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Commercial Reasonableness and the Post-COVID New Normal

February 1, 2022

Since the start of the COVID-19 pandemic, healthcare facilities have focused on responding to and managing a public health emergency unlike any seen in our lifetimes. In the midst of the ongoing pandemic and Medicare Physician Fee Schedule updates, the government released final guidance toward the end of 2020 on key terms applicable to relationships between healthcare facilities and doctors, most notably “commercial reasonableness.”

Physician contracting has been unusual for nearly 24 months because many waivers have been granted due to the public health emergency. While there has been a sense that enforcement efforts would make allowances for such a unique situation, the Office of the Inspector General (OIG) is likely to get back to the business of examining for fraud and abuse. And that’s when the new commercial reasonableness standards are likely to generate additional interest on the part of the government.

Commercial Reasonableness

The final rules issued by the Department of Health and Human Services (HHS) and the Centers for Medicare and Medicaid Services (CMS) state the following:

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. An arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.

To prove the commercial reasonableness of a particular relationship, healthcare facilities will need to focus on:

  • Demonstrating community need or regulatory requirement
  • Following a consistent process for physician contracting
  • Carefully documenting the business rationale for each contract

Meeting Community Needs

If the OIG wants to know why a healthcare facility contracted with three cardiologists, the best answer is a study of the community and market, showing that the population requires that level of physician specialty service. A community health needs assessment can be a helpful tool in demonstrating that need. In some cases, regulations may require a contract with a physician to provide a specific service. For example, Clinical Laboratory Improvement Amendments (CLIA) require that labs doing research on humans have a certain hierarchy of physician oversight, so a healthcare facility that wants to add a lab needs to contract with physicians in order to comply with the rules. Similarly, trauma centers, emergency departments, and transplant centers have very specific requirements for physician access and oversight.

A Consistent Contracting Process

One key to supporting the commercial reasonableness of any new physician contract is to show that it followed an established practice used by the hospital in the past. That will give the hospital a standard that it can point to when explaining the commercial reasonableness of its standard relationships with most of its physicians.

If something about a particular relationship required the hospital to deviate from its standard practice, documenting that modification and the circumstance that required it can be an important step in demonstrating the commercial reasonableness of a relationship that doesn’t follow the hospital’s regular pattern. There may be compelling reasons why two doctors could be compensated differently for providing similar services, but the key to supporting the commercial reasonableness assertion is thorough documentation.

Maintain Thorough Documentation

In fact, documentation is the key to establishing commercial reasonableness throughout the hospital’s contracting activities. Before moving forward with any physician contract, hospital leadership should move through a checklist process that includes questions like:

  • Does the contract further organizational mission and goals?
  • Does the intended action require a physician, and is this physician qualified?
  • Is there any indication that the new contract could result in duplicative services? Or concurrent services?
  • What is the ultimate cost of the service? Is it reasonable? Is it fair market value?
  • Has a community need for the service been identified?
  • Are there alternatives available?
  • Should we contract for services that we could otherwise build? (For example, could we employ orthopedic physicians instead of contracting with an independent orthopedic practice?)
  • Are there unusual or unique facts and circumstances that need to be researched and documented?
  • Is this something that’s commonly paid for in the market? If unusual or unique, document how and why.
  • Is there a written job description and performance review?

Never Underestimate the Importance of Commercial Reasonableness

Oftentimes the primary emphasis on many arrangements is on the evaluation of the fair market value. The OIG examination files are full of cases that met FMV standards but failed to show commercial reasonableness. If your organization would like to learn more about how to support the commercial reasonableness of these relationships, please contact your KSM advisor or complete this form.

Brad Reay Director, Healthcare Consulting

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