Valuing Electronic Health Record System (“EHR”) Donation Arrangements

On October 10, 2006, the Centers for Medicare and Medicaid Services (CMS) implemented exceptions to the Stark and Anti-Kickback rules which preclude EHR donations under the Medicare Modernization Act of 2003. These exceptions allow health entities to subsidize or donate EHRs to independent practices without violating the federal Anti-Kickback Statute or Stark, thus providing an affordable EHR option to such practices.

Regulations issued by CMS and the US Department of Health and Human Services’ Office of Inspector General (OIG) are intended to support the proliferation of information technology such as the EHR.[1] The structure of the regulations are such that hospitals are able to achieve desirable patient care goals including quality and data integration while at the same time allowing physicians access to technologies that they might not be able to achieve independently.

Specifically, CMS and OIG regulations provide that a financial relationship does not exist where there is “[n]onmonetary remuneration (consisting of items and services in the form of software or information technology and training services) necessary and used predominately to create, maintain, transmit, or receive electronic health records, if all of the following conditions are met…(4) Before receipt of the items and services, the physician pays 15 percent of the donor’s cost for the items and services…”[2]

In commentary to its regulation, CMS has stated, in pertinent part:

With respect to calculation of the costs, particularly for internally-developed software and internally developed add-on modules and components parties should use a reasonable and verifiable method for allocating costs and are strongly encouraged to maintain contemporaneous and accurate documentation. Methods of cost allocation will be scrutinized to ensure that they do not inappropriately shift costs in a manner that provides an excess benefit to the physician recipient or results in the physician effectively paying less than 15 percent of the donor’s true costs of the technology.[3]

On December 27, 2013, CMS and the OIG released final Stark and Anti-Kickback rules extending the original exceptions to December 31, 2021. Among other notable items, under the final rule:

• Organizations may subsidize up to 85% of the donor’s cost of certain EHR items and services.
• The exception does not cover hardware costs, operating system costs, storage devices, software with core functions other than an EHR, routers or modems to access connectivity, donation of personnel or data migration services.

FMV PITFALL: Neither CMS, nor the OIG have promulgated specific guidance on quantifying costs associated with EHR. As EHR is rolled out by health systems across the country, we have observed certain challenges associated with identifying and quantifying the applicable costs associated with EHR Donation Arrangements.

EHR systems are comprised of a number of resources with varying direct and indirect cost elements. Allocation of indirect costs and collective resource costs can prove particularly challenging. For example:

• Certain resources, such as web interfaces, can be used by an unlimited number of users. Therefore, the fixed cost of this resource decreases as more users utilize it.
• Other resources may vary in cost depending on the number of users accessing such resources, with such costs being difficult to forecast upon implementation of an EHR.
• Certain one-time infrastructure capital costs are related to resources that are shared among an existing user base and the anticipated recipients of EHR donations.

Care must be taken when calculating the value of the donation to ensure that the costs associated with the EHR have been accurately allocated to the subsidized practice. Reliance on input from various sources, including EHR vendors and consultants can help ensure that costs are established based on an informed, objective, and consistent basis.

Whether your valuation needs are simple or complex, we can help. HealthCare Appraisers has a national team of credentialed healthcare valuation specialists with expertise in a wide range of services that can be tailored to your organization’s specific needs.