Author: Daniel Levin, CFA & Nicholas Janiga, ASA
Over the past few years, marketing arrangements have drawn increased scrutiny from government regulators. As an example, on June 28, 2017, the United States Department of Justice announced that a hospital located in Los Angeles, California had agreed to pay $42 million to settle allegations related to improper payments to physicians. The improper payments included, among other things, “marketing arrangements that allegedly provided undue benefit to physicians’ practices”. In addition, the CMS 2016 revisions to Payment Policies under the Medicare Physician Fee Schedule updated Stark Law regulations regarding advertising of physician-owned hospitals. The following paragraphs outline key aspects of fair market value (“FMV”) and marketing arrangements.
WHAT IS A JOINT MARKETING AGREEMENT?
A joint marketing agreement is an arrangement entered into by two or more parties in which the parties collaborate to market each other’s products and services to each other’s current and prospective customers (i.e., patients). In the context of healthcare arrangements, hospitals and physician groups occasionally enter into arrangements to market hospital service lines where the hospital benefits from the technical collections and the group bills and collects for professional services. These types of marketing arrangements may implicate the Stark Law, Anti-Kickback Statute, and/or Internal Revenue Code given that marketing provides an economic value to both parties.
The Office of Inspector General (“OIG”) has drawn a distinction between marketing that is “passive in nature, in that any contact with the advertiser must be initiated by the customer”, and marketing arrangements recommending the use of a particular provider. As such, not all marketing arrangements fall under the umbrella of joint marketing.
HOW ARE JOINT MARKETING AGREEMENTS STRUCTURED?
From a valuation perspective, it is important to structure marketing arrangements such that the cost each party incurs in contributing resources to the arrangement is proportional to the benefit each party receives from being a party to the arrangement. The types of resources contributed can include advertising costs, professional and administrative staff, digital and physical infrastructure (such as websites and office space), and other marketing related expenses. The total value of the resources contributed by each party should be proportional to the benefit each party receives from the arrangement. If the agreement is structured otherwise, one party runs the risk of providing an economic benefit to the other, which could be viewed as remuneration for referrals.
VALUATION APPROACHES UTILIZED IN VALUING MARKETING AGREEMENTS
In valuing marketing arrangements, HealthCare Appraisers, Inc. typically utilizes a combination of the Cost Approach and the Market Approach. This blending of valuation methodologies involves valuing each component of the agreement separately, then employing a “build-up” to arrive at the total value of the resources each party contributes. Employee time and office space are examples of components that lend themselves to valuation under the Market Approach. Components likely valued using the Cost Approach include advertisements and website maintenance. Summing the components, the appraiser arrives at the cost to recreate the arrangement based on the value of the resources each party contributes.
It may be appropriate to adjust one or more of the components based on the nature of the component. One common example relates to advertising or marketing materials that feature each party’s logo. If one party’s logo is featured more prominently or takes up more space, that party should cover the proportionate cost. Alternatively, if one party is responsible for providing all the marketing materials used in the arrangement, and that party is more prominently featured in the marketing materials, the appraiser may adjust for this when considering how much of the cost to include in the build-up.
The next step in the appraisal process involves assessing the proportion of the total economic benefit each party is expected to receive. This can be determined by analyzing historical collections from the parties, examining the professional and technical collections for the provision of the service marketed, and through interviews with the parties about expected changes in the outlook for the service line being marketed. If the appraiser determines that one party is likely to receive a disproportionate benefit relative to their cost, the agreement should be restructured either by shifting costs from one party to another, or through implementing a reconciliation payment.
Not every marketing arrangement contains the FMV pitfalls discussed above. Hospitals are generally free to market their service lines to the public as long as non-employed physicians or non-affiliated physician groups are not featured in the effort. Hospitals can also structure arrangements such that they meet one of the following exceptions to the Stark Law: the Incidental Benefits Exception, the Nonmonetary Compensation Exception, and the Payments by a Physician Exception.
Incidental benefits include non-cash or cash equivalent benefits (i.e., items or services) that are used on the Hospital’s campus, such as the listing of the providers on the Hospital’s website. In order to be considered incidental, the Hospital must offer the benefits to all providers within the specialty. In addition, the compensation must be of low value and must not take into account the volume or value of referrals.
The Nonmonetary Compensation Exception allows hospitals to provide items or services to physicians as long as the aggregate amount does not exceed $398 annually (the aggregate amount changes from year to year). In qualifying for the Nonmonetary Compensation Exception, the compensation must not take into account the volume or value of referrals by the referring physician, must not be solicited by the physician, and must not violate the Anti-Kickback Statute. Assuming the marketing arrangement is not structured as to qualify for either the Incidental Benefits Exception or the Nonmonetary Compensation Exception, the arrangement could meet the Payments by a Physician Exception as long as all services are furnished at fair market value.
The OIG has provided guidance in certain opinions that highlight the potentially problematic issues relating to marketing arrangements. In OIG Advisory Opinion No. 10-23, the OIG states, “Marketing fees paid on the basis of successful orders for items or services are inherently subject to abuse because they are linked to business generated by the marketer.” Hence, the compensation for marketing services, and costs contributed to a joint marketing agreement, should be set at fixed amounts in advance, and should be consistent with fair market value. More broadly, in Advisory Opinion No. 02-12, the OIG outlined five factors it considers important with respect to marketing and advertising: (i) the identity of the party engaged in the marketing activity and the party’s relationship with its target audience; (ii) the nature of the marketing activity; (iii) the item or service being marketed; (iv) the target population; and (v) any safeguards to prevent fraud and abuse.
Marketing arrangements provide value to physicians and therefore may implicate the Stark Law, Anti-Kickback Statute, and/or Internal Revenue Code. Hospitals and healthcare systems should take care to structure these agreements in ways that do not provide undue benefits to physicians that are in a position to generate referrals of designated health services. Even arrangements that are entered into in good faith could be called into question if one party to the agreement is found to be benefiting improperly.