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OIG opinion 15-10: Fair market value implications for related-party services agreements

On July 20, 2015, the Officer of the Inspector General (OIG) issued Advisory Opinion No. 15-101, in which a health system and a related psychiatric hospital sought an advisory opinion related to a non-clinical personnel lease and management services arrangement.

The health system had proposed that the compensation be set at the cost to provide the services (salaries, benefits, and overhead) without any mark-up or administrative fee. The health system attested the payment would not vary with volume or value of referrals; however it was unable to set the fee in advance because operational and management needs may change over the term of the agreement. Ultimately, the OIG ruled that the arrangement was low risk based on three factors: 1) Medicare cost reporting rules for related parties; 2) the arrangement helped to gain cost efficiencies for the hospital; and 3) there was no evidence the arrangement would induce or increase referrals. While it could potentially generate prohibited remuneration under the Anti-Kickback Statute, the OIG said it would not impose administrative sanctions on the parties. That said, the OIG also concluded the proposed arrangement could generate prohibited remuneration since the rate may be below Fair Market Value (FMV).2

Fair Market Value Implication

By the health system charging for its services at cost (without a mark-up), it is accepting a fee below FMV and, therefore, may be seen as an inducement for referrals. As part of the principle of FMV, a willing seller of management services should receive a reasonable rate of return, which is consistent with generally accepted valuation methodologies and the definitions of FMV under Stark II3 and the Anti-Kickback Statute4. If a third party valuation had been obtained, the compensation would have contemplated a mark-up on costs and considered market comparables for the services.

In the particular arrangement referenced in OIG Advisory Opinion 15-10, not strictly adhering to the FMV and "set in advance" standards was considered "low risk". However, it is important to note there are countless arrangements throughout the country amongst affiliated entities, many of which likely do not have these low risk factors. Without all of these factors, similar arrangements should ensure the payments are FMV.

Practical Tips for Cost-Based Services Arrangements

1. Set compensation in advance based on best available cost estimates at that time
2. Rebase the compensation after one year based on historical/actual costs – this will help to ensure the costs of the services are covered and allows for adjustments to costs if services change
3. Check for duplication of services between the related parties
4. Document cost savings or efficiencies achieved through the subject arrangement
5. Consider engaging an independent third party valuation firm in order to opine and document that the compensation arrangement is consistent with FMV


1 -  Officer of the Inspector General Advisory Opinion No. 15-10 issued on July 20, 2015.

2 - Internal Revenue Service Revenue Ruling 59-60: “Fair Market Value, in effect, is the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

3 - Federal Register / Volume 2, Number 171, issued on September 5, 2007: The expanded self-referral statute is frequently referred to as "Stark II." The scope of this expansion was based on the enactment of Omnibus Budget Reconciliation Act ("OBRA") which extended the self-referral prohibition to cover other "designated health services" reimbursable by Medicare. These designated health services include clinical laboratory services; physical therapy services; occupational therapy services; radiology services, including MRIs, CT scans, and ultrasound; radiation therapy services and supplies; durable medical equipment and supplies; parenteral and enteral nutrition, equipment and supplies; prosthetics and/or orthotics; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services. The government continues to develop and expand Stark legislation in an effort prevent Medicare over-usage abuse through self-referrals.

4 - Social Security 42 USC § 1320a-7b (b). The Federal Anti-Kickback Statute prohibits the payment of remuneration in exchange for, or in order to induce, the referral of patients or other business which is reimbursable under Medicare. The anti-kickback statute is a criminal statute. A violation of the statute is punishable as a felony by a fine of up to $25,000 per violation or by imprisonment for up to five years, or by both fine and imprisonment. In addition, violators may be excluded from participation in the Medicare program. In 1997, the statute was amended to subject violators of the anti-kickback statute to civil monetary penalties in the amount of $50,000 per violation plus "damages of not more than three times the total amount of remuneration offered, without regard to whether a portion of the remuneration was offered for a lawful purpose." The statute has been applied in the context of a wide variety of business transactions, agreements and arrangements between a physician or a family member of a physician and an entity where Medicare funds are involved. There should be no benefit to the physicians that could be construed as an inducement for their referrals, such as a hospital compensating a physician above FMV.

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