How to Extract More Than Fair Market Value

January 18, 2011

Healthcare deal compliance, in terms of antikickback, Stark, and tax exempt entities, often turns on the propriety of the consideration paid. And that turns on the concept of fair market value, which is often neither fair nor indicative of value.

That’s because fair market value is defined for those purposes in a fashion that ignores economic reality, such as the Stark definition of “the value in arm’s-length transactions, consistent with general market value and, with respect to rentals or leases, the value of rental property for general commercial purposes (not taking into account its intended use) and, in the case of a lease of space, not adjusted to reflect the additional value the prospective lessee or lessor would attribute to the proximity or convenience to the lessor where the lessor is a potential source of patient referrals to the lessee.”

In other words, the value attributable by the actual parties to the relationship, strategic value, is not permitted to be considered.

Understandable, perhaps, as the notion is to do away with value based on the worth of referrals.

But completely ridiculous if you want to be paid for the actual value you are providing while still excluding any value relating to referrals.

The solution is not to run the risk of noncompliance by ignoring required definitions of fair market value.  Rather, it is structuring your business operations and the scope of deals to capture and extract strategic value outside of the regulated realm.  Not all practices can do this.  But if yours can, and it is not, then you’re leaving significant dollars on the table.

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