Understanding 'Commercial Reasonableness'

Many physicians are familiar with the provisions of Stark Law and the Anti-Kickback Statute, and the requirement that physician contracts be at a price consistent with “fair market value.” This is aimed at preventing hidden kickbacks, in which the physician might be paid too much for services (or charged too little for things the physician must purchase, such as office space or equipment leases).  

Less is understood about the requirement that contracts must also be “commercially reasonable.”

I asked Michael Heil, one of the founders of MD Ranger, about this. MD Ranger is a subscription service providing market benchmark data about hospital-physician agreements, Michael also leads the consulting firm HealthWorks, which provides valuation services to both physicians and hospitals for hospital-physician agreements.

Martin Merritt: How is “commercial reasonableness” defined?

Michael Heil: In CMS regulations an agreement is “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 (or family member or group practice) of similar scope and specialty, even if there were no potential DHS referrals.”

MM: That definition sounds quite subjective. Are there more objective standards?

MH: No, not really. The only additional sources are IRS guidelines that list a few factors for consideration (such as duties and responsibilities of the physician and economic conditions in the marketplace). Some additional clues can be found in a few court rulings where findings were made against hospitals when the issue was whether anything should be paid at all.

MM: Can you give an example of how commercial reasonableness is different from fair market value?

MH: A hospital considered paying for orthopedic spine surgery call at a rate that was well within fair market value. But it was already paying for restricted neurosurgery coverage. The neurosurgeons were fully credentialed for spine surgery. Based on commercial reasonableness requirements, the hospital shouldn’t contract with the orthopedic spine physicians at all: A reasonable entity would not pay for the same coverage twice in the absence of referrals.

MM: Are there any examples from case law?

MH: In Kaczmarzyyk v. SCCI Hospital Ventures, 2004, the court found an excessive number of medical directors in violation of the commercial reasonableness requirement. To help with assessments like this, MD Ranger provides data on the total number of medical directors for hospitals of various types and sizes.

MM: MD Ranger has developed a checklist to make the process more objective.

MH: We are happy to share it. As you said, the regulatory standard is quite subjective, but here are criteria that physicians and hospital administrators should consider that help make it more objective: