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Fair market value is becoming a hot topic in health care because health reform has stimulated acquisitions and mergers. Health care entities must be aware of the consequences they face if they stray from FMV.

Preparing for transition

Severe Penalties Drive Interest in Fair Market Value in Health Care

  • 10/23/2013

Within the last year, Tuomey Healthcare System in South Carolina was ordered to pay $237.5 million in fines and penalties, Adventist Health System and its affiliated White Memorial Medical Center in Los Angeles agreed to a settlement of $14.1 million, and Cooper Health System and Cooper University Hospital in New Jersey agreed to a settlement of $12.6 million.

The common issue in all of these cases and many others still under investigation is whether payments between providers are at fair market value (FMV).

Whenever anything of value is exchanged among health care providers or between a nonprofit organization and a third party, the value of the exchange needs to be at FMV or the parties may face civil or even criminal penalties. FMV is becoming a hot topic in the health care business because health reform (the Affordable Care Act) has stimulated acquisitions and new employment arrangements between physicians, hospitals, accountable care organizations, physician practices, and related businesses like ambulatory surgery centers and imaging centers. All of the participants have a vested interest in how FMV works and how to appropriately structure these transactions.

“As health reform progresses, there are an increasing number of mergers, acquisitions, and compensation arrangements. Government regulators do not want these payments to act as an inducement for providers to refer their patients,” says Alan Simons, a health care valuation principal with CliftonLarsonAllen. “Because many of these health care providers receive a significant portion of their reimbursements from federal agencies like Medicare and Medicaid, they face severe penalties if these transactions exceed fair market value.”

Health care providers found to engage in transactions where payments exceed FMV could face severe fines and penalties and be excluded from Medicare and Medicaid programs. In addition, managers and insiders of nonprofit organizations can be fined as well; and the nonprofit organization could lose its tax exempt status. Health care providers and nonprofit organizations must be aware of the consequences they face when their transactions are above FMV.

Fair market value white paper

Our Fair Market Value in Health Care Transactions white paper explains the role that FMV plays in the health care industry: why we need it and when we need it.