Author: Kevin Cassell

As covered in Part 1 of this article, the growth and evolution of the telemedicine industry has changed the healthcare landscape.  It is essential to keep up with the changes to ensure your telemedicine arrangements are commercially reasonable and provide compensation that is consistent with fair market value (FMV).  In Part 2 of this article, we continue to highlight our observations of the pitfalls to avoid when structuring telemedicine arrangements.


When entering into an arrangement with a telemedicine services provider, one of the unique aspects of negotiation, which may not have been a point of contention in a standard on-call arrangement, is the determination of the party responsible for operating costs (e.g., technological infrastructure, software licenses, information technology, and clinical support staff).  From an FMV and commercial reasonableness perspective, the considerations necessary for determining FMV compensation for telemedicine coverage arrangements do not end with the professional services component of the coverage.  One of the most common pitfalls in structuring telemedicine arrangements is failing to consider FMV operating expenses.  Improper assessment of operating costs can result in under- or over-compensation/reimbursement.


HealthCare Appraisers has observed that the absence of any valuation of operating expenses has undermined telemedicine coverage negotiations.  Inexperienced valuators commonly exclude the costs associated with telemedicine that may not be observed in a traditional call coverage arrangement.  These costs range widely depending on the service line, but can include initial hardware purchases, implementation efforts, recurring information technology costs, and ongoing maintenance expenses.  While these costs may vary, understanding the correct financial commitment incurred by a provider to set up and maintain a telemedicine program may be the difference between a financially sustainable negotiation or potential cost landmine.


Conversely, it is also common to overvalue the operating costs associated with telemedicine arrangements.  While doing so may not result in as many difficulties in negotiations, this error can result in dangerous situations from a compliance and risk standpoint.  Telemedicine arrangements are often costly upon commencement of the agreement due to equipment fees, program setup, and training.  If an arrangement includes such costs, it is important to consider whether the operating costs are specific to telemedicine coverage at a single facility or if they span across multiple locations.  A key driver in the expansion of telemedicine has been its ability to lower the cost of access to physicians.  This reduction is often achieved through economies of scale associated with expansion to new facilities with limited incremental cost.   

Operating expenses should not increase proportionally with the number of facilities covered. Although certain expenses are variable and increase linearly with each incremental facility, others either diminish marginally with each increase in coverage or are step-wise in nature.  For example, for each new facility covered, a new telemedicine cart will be needed to enable the services.  Conversely, once an initial base of information technology infrastructure has been established, the addition of a new facility results in a marginally lower increase in expenses.  Someone who is not familiar with the unique components of telemedicine implementation, such as the scope of operating expenses and the degree to which they increase with the scale of services offered, may risk wildly overstating the costs associated with implementing a telehealth program.


In an industry that is continuing to expand and mature, telemedicine providers utilize a constellation of unique compensation structures depending on the needs of their clients.  Accordingly, a growing trend in the marketplace is the divergence away from “traditional” compensation structures to secure physician coverage towards newer compensation structures that consider the nuances of telemedicine coverage. 

In our discussions with facilities looking to start a telemedicine program, we are sometimes posed with the question, “We pay a per diem rate for call coverage now; why would we do something else for our telemedicine arrangement?”   Sometimes the answer to this question is as simple as “you shouldn’t.”  However, it is often the case that a per diem rate might not be the best option for a particular arrangement, and negotiations may be near final before the parties have thought about all of the options available.  With variability in number of patients, specialties, and type of telemedicine service (e.g., emergency coverage, imaging, and scheduled consultations), there is not a “normal” payment model that is applicable to all telemedicine arrangements.  HealthCare Appraisers has compiled a list of the most common structures we see in telemedicine arrangements in the article, ”Telemedicine Industry Trends: Compensation Structure”. 

The payment mechanism embedded in a telemedicine arrangement can impact the FMV range of compensation, and in some instances, the overall commercial reasonableness of the arrangement.  For example, it does not make “business sense” for a small, critical access hospital to pay hefty per diems for coverage if it only expects to utilize the telemedicine services a dozen or so times per year.  With upfront fees, implementation costs, and other one-time payments, it can be difficult to navigate the landscape of payment terms inherent to these arrangements.  Therefore, understanding the payment options under a telemedicine arrangement and their value implications is essential.  Through our review of hundreds of telemedicine arrangements, we have observed that a lack of specialization and experience in telemedicine can often lead to fundamental misunderstanding of the value of such arrangements.  Additionally, outside-the-box thinking is often necessary.  A lack of experience and associated flexibility may leave you with a limited toolkit when seeking an arrangement best suited for your needs.

In conclusion, there are many ways that telemedicine arrangements can stray from FMV and commercial reasonableness.  We are hopeful that this review will help to ensure that the “don’ts” are not part of your next telemedicine arrangement.