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ATTACHMENT 1
PROCEDURE FOR DETERMINING FAIR MARKET VALUE
A. Prior to executing any transaction with an Actual or Potential Referral Source, the relevant business unit must determine and secure appropriate supporting documentation that any compensation given or received in the transaction is at fair market value. At a minimum, the following considerations must be included in any fair market value analysis.
B. Fair Market Value Defined
- For rental property purposes, fair market value means the value of the rental property for general commercial purposes, but shall not be adjusted to reflect the additional value that one party (either the lessor or lessee) would attribute to the property as a result of its proximity or convenience to sources of referrals or business otherwise generated for which payment may be made in whole or in part under Medicare, Medicaid or other federal health care programs..
- For personal services and employment purposes, fair market value means the value in arms-length transactions, consistent with the compensation that would be included in a services agreement, as the result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party at the time of the service arrangement.
C. Determination of the compensation under fair market principles will begin with a range of benchmark payments, as described below. The appropriate value to select from within the range for a given transaction depends on individual factors. For example, a physician with a considerable experience in an area or a historically documented high level of personal productivity could receive compensation on the high end of the range. Similarly, where office space to be leased is in below standard condition for the market, the lease rate charged may be in the low end of the range.
- Comprehensive. Any fair market valuation must specifically list what is included in the valuation. Items and services included in the valuation must match those provided for in the agreement and must also match those items and services actually provided to the referral source.
- Consideration of Facts and Circumstances. All valuations should provide a thorough analysis of the facts and circumstances of the underlying transaction in comparison to industry benchmark data (i.e., MGMA, AAMC, Sullivan Cotter). In certain circumstances, comparing payments against objective benchmark measures or industry practices does not guarantee that a payment meets the standard of fair market value.
D. Rental or Lease of Space or Equipment
- Limitations. Any rental arrangements between a hospital and physician or otherwise between referral sources may be used as data points in calculating fair market rent, but should not be used exclusively. Rental payments may reflect the value of any similar commercial property with improvements or amenities of a similar value, regardless of why the property was improved.
- Calculating FMV for a Lease of Space. The fair market value in a lease for space will equal the product of the number of square feet in the space leased and the market value of such property for general commercial purposes. The leased space should include exclusive use space, plus allocated shared space, plus allocated building common space, adjusted for time utilized if used less than full time. Fair market value comparisons should further consider the condition of the space, amenities and services, including outfitted with cabinetry and lighting, furniture, utilities of the occupied and common space, housekeeping, maintenance and hazardous waste disposal, property and liability insurance, telecommunication and internet accessibility. In addition, landlord's overhead and margin factors may be considered.
- Calculating FMV for a Lease of Equipment. Generally, many of the above considerations regarding a lease of space apply to a lease of equipment. However, in the case of equipment, due to the nature of medical equipment, sometimes all of the comparables or market values of a transaction type involve entities in a position to refer or generate business to each other. In such cases, one method of calculating fair market value would be to add factors for equipment maintenance and repair, overhead and margin of comparable medical equipment.
E. Personal Service Agreements and Employment Agreements
- In calculating fair market value, the nature of the services to be provided must be considered. Fair market value of administrative and teaching services may or may not be similar to the fair market value of clinical services. Cost factors for professional liability insurance at fair market value should be considered and added to professional services agreements for clinical services.
- If an hourly rate is used to determine a physician or staff's annual salary, the rate should be multiplied by a number of hours that accurately reflects the time actually worked by the physician or staff each year.
F. If any transaction with a Potential Referral Source is a Focus Arrangement (as defined above), the Focus Arrangements Database Policy and Focus Arrangements Approval Procedure apply and must be followed.