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Fair-market-value compensation exception

42 CFR § 411.357(l) created a fair-market-value exception for compensation resulting from an arrangement between an entity and a physician, an immediate family member or any group of physicians for the provision of items or services by the physician, family member or group of physicians to the DHS entity.  In the phase III final rule the exception was amended so that it also applied to compensation provided to an designated health service entity from a physician.

For purposes of this exception, the arrangement may be with a group practice that may or may not meet the Stark law's definition of a bona fide group practice to comply with the in-office ancillary services exception. Therefore, the exception may be used with both direct and indirect compensation arrangements.

To use the fair-market-value compensation exception, a health care entity must meet the following conditions:
  • The arrangement is in writing, signed by the parties, and covers only identifiable items or services, all of which are specified in the agreement;
  • The writing specifies the timeframe for the arrangement, which can be for any period of time and contain a termination clause, as long as the parties enter into only one arrangement for the same items or services during the course of a year. An arrangement made for less than one  year may be renewed any number of times if the terms of the arrangement and the compensation for the same items or services do not change;
  • The writing specifies the compensation that will be provided under the arrangement. The compensation must be set in advance, be consistent with fair market value, and not be determined in a manner that takes into account the volume or value of referrals or other business generated by the referring physician;
  • The arrangement would be commercially reasonable (taking into account the nature and scope of the transaction) and furthers the legitimate business purposes of the parties;
  • It does not violate the antikickback statute, or any federal or state law or regulation governing billing or claims submission; and
  • The services to be performed under the arrangement do not involve the counseling or promotion of a business arrangement or other activity that violates a state or federal law.
This exception builds on and modifies an exception of the same name  presented in the proposed rule.  All of the special rules related to compensation outlined above apply to this exception, including the requirement that the compensation be set in advance, be consistent with fair market value and be commercially reasonable.  Importantly, this exception requires that the arrangement meets a safe harbor under the antikickback statute, must have been approved by an advisory opinion, or does not otherwise violate the antikickback statute's provisions.

In Stark phase III the application of the fair market value exception was limited such that it no longer applies to leases for office space.  Leases must now comply with the office space exception.

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