Subsidy

What an Anesthesia Fair Market Value Opinion Should Contain

By , Managing Director · Published

What an Anesthesia Fair Market Value Opinion Should Contain

The short answer: a fair market value (FMV) opinion for an anesthesia subsidy should state exactly what arrangement was valued, apply the federal definitions of fair market value and commercial reasonableness, name its data and methods, show its assumptions and sensitivity, and end in a range with stated limits. Nothing in the regulations prescribes that format, and no rule we found requires the opinion to come from an outside firm. What the law asks is that the compensation be consistent with fair market value, set in advance, and not tied to referrals, and that you can show it. The opinion is evidence of that, not a safe harbor. This article is a finance-side guide, not legal advice; your counsel decides how the rules apply to your facts.

What the federal definitions say

Three definitions in 42 CFR 411.351 carry most of the weight, and valuation firms build their opinions on them:

TermRegulatory text
Fair market value“The value in an arm’s-length transaction, consistent with the general market value of the subject transaction.”
General market value (services)“The compensation that would be paid at the time the parties enter into the service arrangement as the result of bona fide bargaining between well-informed parties that are not otherwise in a position to generate business for each other.”
Commercially reasonableThe arrangement “furthers a legitimate business purpose of the parties” and “is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty. An arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.”

The last sentence matters for anesthesia. A stipend exists because the group’s collections do not cover the cost of coverage, so by design the arrangement loses money for the group without the hospital’s support. That does not make it commercially unreasonable. What has to hold is that the coverage is needed for a legitimate business purpose of the hospital and that the price is what well-informed parties would agree to.

Which rules apply to a stipend

  • Anti-Kickback Statute personal services safe harbor, 42 CFR 1001.952(d)(1). A written, signed agreement covering all the services; a term of at least one year; a compensation methodology set in advance, consistent with fair market value in arm’s-length transactions, and not determined by the volume or value of referrals; and aggregate services no more than reasonably necessary. Since a 2020 final rule (85 FR 77684, effective January 19, 2021) the methodology, rather than the aggregate amount, has to be set in advance. The safe harbor is voluntary.
  • Stark Law exceptions, 42 CFR 411.357(d)(1) and (l). Similar conditions: writing, a term of at least one year, compensation set in advance and not above fair market value, and, for the fair market value exception, an arrangement that would be commercially reasonable even if no referrals were made.
  • Whether Stark applies at all. The Stark definitions of inpatient and outpatient hospital services exclude professional services by physicians and certified registered nurse anesthetists that Medicare pays for independently. A group’s professional anesthesia services are therefore generally not themselves designated health services, and the Anti-Kickback Statute is usually the main lens for a stipend. That can change with the facts, for example where a group member also runs a pain practice that refers other services, as in Kosenske v. Carlisle HMA, 554 F.3d 88 (3d Cir. 2009). Counsel should confirm.

The HHS Office of Inspector General’s 2005 compliance guidance for hospitals asks whether services are “legitimate, commercially reasonable, and necessary,” whether compensation “represent[s] fair market value in an arm’s-length transaction,” whether the hospital “could obtain the services from a non-referral source at a cheaper rate,” and whether the valuation rests on “a reasonable methodology that is uniformly applied and properly documented.” It says hospitals “should consider obtaining an independent fair market valuation” in some cases, “particularly rentals.” That is “consider,” not “must.” It also notes that arrangements with traditional hospital-based physicians such as anesthesiologists “raise some different concerns,” and that an exclusive arrangement can be consistent with fair market value “taking into account the value attributable to the exclusivity.”

What a sound anesthesia opinion contains

There is no prescribed template, so this is our view of good practice, built from the regulations and from published valuation methods. A reader should be able to check each item.

SectionWhat it should say
1. The arrangement valuedParties, term, coverage schedule (rooms, hours, in-house or on-call), staffing plan by provider type and FTE, how the stipend is calculated and paid, and any exclusivity. It must match the agreement you will actually sign.
2. The standardFair market value and commercial reasonableness as defined in 411.351, and the valuation date.
3. Data sourcesNamed compensation and productivity surveys, local market data, and the group’s own collections, with the reason each was chosen.
4. MethodsWhich approaches were used, which were rejected and why.
5. The calculationCost build-up, projected collections, and the resulting subsidy, with every assumption shown.
6. SensitivityHow the answer changes if pay, volume or collections differ from the assumptions.
7. ConclusionA range, and where the proposed payment falls in it.
8. Commercial reasonablenessA separate analysis of need, volume, alternatives (such as employing the team) and purpose.
9. LimitsAssumptions relied on, what was not verified, validity period and what changes require an update.

How anesthesia is usually valued

Valuation firms generally describe three approaches: market, cost and income. Root Partners notes that the income approach is “not typically used for valuing physician compensation” because considering income generated by the services “could violate the regulatory prohibition of consideration of the volume and/or value of referrals,” and that the cost approach “often serves as an upper limit.” PYA makes the same point about the income approach.

A published VMG Health case study shows the anesthesia version. The cost approach was “a build-up of provider costs based on market compensation survey data,” with FTEs drawn from the onsite and on-call coverage schedules. The market approach benchmarked projected ASA units and professional collections against survey data. Billing and indirect costs were added, and projected professional collections were deducted from total projected costs “to arrive at a conclusion of value for the subsidy payment.” HSG Advisors describes the same inputs: survey data, local job data, internet job postings, and the group’s historical collection percentage. HSG reported that most of its assessments produced a formal fair market value and commercial reasonableness opinion, with subsidies in its engagements ranging from $500,000 to $3.7 million a year and $35,000 to $209,000 per provider.

That structure has a consequence: the subsidy is a difference between two estimates, so error in either one passes straight through. Using the illustrative group from our stipend request guide (10 locations, $7.25 million cost, $5.0 million collections, $2.25 million subsidy), a 5% error in projected collections moves the answer by $250,000 and a 5% error in pay assumptions by $362,500. Both are larger than most negotiated adjustments. An opinion that gives one number with no range is hiding that.

Limits of the data

  • Surveys are voluntary. Stout notes the MGMA and AMGA surveys rely on voluntary submissions and are not built with statistical sampling methods.
  • A percentile is not a safe harbor. Holland & Hart summarizes CMS’s position: “It is not CMS policy that salary surveys necessarily provide an accurate determination of fair market value in all cases.” CMS declined to adopt a 75th-percentile safe harbor.
  • An outside opinion is not immunity. MGMA puts it bluntly: you do not get a “get-out-of-jail-free” card by having an outside valuation.
  • Old numbers go stale. In Kosenske, the Third Circuit held that “a negotiated agreement between interested parties does not ‘by definition’ reflect fair market value” and that negotiations from 1992 “could not possibly reflect the fair market value … more than six years later.”

What enforcement actually looked like

In the best-known case, the Department of Justice resolved a $237 million judgment against Tuomey Healthcare System for $72.4 million in October 2015. It said Tuomey paid 19 specialists “compensation that far exceeded fair market value” and that the hospital ignored its own attorney’s warnings that the contracts were risky. That case was about specialist employment contracts, not anesthesia stipends. In our research we found no published Department of Justice or OIG action alleging that a hospital’s anesthesia stipend exceeded fair market value. The point of citing Tuomey is the pattern it shows: compensation above market, plus a record showing that the hospital had been warned.

Warning signs in an opinion

  • It values a different arrangement from the one in the draft agreement, for instance fewer rooms or no call.
  • The projected collections come from the group and were not tested against claims data.
  • It names no surveys, or says only “national surveys.”
  • It gives a point estimate, with no range or sensitivity.
  • It addresses fair market value but not commercial reasonableness.
  • The valuation date is well before the effective date, or the terms changed after it was issued.
  • The valuator’s fee depends on the conclusion.

How often to refresh

We found no rule that sets an interval. The Stark fair market value exception allows an arrangement to be renewed any number of times only if its terms and compensation do not change, and the compensation definition looks to value “at the time the parties enter into the service arrangement.” Any change in coverage, staffing or the payment formula is therefore a reason for a new analysis, and many hospitals review the stipend every year. Our post on annual fair market evaluations covers that cycle, and the renewal timeline shows where the opinion fits.

Sources

Where this applies

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