What Is Fair Market Value?

Introduction (00:02):
Welcome to Health Law Talk, presented by Chehardy Sherman Williams Health Law. Broken down through expert discussion, real client issues and real life experiences, breaking barriers to understanding complex healthcare issues is our job.

Conrad Meyer (00:23):
All right, so Rory, I got to ask, what happens? Imagine that for a minute. You’re sitting there and you’re a physician and you’re looking at your contract, and in that contract there’s a salary cap and suddenly you’re getting a call from DOJ or an investigator saying that, Hey, by the way, we think that your salary cap is above fair market value and that you’re in violation of a false claim act or in any kickback, what do you do?

Rory Bellina (00:57):
Well, I think we have to go back to where did that number come from? Most of the time, the providers are given a number by their employer and then they’ll go to their attorney or they’ll do it themselves, but they’ll try to negotiate that number. Most of the employment agreements that I see will have in there that caveat that your compensation number is based on what we believe is fair market value, but there’s always that provision in the employment agreement where it can be renegotiated up or down. If the employer or hospital system decides that it’s falling, it’s going too high. So I think the example you’re talking about is that a number is agreed upon, but then after a period of time there’s some sort of audit and they look at it and they say that you’re being compensated too high, or we think that you’re being essentially paid for referrals. Is that accurate?

Conrad Meyer (01:47):
That’s extremely accurate. In fact, I think that actually happened on the North Shore. I mean, that was a North shore, I dunno if you remember the North Shore Hospital, I think it’s gone now, but at some point in time they were paying, and I remember this because I sat and I had several clients that were involved in that, where I found out that their compensation models from that hospital exceeded even M gmas, FMV of over a hundred percent. So they’re getting paid like 110, 120%. And I even questioned, I said, do y’all have FMV valuations from someone to verify that this comp is okay? Oh yeah. And guess what they did? Which was amazing to me. So I knew this was on the radar, and in that case, that’s an easy trigger because there was exceeding fair market value on the comp model. But the normal contracts that I see, same thing with you have that clause in there that says the hospital are usually the system of the employer has the right to adjust compensation should they determine that it could, especially with productivity bonuses and focusing on RVU compensation. And you’re getting beyond what they believe is fair market value, that they have the right to adjust it, which I think is a catch 22, because I mean, nobody wants to work for free.

Rory Bellina (03:10):
Right. And you never want that number to go down.

Conrad Meyer (03:13):
No,

Rory Bellina (03:13):
And I think so much of it, I think a lot of times when you’ll see these audit letters come in where there’s a question about the compensation of a physician is kind of like you said, what is in that physician’s file that led to this compensation and what can justify it? So did the practice just look at MGMA data, which for people that aren’t familiar with that is national survey that’s put out every year. A lot of hospital systems and our firms subscribe to that data and it does a survey across the nation of what compensation looks like based on region specialty type of hospital, private, nonprofit, number of employees. It really gets very granular and some of the data is very good because they have a lot of people respond to the survey, but for some you don’t have a lot of data. And then in certain cases, you’ve got a provider who has a specialty or a subspecialty, and they’re highly trained in experience. And so when you go look at that, what that provider is, let’s say it’s an oncologist, and you look at what that MGMA data is, but then you say, okay, well this physician is double board certified. He’s got a subspecialty in this area, and he has innovated this new procedure that we believe warrants paying 120% of MGMA data. So do you have that information in that physician’s file to back it up? Did you use a third party valuation firm? We have a lot of colleagues that we work with

(04:41):
For these high level physicians because their numbers are typically off the charts compared to MGMA data. So what do you have in that physician’s file to back it up? Or is it something where it’s just blatantly obvious on its face that this is a, we’ll call it a, for lack of better expression, just a regular physician, but that physician is driving so many referrals that we have to find a way to compensate them and we’re going to try to hide it in their compensation for these referrals. I think those are two different scenarios that we can discuss and where the issues lie.

Conrad Meyer (05:21):
Well walk back. I mean, let’s start with the main question. What is fair market value? What is that? I think that that’s the most subjective term, a thousand pound elephant in the room. What is

Rory Bellina (05:34):
It that’s the most subjective term in healthcare? I mean, you’ll see that H-H-S-O-I-G-C-M-S, everyone has different definitions of what fair market value is, but there is no real number. There is no one data set that says fair market value can be found at this website.

Conrad Meyer (05:54):
And see, that’s the problem because almost everything on the regulatory in healthcare hinges on fair

Rory Bellina (05:59):
Market market value

Conrad Meyer (06:01):
Mean. So having that conversation, I bet you if we stuck three valuation firms in this room and said, guys independently, what’s fair market value? Every single one would’ve a different response.

Rory Bellina (06:12):
And they’re probably not going to give you a number. They’re probably going to give you a range and they’re going to have a little

Conrad Meyer (06:17):
Asher or methodology that might be Right. Exactly.

Rory Bellina (06:19):
And there’s going to be an asterisk next to it that says, here’s a range, but

Conrad Meyer (06:23):
Subject to our revision or we have the reserve the right to change it.

Rory Bellina (06:27):
And you have to consider all these other factors of this physician. What does this physician have? If you’re doing a, and I think it goes back to the struggle of these large hospital systems and large employers. They don’t want to do this for every physician.

Conrad Meyer (06:42):
No.

Rory Bellina (06:43):
So if you’ve got a large hospital system that is hiring a group of we’ll call, we’ll say er, ER physicians straight out of residency, they want to look at MGMA data or have a valuation done for what they believe is the fair market value for those, but they don’t want to do it for every time that they’re hiring a physician because that’s just cost prohibitive. It gets very expensive. So they’re using that same information for everyone. It’s not specific to that doctor. And I think that they need to, for your high level high training physicians, there needs to be that specific evaluation done, but it’s just not being done in a lot of cases.

Conrad Meyer (07:25):
Well, also I think about this when it comes to fair market value in terms of a false claims act or some kind of that kind of a suit, it’s whatever the government says they want it to be, right?

Rory Bellina (07:37):
Yeah.

Conrad Meyer (07:38):
So you have a DOJ attorney telling you, well, here’s what we believe FMV is, and that’s it. That’s all.

Rory Bellina (07:43):
That’s what we think it is,

Conrad Meyer (07:44):
Right? This is the, so if they have a number and everybody’s number all over the place, it’s a hard target to hit.

Rory Bellina (07:50):
And then you as the employer have to try to find a way to justify or back into that number, where did you come up with this number? Is it because this doctor is double board certified and has an innovative technique? Or does this doctor drive 90% of referrals to that practice section in your hospital? And how can you really justify that number? And another thing is, are you justifying it now or do you have some sort of record where you justified it before you hired them?

Conrad Meyer (08:23):
Well, here’s another problem though. Okay. So imagine you have a high valued physician going into an employee to start some contracting, a simple contract scenario, right? And in that contract, they have the language that we reserve the right to adjust compensation based on our fair market value.

Rory Bellina (08:38):
Well,

Conrad Meyer (08:38):
Shouldn’t the doctor have the right to challenge that? I mean, shouldn’t a physician have the right to say, okay, show me the valuation. You’re telling me that I’m exceeding fair market value based on your subjective determination. I want some objective values of why that is. I have a right to challenge that

Rory Bellina (08:56):
And from that,

Conrad Meyer (08:57):
And they’ll never let that happen. I have tried that so many times and they will not let me do it,

Rory Bellina (09:02):
And I have never seen it go up. It always will go down, down. They’ll say that according to our analysis, your fair market value has gone.

Conrad Meyer (09:12):
So if I’m the doctor, do I want to be working for free? Absolutely not. So what do you do if you’ve exceeded your targeted, let’s just say, and for those listening, when we’re talking about this, we’re talking about a targeted rvu and you exceed the targeted RV by X numbers, and then suddenly you’re being told, say for example, your target’s a 5,000 rvu and you exceed it by 2000, so you at 2000 extra, and you’re being told that, okay, based on our dollar per RVU times the 2000 extra, you’re exceeding the fair market value and say it’s like September.

Rory Bellina (09:47):
What do you do for the next three

Conrad Meyer (09:48):
Months? What do you do next for the next three months?

Rory Bellina (09:50):
Right?

Conrad Meyer (09:50):
Do you just say, okay, I’m going to go in and just watch tv because essentially that’s what you should do.

Rory Bellina (09:56):
Yeah. Because they’re not going to want to pay you over that fair market value,

Conrad Meyer (09:59):
Right? I mean, you literally would be working for free. I just can’t wrap my head around that.

Rory Bellina (10:04):
No, it’s a problem. Like you said, for the physicians that are on that higher spectrum of knowledge and expertise, and then for the ones that are very productive. Now, what if we flip the scenario where you want to bring in a physician and that their fair market value is let’s say 300,000, but their surgeon and they’re going to refer a ton of lab and imaging work to your center.

Conrad Meyer (10:34):
Do you give ’em a pass?

Rory Bellina (10:37):
I know the answer to this, but can you build into their salary the thought process of, well, yeah, his build services are really only worth 300,000, but he’s going to send every patient for lab work and every patient for imaging and every patient for follow-up on the doctor’s side. That doctor’s going to want to be compensated for that. He knows how much value in a dollar sense he’s bringing to that hospital or that

Conrad Meyer (11:04):
Surgeon. I’m sure the hospital’s going to want to compensate ’em for that. But the problem is how do you do it legally and how do you do it within your regulatory compliance, right? That’s the hard,

Rory Bellina (11:14):
It’s very hard to do. But the Dr. May say, well, I’m not coming to your hospital because,

Conrad Meyer (11:20):
And they have every right to do that

Rory Bellina (11:21):
Because I believe, I know that I’m going to bill X amount of dollars for services, but I’m also going to drive so much more business to your practice. So what do you do in that case?

Conrad Meyer (11:32):
I don’t know. That’s the problem. Let me ask you this. I’m going to sort of pivot there. Most of the time when we’d argue comp for physician contracts, we’re talking about using MGMA benchmarks, right?

Rory Bellina (11:44):
Sure.

Conrad Meyer (11:45):
So what we’re talking about right here at 120% or high level or your lab example, for example, what you just stated. I mean, that’s sort of the outlier. I mean, that is almost the exception to the rule. I think the answer is to your question is that there’s nothing you can do. You have to work in the confines of trying to keep within fair market value. And if that doctor has to walk, guess what they walk. I mean, otherwise you’re just opening yourself up to problems,

Rory Bellina (12:14):
But you don’t want them to walk because you’re losing all those an ancillaries no losing revenue.

Conrad Meyer (12:17):
That’s right. You’re losing revenue from all that. So the only other way to do it, I mean frankly, is you’re talking about medical director agreements. You’re talking about maybe some sort of administrative role where you can compensate ’em for the administrative part separately and try to work in something like that. If you’re a private hospital, you have more options. So you can put them in, if you have a reit for example, you can put them in the REIT for those of you in real estate investment trust. So you have that option. But wait, I want to get back to the normal everyday even specialist contract that we’re looking at. Most times comps are falling at 50% or less from MGMA. And the question I have is, does MGMA itself, is that a reputable FMV? I use it.

Rory Bellina (13:11):
I use it as well. I use it as

Conrad Meyer (13:12):
Well. So

Rory Bellina (13:13):
It’s only not the only source, but it’s the main source that we can rely on because it’s a demonstrative, it’s on paper now. It’s online only, but it’s a demonstrative way for you to say, here’s where these numbers came

Conrad Meyer (13:28):
From,

Rory Bellina (13:29):
And then everything else after that has to be taken on a case by case basis. But you brought up a good point about the medical directorships.

Conrad Meyer (13:35):
That’s a good way. That’s another to thread the needle,

Rory Bellina (13:38):
But the government knows about those and so they know that for my example of the surgeon who’s going to refer a ton of lab work and imaging work, are you just going to go ahead and pay him what you can justify as fair market value and then give him some sort of fake medical directorship where you’re getting him another pot of money? I think the government’s very aware of those situations and they’ll look at those as well. I think that’s why it’s really important for these medical directorship roles that you can actually justify your duties. And a lot of times I’ll see in these medical directorship agreements, they’ll be in there an attachment where the doctor has to state the date and the time and how long he spent and what he did actually being that medical director. Because just giving someone the title of medical director and here’s another $200,000, I don’t think that passes the smell test for the

Conrad Meyer (14:30):
Government’s. A lot of money for a medical director.

Rory Bellina (14:32):
I bet I’ve seen it before.

Conrad Meyer (14:35):
Rare cases. I mean, I had that problem and I was amazed that, I’ll be candid with you, I was amazed the government passed that up. We had that in my kit tam, that whistleblower action, and I had director agreements to your point 200,000 plus, and it was always the highest referral. I brought that up to D oj and you would’ve thought that it was just like, please pass the salt. They didn’t care. I couldn’t believe it. But from our standpoint, when we’re drafting that and we’re advising clients, I 100% agree with you. It has to be fair market value in line, and the administrative duties have to be met, be recorded, otherwise you’re running into problems.

Rory Bellina (15:23):
And we have data. We have MGMA data on medical directorships. Yes, I saw that recently. And what

Conrad Meyer (15:28):
Those 25, $30,000 a year kind of thing, that’s supposed to be 200,000,

Rory Bellina (15:33):
Right? But you and I have both seen those really high ones, and so that’s an

Conrad Meyer (15:38):
Issue. I’m just amazed people would even think that that’s normal.

Rory Bellina (15:43):
Now, what is the physician’s perspective? If they’re involved in, like you said, a false claims act, or there’s a case brought against the physician saying that they’re being paid above our fair market value, and the doctor says, well, wait a second, guys. I went there and interviewed and this is the number they gave me. And I said, okay to it, and I had all my cases in my labs and my imaging there, but I didn’t come up with this number. Is there any defense for the doctor if he had no part in it, meaning if the doctor just took the number that was given to him?

Conrad Meyer (16:16):
I mean, that’s a great defense. Put my hands in my pocket and say, Nope, wasn’t me. They told me. I said I liked it, and that’s it. Sign here.

Rory Bellina (16:29):
I don’t think it absolves the doctor, don’t the water, right? I don’t think it absolves the doctor because the government is going to say, you knew that this was excessive compensation. Of

Conrad Meyer (16:36):
Course, yes.

Rory Bellina (16:36):
Driven to you for you to drive referrals.

Conrad Meyer (16:39):
Well, I guess then we go back to your point about the administrative duties. How much work would you have to put in to objectively state that a $200,000 medical directive fee was legitimate? You follow me? Yeah. Yeah. So if you’ve got a full-time practice and you’re like a 1.0 FTE and you’re doing a full practice clinical whatever years you’re doing and you’re getting paid another two or six figure, just a six figure right of a medical director, you better be damn sure that your calendar entries show significant amount of time administratively or you’re going to be in real trouble. Absolutely.

(17:14):
Because that’s the funny thing. I think doctors don’t realize this, but it’s not just them going to d OJ and saying, they gave it to me. I didn’t realize I just signed the what? The DOJ really not the D oj. It’s the FBI. The FBI is going to come into that office, Rory. They’re going to get the emails, the calendars, the written calendars, the appointment books they’re going to go through and look at the daily, everything of that physician if they’re targeting a clinic or their doctor. I mean, it’s not simply just, Hey, we got a complaint here. I mean, it is a massive, they’re going to come in and take everything and they’re going to take the appointment book and match it with the Outlook calendar on the system. They’re going to look at the time you spent in meeting minutes to see how long you actually were sitting in the meeting.

Rory Bellina (18:03):
Now what about the scenario, and I have seen this before, and I’ve read about this from the publications that the DOJ will put out on their investigations for these.

Conrad Meyer (18:12):
That’s right.

Rory Bellina (18:13):
One was recent where the medical directorship was adjusted in line and this hospital got hit for this, the medical directorship and the compensation was adjusted in line annually based on that physician’s referral patterns. And that was a

Conrad Meyer (18:30):
Real deal,

Rory Bellina (18:31):
And that was a very clear, I’ll have to share it with you. That was a very clear case where this system would look at the doctor’s referrals and then a one year where his referrals weren’t what he probably said he was going to bring, they adjust. It is calmed down.

Conrad Meyer (18:46):
Can I ask the question? Who’s advising these hospitals?

Rory Bellina (18:50):
I think that they’re looking at it from a business decision of this makes sense for business. Do

Conrad Meyer (18:54):
They not contact counsel? I mean, do they not? Again, this to me, this is to cut your nose off to spite your face. I don’t want to pay for it. And then suddenly they run afoul because you’ve got a CEO who’s doing this. That just blows my mind.

Rory Bellina (19:08):
And in every other industry, it makes perfect sense. If you’re not bringing business, then we’re going to adjust your compensation. Not in healthcare. Not in healthcare.

Conrad Meyer (19:17):
Gee whi. So let’s circle back. So just of this, the whole thing is fair market value. How do you figure that out? What do you do if you’re a physician and you get a contract with that cap language, and I guess where do we go from here? How does it

Rory Bellina (19:36):
Work? Well, I think that every physician that’s negotiating their employment agreement and they’re presented with an offer that the employer is stating, here’s your base compensation or here’s your salary, and we believe this is fair market value. I think that provider should always ask, can you show me where these numbers came from? Do you have something? And the hospital system say, well, yes, we checked 2023, now it’s rolling on 2024 data that’s about to come out. We checked 2023 MGMA data and our system pays in this range, and you fall in this range. And that’s where the number came from. I think that that should be step one for a physician to find out from their perspective, are they comfortable with it? Are they comfortable with what is being told to them as fair market value? I think on the hospital side, they should be documenting this.

(20:28):
They should have in there or the employer side, they should have in there their records showing, okay, this is what we offer for this type of physician and here’s where we came to that justification and if we’re bringing in this excellent. The example, I keep using the double board certified surgeon who has this new technique that we’re bringing him in. We believe he’s worth this. They need to go out and get a separate valuation for that physician to justify that. I think that’s the steps that you need to take on depending on what side you’re on.

Conrad Meyer (21:00):
I mean, I also think too that there needs to be a mechanism for a doctor to challenge a systems determination that they’re capped. There’s got to be a way to, because otherwise, I mean, I had the issue of an ortho back spine client of mine, literally to being told that he was capped. It was like August and he had already, he was like a workhorse and he was told, oh, well, we can’t pay you anymore because you’re capped. And that’s just the way it’s going to be. So he would literally go into the office and go watch movies. And I’m like, this is just the most

Rory Bellina (21:43):
Inefficient.

Conrad Meyer (21:46):
So you have a guy who’s clearly got qualifications, who is going in watching movies,

Rory Bellina (21:53):
And then next year

Conrad Meyer (21:54):
They’re not going to pay ’em.

Rory Bellina (21:55):
And then next year for that same physician you just described, are they going to now adjust as RVs down so that he now works 12 months but makes the same amount? Because if I’m the hospital, that’s what I’m probably going to think. I’m going to think, well, let’s just pay him less. We know he is going to work this amount.

Conrad Meyer (22:12):
Let me just tell you. Then he’s going to walk the exit door.

Rory Bellina (22:14):
He’s absolutely going to leave.

Conrad Meyer (22:15):
Yeah, absolutely. 100% going to leave.

Rory Bellina (22:17):
So here’s a hypothetical that we could kind of wrap this up on, but why do you think H-H-S-O-I-G doesn’t put out or have a comparable or say we base our numbers off of MGMA or we’re going to put together our own survey and here is fair market value, it’s going to be updated annually and this is justifiable fair market value. If you have outliers, be sure that you’re able to justify it. Why do you think they’ve never, in the decades that this has been around, they have never done their own? Because this is the hardest question to answer is what is fair market value?

Conrad Meyer (22:51):
I think with the myriad of healthcare contracts and businesses and all of the interactions going on, I don’t think it’s possible to cover all the bases. And of course it’s a moving target because valuation continues to move on a yearly basis. I don’t think it’s set one year and then you late wait three years. But I do think CMS has come out recently with a clarified definition of just fair market value of itself. So I think they’re trying to narrow it down so that this nebulous vague idea of what fair market value could be construed as is sort of narrowed in the sense, but it’s not there yet. I don’t think they’ll ever get there. Maybe they, people put the valuation firms out of business,

Rory Bellina (23:35):
And maybe this is a horrible way to think about it, but maybe they don’t want to say what fair market value is because then it’s going to take away a lot of their power to go after these. If they say what it is, then are they going to have less cases to go after?

Conrad Meyer (23:53):
I see what you’re saying. Yeah. Maybe so. I don’t know. I mean, I don’t know. But you know what, the other way I look at it, that’s great. It is got its good and bad points, good for valuation firms.

Rory Bellina (24:07):
Very good,

Conrad Meyer (24:08):
Very good for them. Hard for clients and doctors to wrap their heads around because this is such a nebulous term with no concrete, truly objective thing. And even if we use MGMA, for example, I think you’re safe if you’re in the bell curve, but when you start pushing the bell curve, and that only happens in the most rare situations, I think, because most systems want to lower the expectations on the base and move the needles. So they always win and make money. But on the rare occasions, you’ve got the unique doctor with the labs, for example, or the expertise or the entrepreneurial, the guy, the gold standard or whatever. You run real close to running across the line. If you push it to the 90th 95th a hundred percentile, even at MGMA.

Rory Bellina (25:02):
I agree.

Conrad Meyer (25:04):
Well, look, lemme tell you this. I like this discussion. I like fair market value discussion, but I want to tell you this. I am putting together a special fraud program so that you and I are going to talk about this. So we’re going to talk about fraud and examining how billions are lost in fraud schemes in healthcare. So that’s going to come up next time. So be on the lookout for that.

Rory Bellina (25:25):
Alright,

Conrad Meyer (25:25):
I’ll lay it out for you and we can tell the audience about the billions and billions of dollars lost in healthcare every year, what DOJ is going to be doing of a forecast of 2025, and sort of our little note to clients as to, Hey, be on the lookout for these schemes and here’s how to protect yourself.

Rory Bellina (25:44):
Alright,

Conrad Meyer (25:44):
Looking forward to it. Alright, have a great weekend. Enjoy.

Introduction (25:50):
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