Commercial Reasonableness: Critical Considerations for Physician Contracts

Posted on
May 1, 2018

To be compliant, it is first necessary to determine the need to pay, then to determine how much.

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Before paying a physician for services, hospitals should ask whether it is reasonable to pay for such services. Not all coverage or administrative services warrant payment. To be compliant, it is first necessary to determine the need to pay, then to determine how much.

Determining if paying a physician is commercially reasonable can be challenging. This brief interview explores the definition of commercial reasonableness, approaches to making and documenting a determination, and how this differs from "fair market value".

What does "commercially reasonable" mean?
The Department of Health and Human services has defined the term as "a sensible, prudent business agreement, from the perspective of the particular parties involved, even in the absence of any potential referrals" (Medicare and Medicaid Programs; Physicians' Referrals to Health Care Entities with Which They Have Financial Relationships 63 FR 1700 (January 9, 1998)). In the preamble to the Stark interim final rule, Phase II, CMS noted that 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." 69 FR 16093 (Mar. 26, 2004)

Both Stark and the Anti-Kickback Statutes prohibit compensating a physician with money or non-monetary gifts for referring patients to an organization with which the physician has a financial interest. Payments to physicians must remain completely unassociated with the business they bring to your organization. Thus, it is important that every payment you make is justified.

Simply put, commercially reasonable means that it is common business practice for an organization to pay for that particular physician service. A real-life example could be the question of general surgery call coverage. Is it commercially reasonable for your organization to pay for the service? 75% of MD Ranger subscriber hospitals report paying for general surgery coverage, so there is statistical evidence that many organizations compensate for the service. However, dermatology call coverage is another story. Only 1% of MD Ranger subscribers report payment for dermatology coverage. A less clear example is coverage for infectious disease, with only 11% reporting payment. To prove commercial reasonableness of payment for such a service may require extra documentation and research.

Why is being commercially reasonable important?
Despite the lack of a bright line, determining commercial reasonableness is important and should be a part of compliance documentation before a payment rate is considered. Assessing commercial reasonableness is the essential first step when considering a financial relationship with a physician. If it's not reasonable to pay for a particular service, it could be interpreted that your organization is paying the physician for referrals. The repercussions for having either a Stark or AKS violation are harsh. Stark law violations incur a civil penalty and fine, plus owing CMS what you collected under the arrangement with the physician. AKS violations are criminal offenses, and carry fines plus repayment of collections from involved physicians or groups.

How can you determine commercial reasonableness?
The IRS provides guidance on how to evaluate whether an agreement with a physician is commercially reasonable. According to the Internal Revenue Manual, § 4233.27, specific factors should be considered while determining commercial reasonableness:

  • duties and responsibilities of the physician
  • physician's background and experience, as well as knowledge of the business
  • economic conditions of the marketplace

You should also consider:

  • Does a physician have to perform the service, or can it be done by another clinician or professional?
  • Is it necessary to have a physician of a certain specialty in the position?
  • Is this a service that hospitals typically pay physicians to provide?

In addition to reviewing these questions, MD Ranger subscribers turn to our "Percent Paying Tables", which report the frequency of physician payments for over 150 physician services across MD Ranger hospital subscribers. When discussing whether or not to pay for a service, subscribers can access this data immediately and get a first impression of how common paying for the service is. We recommend using this number as a starting point in your physician negotiation process.

How is commercial reasonableness different from "fair market value"?
While fair market value is an "arm's length" negotiated fee for a physician service in the absence of referrals, commercial reasonableness addresses whether or not it is actually reasonable to pay for the service in the first place. A commercially reasonable service could have payment terms that exceed fair market value, and a fee that falls well within fair market value might not be commercially reasonable given certain market conditions. Here are some examples:

Hospital A wants to pay for a second medical director of its Cancer Center. The MD Ranger reports show that 22% of subscribers report paying for a medical director; however 100% of them only report paying for one position. If the second director is a co-director, and the sum of the hours and payments for both positions is with the range for a single director, payment would be reasonable. However, if both directors were paid at the same rate as a single position, and there were not unique, documented program and position requirements to justify a second position, the position and amounts paid may not be commercially reasonable.

Hospital B is asked to pay call coverage per diem rates for bariatric surgery. There are no reported contracts for such a service in MD Ranger; furthermore, as a non-elective service, the physician would be expected to cover his own patients. This would likely not meet a test for commercial reasonableness.

If something is negotiated at fair market value, is it commercially reasonable?
Not always. Just because a service has a fairly negotiated rate in the market, it doesn't necessarily follow that the service should be paid at your facility. One example is ophthalmology call coverage. Emergency needs are small and there are plenty of ophthalmologists in most communities, so payment for coverage is unusual. However, in some circumstances, such as an adverse payer mix or an especially complex trauma facility with large volumes or a lack of providers on the medical staff, it is necessary for a hospital to pay for coverage; hence, there is a market rate for the service. This is why MD Ranger encourages subscribers to always document commercial reasonableness along with the rate negotiated—even if your documentation is a brief summary paragraph identifying reasons that the service must be compensated, along with MD Ranger benchmark data. Another good example is hand surgery. A per diem for hand surgery that is within fair market value is at or under $800 (at the upper end of the spectrum). However, since only 14% pay for hand surgery coverage it's unlikely that you will need to pay for coverage for this service.