Case Examples of Commercial Reasonableness

Documenting commercial reasonableness is an essential element of any hospital's physician contracting program. However, conforming to the legal guidelines surrounding commercial reasonableness often proves challenging even for conscientious healthcare organizations.

Commercial reasonableness is one of the two standards required in Stark Law regulations for physician contracts. Fair market value, the other standard, is more objective and is addressed by payment benchmarks. To be commercially reasonable, a payment must be a common business practice in the industry, and the service provided must meet the duties of the job. Finding data to document commercial reasonableness compliance can be a challenge.

Fines and settlements have been levied for failure to meet the commercial reasonableness standard, so it is important to ensure that your contracts are compliant. So what is commercial reasonableness and how is it documented? Learn from these case studies to better understand commercial reasonableness, and how to avoid potential compliance pitfalls.

Court Cases Involving Commercial Reasonableness

Court cases involving commercial reasonableness reveal best practices for healthcare organizations to determine and document the commercial reasonableness of physician agreements.

We have summarized three illustrative cases that demonstrate the fed’s thinking:

  1. United States ex. rel., Kaczmarczyk v. SCCI Hospital Ventures (2007)
  2. This is one of the earliest cases to directly address fair market value and commercial reasonableness in physician agreements. Government experts suggested a two-part test for commercial reasonableness:

    1. Is the agreement in question essential to the functioning of the hospital?
    2. Does it make sound business sense to pay the physicians?

    In this case, the government argued that:

    • The hospital’s low census did not support the number of medical directors
    • Some duties that were paid under directorships overlapped with duties required by the medical staff bylaws
    • The hospital did not efficiently coordinate directorships among its campuses The hospital did not have adequate compliance oversight and enforcement

    MD Ranger takeaways:

    • Test all contracts for commercial reasonableness relative to your specific organization
    • Don’t pay for the same service twice
    • If you have more than one campus or facility, document why dual directorships are needed
    • Don’t understaff your compliance program

    Lewis Lefko, “Fair Market Value in Health Care Transactions,” July 20, 2007,, citing United States of America ex. rel., Darryl L. Kaczmarczyk, et al., v. SCCI Hospital Ventures, Inc. d/b/a SCCI Hospital Houston Central, U.S. District Court, Southern District of Texas, Houston, Division, No. H-99-1031, July 14, 2004.

  3. United States v. Campbell (2011)
  4. Even employment physician relationships can be implicated under Stark. United States v. Campbell is an excellent example of what can happen when employment arrangements are not bona fide or they fail the commercially reasonable test.

    The court determined that the hospital was paying local cardiologists for cardiothoracic patient referrals based on the formula used to pay an employed physician. Dr. Campbell’s contract with the University of Medicine and Dentistry of New Jersey was not protected by the Stark law’s exception for bona fide employment relationships because he did not perform all of the duties outlined in his contract. Furthermore, it was determined that the amount of his salary was neither commercially reasonable or FMV.

    MD Ranger takeaways:

    • All types of physician contracts are at risk for Stark violations, even employment arrangements
    • Paying for referrals is illegal even in the context of employment
    • Compensation should be set in advance and should not be related to services provided at an affiliated health facility

    U.S. v. Campbell, 2011 WL 43012, No. 08-1951 (D. N.J., Jan. 4, 2011).

  5. United States ex rel. Elin Baklid-Kunz v. Halifax Hospital Medical Center. et al (2015)
  6. Given the amount of press given to the Halifax case, most know that the heart of the matter concerned paying too much for physician services. These self-referral overpayments violated Stark law and landed Halifax Hospital Medical Center with an $85 million settlement. There were also commercial reasonableness concerns in the case, which are just as important to highlight. The Halifax case demonstrates both FMV and CR concerns with the payment arrangements negotiated with referring physicians.

    The expert witness for the United States cited commercial reasonableness concerns including:

    • The neurosurgery practices in question led to Halifax losing money
    • The agreement between the neurosurgeons and the hospital showed preferential treatment
    • Aside from medical oncologists, neurosurgeons were the only physician specialty earning compensation above the 90th percentile
    • The number of wRVUs for the neurosurgeons was inconsistent from year to year
    • The coding for services billed was far more than one FTE could be reasonably expected to produce

    MD Ranger takeaways:

    • If a service is losing money, be careful to document the need to pay a physician for direction services
    • Review all physician agreements thoroughly before they are executed and look for outliers. Check for payments above the 75th percentile, anything out of the ordinary in terms of perks or benefits, and inconsistencies in payments from year to year.

Using MD Ranger for Commercial Reasonableness Documentation

MD Ranger collects subscriber data, providing a set of comprehensive benchmarks for physician contracts. We also publish data on the percentage of hospitals in our database that report paying for benchmarked services. This market data can help determine and document commercial reasonableness for a broad range of administrative, leadership, coverage and other non-employment services.

If the percentage of MD Ranger hospitals that report paying for a service is high, it is a strong indication that a decision to pay for that service is commercially reasonable. This doesn’t mean a payment is automatically fair market value, but it does mean that a particular service is commonly provided.

CR Cases Graph

Conversely, if the percentage of MD Ranger hospitals that report paying for a service is low, it is possible that payment for the service is not commercially reasonable. For low frequency services, additional information on hospital size, program requirements, and community need should be reviewed and documented in the commercial reasonableness analysis.

MD Ranger also reports the distribution of number of total positions for hospitals, as well as by service, which can help document the reasonableness of multiple medical directors for programs such as cardiology and behavioral health.

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