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Assessing Need in Health Care Arrangements

December 2008

Assessing Need in Health Care Arrangements

Health care fraud and abuse compliance is often marked with uncertainty. Many aspects of fraud and abuse law are ill-defined, and those seeking to achieve compliance can be left with the uncomfortable task of making subjective judgment calls. One such ill-defined aspect of the law is the requirement that a health care arrangement be "reasonably necessary," "commercially reasonable" or serve a "legitimate business purpose." These and similar terms are often used in the federal Anti-kickback Statute safe harbors 1 and federal Stark Law exceptions,2 but without regulatory definition. Formal governmental guidance and expert commentary with respect to the meaning of these terms are sparse.

In an industry that is constantly challenged to balance business and humanitarian motives with strict legal requirements, application of the "reasonably necessary," "commercially reasonable" or "legitimate business purpose" tests in certain arrangements may be problematic. For example, in some arrangements with physicians, it may be difficult to differentiate between what may be beneficial for a medical center and its patients and what is "necessary."

Compensation arrangements between hospitals and physicians for on-call coverage-which have greatly proliferated in recent years-may present such a scenario. Payment for on-call coverage can inherently incentivize physicians to make referrals to the hospitals with which they have such arrangements and can, therefore, present some difficult compliance issues. Certain on-call coverage may be mandated by law (and may be deemed "necessary" for that reason alone), but what about on-call coverage that is not clearly required by law? Such arrangements may increase the value and quality of the services offered by the hospital, but are they "reasonably necessary" as that term is used (e.g., in the Anti-kickback Statute safe harbor for personal services and management contracts)?3

In order to make such a determination, it is helpful to review guidance/commentary from the Department of Health and Senior Services Office of Inspector General (OIG) and the Centers for Medicare and Medicaid Services (CMS) with respect to its interpretation of "reasonably necessary," "commercially reasonable" and similar terms. This article highlights such guidance/commentary, with a focus on the OIG's recent Advisory Opinion regarding on-call coverage.

Anti-kickback Statute safe harbors

OIG discussed the "commercially reasonable business purpose" test of the safe harbors 4 for space and equipment rental and personal services and management contracts in its November 19, 1999 Final Rule. It clarified the initial OIG safe harbor provisions and established additional safe harbor provisions under the Anti-kickback Statute. OIG stated that "commercially reasonable business purpose" means the "purpose must be reasonably calculated to further the business of the lessee or purchaser," and that purchased services must "have intrinsic commercial value." OIG identified three factors to further demonstrate the meaning of this standard: the purchaser must (1) need, (2) intend to utilize, and (3) in fact, utilize the services in furtherance of commercially reasonable business objectives.5

OIG hospital compliance guidance

In its Supplemental Compliance Program Guidance for Hospitals, OIG explained that hospitals should review the following factors (among others) to assess fraud and abuse with respect to their physician compensation arrangements:

Are the items and services obtained from a physician legitimate, commercially reasonable, and necessary to achieve a legitimate business purpose of the hospital (apart from obtaining referrals)? Assuming that the hospital needs the items and services, does the hospital have multiple arrangements with different physicians, so that in the aggregate the items or services provided by all physicians exceed the hospital's actual needs (apart from generating business)?6



Stark 1998 Proposed Rule

CMS discussed the "commercially reasonable" standard of the Stark compensation-related exceptions in the Stark 1998 proposed rule, stating that it interprets the term to mean "that an arrangement appears to be a sensible, prudent business agreement, from the perspective of the particular parties involved, even in the absence of any potential referrals."7



Stark II, Phase I Preamble

CMS stated the following in the Stark II, Phase I Final Rule with respect to the "commercially reasonable" standard of the fair market value exception: 8

With respect to determining what is "commercially reasonable," any reasonable method of valuation is acceptable, and the determination should be based upon the specific business in which the parties are involved, not business in general. In addition, we strongly suggest that the parties maintain good documentation supporting valuation.9



Stark II, Phase II Preamble

CMS provided the following explanation of the "commercially reasonable" standard of the personal service arrangements exception in the Stark II, Phase II preamble:10
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 (or family member or group practice) of similar scope and specialty, even if there were no potential [designated health services] referrals.11


Advisory Opinion No. 07-10

OIG favorably analyzed a medical center's arrangement for physician on-call coverage. In Advisory Opinion No. 07-10, OIG explained that legitimate reasons exist for physician on-call arrangements, such as "compliance with EMTALA obligations; scarcity of certain physicians within a hospital's service area; or access to sufficient and proximate trauma services for local patients." Notwithstanding these legitimate purposes, OIG stated that "on-call coverage compensation potentially creates considerable risk that physicians may demand such compensation as a condition of doing business at a hospital, even when neither the services provided nor any external market factor (e.g., a physician shortage) support such compensation."

OIG clearly viewed the medical center's need for the services to be of particular importance in issuing a favorable opinion. OIG found that the medical center demonstrated a "legitimate, unmet need" for the on-call coverage, stating that the medical center's emergency department was "understaffed for lack of capable and willing physicians" and that the medical center consequently "resorted to the outsourcing of emergency care and other related treatment to other medical facilities."12


The commentary above may be helpful, but it certainly does not exhaust the numerous questions that may arise in certain arrangements, especially those that are outside the context of a clear need created, for example, by a physician shortage or understaffing. In spite of the uncertainty in construing "reasonably necessary," "commercially reasonable" and similar terms, it is quite clear that OIG and CMS expect assessments of need in health care arrangements to be made without regard to referrals or the generation of business between the parties. It is also clear that documentation of the need, particularly in the case of on-call arrangements, is invaluable. When faced with an absence of documented need, providers may find it useful to engage outside consultants to review an arrangement and provide a needs assessment report.

David M. Hyman is a member of Wolff & Samson PC in West Orange, New Jersey. His health law practice includes regulatory, corporate and fraud and abuse law, as well as mergers and acquisitions. He can be reached at 973-530-2009 or by email at

Nicole DiMaria is an associate at Wolff & Samson PC in West Orange, New Jersey and specializes in health law, including health care corporate and regulatory counseling. She can be reached at 973-530-2111 or by email at

A special thanks to Wolff & Samson associate Nicole K. Martin, MPH, Esq. for her research and writing assistance.

This article, published in the December 2008 issue of Compliance Today appears here with permission from the Health Care Compliance Association.



1. See 42 U.S.C. § 1320a-7b (Federal Anti-Kickback Statute); 42 C.F.R. § 1001.952 (Federal Anti-Kickback Statute safe harbors).

2. See 42 U.S.C. § 1395nn(a)(Federal Stark Law); 42 C.F.R.§ 411.350 et seq. (regulations implementing Federal Stark Law).

3. See 42 C.F.R. § 1001.952(d).

4. See 42 C.F.R. § 1001.952(b)(space rental safe harbor),(c)(equipment rental safe harbor) and (d)(personal services and management contracts safe harbor).

5. See 64 Fed. Reg. 63518, 63525 (November 19, 1999).

6. See 70 Fed. Reg. 4858, 4866 (Jan. 31, 2005).

7. See 63 Fed. Reg. 1659, 1700 (Jan. 9, 1998).

8. See 42 C.F.R. § 411.357(l) (fair market value compensation exception).

9. See 66 Fed. Reg. 856, 919 (Jan. 4, 2001).

10. See 42 C.F.R. § 411.357(d) (personal service arrangements exception).

11. See 69 Fed. Reg. 16054, 16093 (March 26, 2004).

12. See OIG Advisory Opinion No. 07-10, September 20, 2007