FMV (Fair Market Valuation) Heads Up

By: Jeff Cohen

FMVs are at the heart of healthcare regulatory compliance when money or anything of value changes hands in a healthcare business setting.  Why?  Two reasons:

1. Healthcare laws (Stark, the Anti Kickback Statute and the Patient Brokering Act) all target money changing hands in the healthcare business space; and
2. There are clear exemptions and exceptions that have as an essential ingredient that the compensation (or pricing) is consistent with “fair market value.”

How it Goes—A Six Part Process

Locking down an externally performed FMV (part of the “gold standard” in regulatory compliance) is a process.  Here’s what it should look like:

Step 1.  The healthcare business person or his/her advisors (often accountants) find someone who specializes in performing FMVs for the specific matter (e.g. compensation, price of a business to be acquired);

Step 2.  The LAWYER for the healthcare business is immediately involved in the process BEFORE the FMV firm is engaged;

Step 3.  The LAWYER engages the FMV firm on behalf of the healthcare business client;

Step 4.  The parties (including the lawyer) get on the phone or in a meeting with the “FMV guy” and has a very extensive conversation re the project;

Step 5.  Once the FMV process done, a DRAFT FMV study is prepared and discussed interactively with the healthcare business and the lawyer;

Step 6.  Once finalized, an execution copy is prepared and provided to the lawyer.

Why?

It’s expensive enough just to obtain and FMV study.  So why involve a lawyer and drive your costs up?  Simple.  Because of the attorney client privilege (confidentiality).

The FMV process is a process.  It involves back and forth, communication, miscommunication, correction, alteration of drafts and more communication until there is a final report that complies with applicable law (e.g. the Stark law and the Anti Kickback Statute).  And that process must be confidential.  This is even more of an issue after recent changes to the Stark law amplify the need to ensure that the transaction under FMV study is also “commercially reasonable.”

A Bad Story

Here’s a bad story to consider which underscores the need for following the process described:

Client wanted to sell his healthcare business to a purchaser that is a tax exempt entity.  The client’s accountant sent the matter to an FMV guy (no lawyer involved).  The FMV guy communicated with the client and produced a final, signed report.  No draft was ever prepared or discussed with the client.

Trouble is, the FMV didn’t follow applicable healthcare law.  “So just change it,” you say.  It’s not that simple.  Because changing the FMV immediately becomes a red flag to healthcare regulators looking for Stark and Kickback violations.  Think it might be suspicious for there to be signed FMV Report #1 for $1,000,000, then a redo (that is discoverable!) resulting in FMV Report #2 with a very different number?  Of course it is!

While going through the FMV process necessarily involves communication and modification of draft FMV reports, doing that “out in the open” with no confidentiality, fully subject to discovery by suspicious regulators is just…well, it’s not smart!

Take Aways

What are the take aways?  Simple:

1. Don’t hire anyone for an FMV on your own;
2. Let an experienced healthcare lawyer quarterback this stuff for you;
3. Involve the lawyer in the communication, draft review and finalization; and
4. Make sure the FMV opinion also opines on the commercial reasonableness of the business relationship under review.

FMVs are an important part of the compliance matrix.  But they’re only valuable if they’re complaint,.  And you’re only safe from prying eyes if the attorney client privilege is locked in.