provider’s profits and/or the
development of a particular service line without requiring income from
proscribed referrals?
Do relevant national, regional, and local economic conditions exist that may
affect the appropriateness of the proposed arrangement?

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Provider Analysis
Does the proposed arrangement require a physician to perform the services?
Does the proposed arrangement require a physician of a certain specialty to
perform the services?
Does any specialized training and/or experience of the provider exist that
should be taken into account when evaluating the proposed arrangement?
Are the particular nature of the duties and corresponding amount of
accountability associated with the proposed arrangement clearly defined and
reasonable?
Is the amount of time demanded of the physician under the proposed
arrangement reasonable?
Do any salary considerations exist that should be evaluated in relation to
providers of similar specialty and experience in comparable organizations and
positions?

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Facility Analysis
Are patient demand, the number of hospital patients,
and/or the community need sufficient to justify the
services?
Are patient acuity levels such that the proposed services
are necessary?
Do patient needs dictate the necessity for a separate and
distinct provider for the proposed services?
Are the size of the hospital and the relevant department
appropriate for the proposed services?

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Resource Analysis
Is the proposed arrangement a necessary addition to the managerial and
administrative efforts already required by the medical staff bylaws?
Have the number of committees and/or meetings that otherwise require
physician attendance outside of the proposed arrangement been considered?
If the healthcare entity is part of a larger health system, do patient care
protocols and procedures exist that can be coordinated among its facilities in
lieu of the proposed arrangement?
Does the proposed arrangement lend itself to the potential for duplication or
misuse?
Does the healthcare entity maintain any features, controls, and/or safeguards
to reduce or eliminate the potential for risks of duplication or misuse?

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Independence and Oversight
Analysis
Does the provider entity currently evaluate the performance of its provider arrangements?
Does the healthcare entity use its performance assessments to determine whether new or existing
provider arrangements should be reduced (e.g., hours condensed) or eliminated?
Does the entity maintain a formal process for executive management and legal counsel to review
and approve the proposed arrangement?
Does the provider engage in appropriate monitoring to determine:
• Whether services specified in similar arrangements are actually performed?
• The total amount of funds spent for such services?
• A verifiable outcome resulting from the arrangement?
Will the entity engage in regular assessments of the proposed arrangement that clearly show its
effectiveness and demonstrate a legitimate need for continuation and/or renewal?
Does sufficient independence exist related to the board or committee that establishes the proposed
arrangement?
Is there a written agreement that addresses the terms of the proposed arrangement?

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• Project: Is “X” Medical Director Arrangement CR?
• Key Provider Inquiries:
– Is it necessary to have a physician perform a certain service?
– Is it necessary to have a physician of that specialty perform a certain service?
• Logic: The FMV compensation for a specialty is generally higher
than that of general practitioners and non-physician practitioners
• Implication: If a specialized physician is receiving compensation within
the higher range of FMV to perform duties that a less skilled practitioner
could perform for less compensation, the arrangement may not be
deemed to be commercially reasonable despite the fact that it is within
the range of FMV for that specialist
Example Inquiry:
Proposed MD Provider

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Cases
• U.S. ex rel. Drakeford v. Tuomey Healthcare
System, Inc.
– Part-time employment agreements for outpatient
surgery services
• Compensation methodology
• Aggregate compensation (benefits)
• Compensation / production parity
• Appraiser perspective and approach
• Mission support

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Cases
• U.S. v. Campbell
– Part-time employment of cardiologists for Clinical
Assistant Professor
• Performance of duties
• Qualifications of employee
• $8m settlement by UMDNJ

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Cases
• U.S. ex rel. Kaczmarczyk v. SCCI Health
Services Corp.
– Medical directorships paid by LTAC
• Reasonable necessity
• $7.5 million settlement

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Cases
• U.S. ex rel. Singh v. Bradford Regional
Medical Center
– Sublease for nuclear camera between physicians
and hospital
• Payment for lease and non-compete
• Appraiser perspective and approach
• Non-compete valued based on referral stream
• $20m estimated settlement

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Lyle Oelrich, Principal
Knoxville, Tennessee
(865) 673-0844
loelrich@pyapc.com
Darcy Devine, Principal
Atlanta, Georgia
(404) 266-9876
ddevine@pyagatesmoore.com