Modernizing the Stark Law - An Appraiser's Perspective

In the Stark Law Final Rule, CMS added an official definition for commercially reasonable (“CR”) which I’ve analyzed from an appraiser/consultant’s perspective. Although before now there was no explicit definition of CR for healthcare compliance professionals to follow, there was some guidance and references from regulatory sources that interpreted the term.

In 63 F.R. 1700 (Jan. 9, 1998) CMS identifies CR as an arrangement which appears to be “a sensible, prudent business agreement, from the perspective of the particular parties involved, even in the absence of any potential referrals.”[1]

In the Stark II Phase II commentary it was suggested that an arrangement will be considered “commercially reasonable in the absence of referrals if the arrangement would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician of similar scope and specialty, even if there were no potential DHS referrals.”[2]

Under the new guidelines, CMS finalized the following definition for CR[3] as: Commercially reasonable means that the particular arrangement furthers a legitimate business purpose of the parties to the arrangement and is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty. The final regulation also states that an arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.

The concept of CR is highly subjective and the recognized terms and definitions above include words like “sensible”, “prudent” and “reasonable”. From an appraiser/consultant standpoint, all of the above definitions basically mean the same, but with two exceptions:

• Removal of “..even in the absence of referrals” and
• Clarification related to “even if it does not result in profit for one or more of the parties”.

I find these two clauses to be the most significant and dramatic changes to the CR term. Although CMS is removing the specific language related to “…even if no referrals were made...” it still considers this to be “an important constraint when determining whether an arrangement satisfies the requirements of an applicable exception.” In addition, CMS is implying that an arrangement that isn’t profitable doesn’t necessarily mean that it isn’t CR.

However, a bigger question now looms. Will regulators now be more scrutinous over CR issues with arrangements? I’m often hired to issue an FMV opinion related to a particular arrangement but not a CR opinion. I believe CR has been taken for granted and sometimes disregarded.

Certain arrangements carry more CR compliance risk than others. Occasionally I’ll be analyzing an arrangement to issue an FMV opinion and notice considerable CR issues, while a CR opinion isn’t requested. Of course, I, as the appraiser, will almost never impress upon a client that they need a CR opinion/analysis because I believe this advice should come from their legal counsel. Instead, I will discuss the issue with outside counsel if I see the arrangement being problematic from a CR standpoint.

Although CMS is now providing us with an official definition of CR, a thorough CR opinion/analysis should still start with the basic question of “does this arrangement make sense from an operational, strategic, clinical/public health and financial standpoint?” A CR opinion is highly subjective and requires a thorough analysis of the healthcare organization and its goals, objectives, strategies, communities needs, financial constraints and many other factors. 

[1] 63 F.R. 1700 (Jan. 9, 1998).

[2] 69 F.R. 16093 (March 26, 2004). Page 41

[3] 42 CFR Part 411; https://www.govinfo.gov/content/pkg/FR-2020-12-02/pdf/2020-26140.pdf