Before compensating a physician to take emergency call or provide an administrative service, it's crucial to consider whether paying is commercially reasonable or not. Not all physician services warrant payment. Most hospital leaders deal with the challenges of determining commercial reasonableness.

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Commercial Reasonableness: What You Must Know
Before Contracting with Physicians
August 21, 2014
Michael Heil, Founder
Allison Pullins, Director

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Outline:
• Introducing MD Ranger
• Defining Commercial Reasonableness
• Regulatory Citations, Court Decisions
• Determining Commercial Reasonableness
• Practical Questions, Data Driven Judgments
• Your Questions

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MD Ranger
MD Ranger is a market data company that collects non-employed
physician contract data directly from hospitals. Our unique
approach to capturing all contract data from an organization allows
us to not only determine what to pay, but also when to pay.
We help hospitals analyze their internal physician contracting costs
to enable negotiation of competitive rates with physicians, and
documentation of FMV and compliance with Stark.

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MD Ranger Includes:
• A secure, web-based Data Tool to collect and organize contract
data (uploads via Excel available, too)
• Benchmarks, available as full reports and online service-
specific queries, with market data for call, medical direction,
administrative services, hospital-based services,
uncompensated care programs, and diagnostic testing services
• Web-based Analytic Tools to benchmark internal data, identify
compliance issues, and analyze where dollars are spent
• Contract Reports to document FMV compliance
• Consultations with our experts

5. Our Benchmarks:
• 80+ administrative services: hours, hourly and annual rates
• Includes hard to find data on:
• Committee and meeting attendance
• Quality initiatives
• EHR and IT initiatives
• Department chairs and section chiefs
• Medical staff officers and leadership
• 50+ positions emergency call coverage
• 15 hospital-based services (pathology, hospitalists, etc.)
• Diagnostic and testing services: EEG, EKG, stress, autopsy, etc.
• Other contract data to inform decision-making, like frequency of
payment, number of positions, types of contracts, and total
facility spending
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6. Introducing Michael
• 40 years experience in healthcare
as hospital administrator and
management consultant
• Founded two firms: HealthWorks
and MD Ranger
• Areas of expertise include:
strategic planning, business
planning, trauma centers,
operations improvement,
physician contracting, valuation,
litigation support/expert witness
and medical staff development
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7. Defining Commercial Reasonableness
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A distinctly different concept and test than fair market value

8. Beyond the formal regulatory
definition
• Two (very similar) definitions from regulatory authorities, one set
of guidelines on what information to consider and a few court
decisions
• But compared to fair market value—where there is a well
established set of professional valuation standards, methods
and benchmarks—there is very little additional in the way of
criteria or guidelines on this important topic
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The rest of this presentation is designed to take us beyond
the general and theoretical to the practical

9. What does commercially reasonable
mean?
Department of Health and Human Services ((Medicare
and Medicaid Programs: Physicians’ Referrals to
Health Care Entities with Which They Have Financial
Relationships 63 FR 1700 (1/8/98))
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“…a sensible, prudent business
agreement, from the perspective
of the particular parties involved,
even in the absence of any
potential referrals.”
“…a sensible, prudent business
agreement, from the perspective
of the particular parties involved,
even in the absence of any
potential referrals.”

10. What does commercially reasonable
mean?
CMS, Stark Interim Final Rule Phase II, 69 FR 16093
(3/26/04)
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“[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 (or family
member or group practice) of similar scope and
specialty, even if there were no potential DHS
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 (or family
member or group practice) of similar scope and
specialty, even if there were no potential DHS
referrals.”

11. Basic IRS guidelines on “how to”
The IRS provides guidance on how to evaluate whether or not an
agreement with a physician is commercially reasonable. According
to the Internal Revenue Manual, §4233.27
• Duties and responsibilities of the physician
• Physician’s background and experience, as well as knowledge
of the business
• Economic conditions of the marketplace
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12. Case law on Commercial Reasonableness
• United States ex. rel., Kaczmarczyk v. SCCI Hospital Ventures
(2004)
• Low hospital census did not warrant so many medical directors
• Some services were already provided for as a part of the
physician’s roles as described in medical staff bylaws
• Opportunities for multi-campus coordination were not considered
• Inadequate oversight
• United States v. Campbell (2011)
• Physician did not have the qualifications for the position in question
• Physician did not perform many of the duties included in the
agreement
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13. Commercially reasonable agreements
are:
• Sensible, prudent arrangements from both buyers’
and sellers’ perspectives
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Increased meaning can be provided by illustrating
arrangements that have been judged to be not commercially
reasonable

14. Why Commercial
Reasonableness is Important
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15. A critical first step for physician
agreements
• If a compensated service is not commercially
reasonable, it should not be contracted for….
• …even if the amount paid is consistent with FMV
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16. Healthy business practices are
important to the bottom line
• Non-employment physician contracts are now a
significant line item of hospital budgets, typically
anywhere from 4-6% of total operating budget.
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17. Determining Commercial
Reasonableness
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18. Practical questions to ask and answer
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Category Questions
1 Industry Practice
Is the arrangement reasonably prevalent in the
industry in similar type and size hospitals? The more
unusual, the less likely it is to be CR.
2
Frequency / Intensity of
Need
How often is the service needed? How intense is the
service in terms of workload? The less frequent and
less intense the need, the less likely it is to be CR
3 Originator of Proposal
Was it the hospital or the physician who originated the
proposal for the arrangement? The more the
originator was the physician, the less likely it is to be
CR.
4 Alternatives
Are there less costly alternatives? To the extent there
are practical alternatives that would have lower cost,
the less likely it is to be CR.
5 Duplication
To what extent is payment or other value for the
service duplicated by another arrangement? To the
extent another payment or another consideration with
economic value (in particular exclusivity), the less
likely it is to be CR.

19. Check industry practice
• Are other facilities paying for this service?
• If yes, how common is it?
• MD Ranger is an excellent resource for assessing
frequency of payment with its “Percent Paying”
Report
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20. A data-driven approach to commercial
reasonableness
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21. Case Study One: Nephrology v.
Gastroenterology
• Nephrologist approaches leadership at a small
community hospital for emergency coverage
compensation
• Argument: the gastroenterologists are compensated
for their time, so why shouldn’t I?
• Hospital decides no payment appropriate at this
particular hospital, because:
• Industry practice (#1): Relatively common in this type of hospital to
pay an gastroenterologist, rare for nephrologist (5% paying)
• Nature of service (#2): Very low volume and intensity for
nephrology
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22. Case Study Two: Bariatric Surgery
Coverage
• Renown, highly-sought bariatric surgeon demands
payment for emergency coverage
• With assistance of independent valuator hospital
declines, citing:
• Because all patients with bariatric surgery complications in the
region are overwhelmingly likely to be his patients, he is continues
to be responsible for their care and responding to complications
that his care might have cased (#4)
• Low percent paying seen in MD Ranger (#1)
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23. Case Study Three: Neurosurgery
Coverage
• A trauma center is currently paying for neurosurgery
call coverage.
• This coverage is three-deep.
• While two-deep neurosurgery coverage is necessary
for this high volume of trauma (per ACS), probability
of simultaneous need for three is negligible (#2)
• Also, MD Ranger plus special survey found no other
Level 1 or 2 TC in US had formal three deep (#1)
• After analysis, hospital ended the 3rd call slot
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24. Case Study Four: Spine Surgery
Coverage
• Hospital currently compensates neurosurgeons to provide
restricted coverage for trauma patients.
• That panel was qualified for spine surgery
• Separate orthopedic trauma panel
• Orthopedic spine surgery group approaches hospital, wishes to
be paid call coverage for spine surgeries
• Hospital declines payment, because:
• Alternatives exist: neurosurgeons, who are already being paid for
restricted coverage, are qualified and able to perform emergency
spine surgeries
• Paying a spine surgeon would be a duplicative payment (# 4 and
#5)
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25. Case Study Five: Eight Medical
Directors in Cancer Care
• Hospital has tertiary—but not quaternary—cancer
center of excellence
• There are eight medical directors
• Hospital is still evaluating
• MD Ranger data show hospital is outlier for medical directors
overall and for cancer in particular
• In some of the positions, the medical director is either the
only subspecialist on the active staff (or is a member of a
small group that is the only one on the active staff)
• Further study underway
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26. Fair Market Value vs.
Commercially Reasonable
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27. FMV vs CR
• They are related, but not interchangeable.
• Just because a contract is negotiated at fair market
value, doesn’t necessarily mean that it’s
commercially reasonable.
• Example: there is a market rate for paying podiatrists
emergency call; however, because only 3% of MD
Ranger subscribers report doing so, it’s probably not
commercially reasonable to do at your facility
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28. Key Take-Aways
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29. Key Take-Aways
• Should be the first key question for all physician
agreements
• Defined by regulators in highly subjective terms
• Those making CR assessments can do better than say
the “deal makes sense” or “the deal does not make sense”
• Uniform criteria (such as the set of five provided here) can
be add objectivity
• Although sometimes opinion from independent valuation
expert may be necessary, use of data from MD Ranger
such as “Percent Paying” or “Total Number of Medical
Directors” in MD Ranger
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30. Questions?
www.mdranger.com
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Allison Pullins
Director
apullins@mdranger.com
650-692-8873
Michael Heil
Founder
mheil@mdranger.com
650-692-8873