Preview: The Complete Guide to FMV Under Stark Regulations

The Complete Guide to Fair Market Value Under the Stark Regulations is out now and is filled with impactful, thought-provoking, and sometimes critical assessments of the new definitions for fair market value under the recently updated regulations for the physician self-referral law. This sneak peek covers an excerpt from Chapter 7 of the guide that provides a framework for the reasoning of the new definitions of FMV.

Chapter 7: The Retracted Definition of FMV: We Don’t Like ‘Likes’

A. Comments From Professional Valuators: We Don’t Like ‘Likes’ Mark Dietrich and Tim Smith (your editor) provided specific public comments disfavoring the addition of the “likes” as criteria for an FMV definition. Here is the complete text of their comments:6

3. An Evaluation of the Proposed Definition of FMV

A. Introduction

In this section, we provide feedback and commentary on the proposed general regulatory definition of FMV, defined as follows: The value in an arm’s-length transaction, with like parties and under like circumstances, of like assets or services, consistent with the general market value of the subject transaction.7

B. Concern About the Use of “With Like Parties”

Our first concern is the inclusion of “with like parties” in the definition. The concept of “like parties” is not part of the classic definition of FMV. The basic concept of FMV is the value to the willing buyer and seller. These hypothetical parties may reflect multiple types of buyers and sellers in some markets, and in other markets, a single type of buyer and seller may be contemplated.

Market conditions for the valuation subject provide the context for determining who the hypothetical buyer and seller should be. In markets with multiple types of buyers, for example, FMV may be the value to unlike buyers.8 On the other hand, some markets may have a predominant or single type of buyer, and thus, FMV may be the value to like parties.9 To define FMV as the value to “like parties” preempts the needed analysis of market conditions to identify the appropriate willing buyer and seller for the valuation subject. Market conditions should determine who the buyer and seller should be under FMV. CMS should not predispose the parties to any type of buyer and seller, like or unlike. It may be helpful to look at a simple stock market example to understand the origins of FMV. Take a widely traded stock like IBM where millions of shares change hands every day. Sellers of the stock either believe that there are better alternative investments or have a need for cash. Buyers of the stock believe IBM is a better investment alternative than a different stock. In this regard, buyers and sellers can hardly be said to be “like parties” since they have opposite views on the stock, although both have a focus on investment return. Further, there are 1000s of actual buyers and sellers, BUT their behavior in an open market focused on investment, in the aggregate, represents FMV to hypothetical persons.

We can differentiate this example from a corporate takeover where a large block of stock is purchased by a single buyer to gain control of another company. These types of transactions are typified by increases over and above the pre-acquisition FMV of the target company’s stock due to demand for a large number of shares in a short time period. The buyer’s willingness to pay more than the FMV of the stock to the hypothetical investors described above is due to strategic opportunities—real or imagined—in the acquisition. This type of value is referred to as strategic or investment value.

An example of strategic or investment value in healthcare would be a hospital employing a private practice cardiologist and moving physician-office-based nuclear medicine scans and echoes into the hospital outpatient department and paying the cardiologist compensation that reflects the hospital’s heightened income opportunities on these ancillaries. Certainly, CMS would not want to condone elements of a definition of value that permitted such a strategy…..

These are just the tip of the iceberg when it comes to Tim Smith’s insights into the new rules with even deeper dives into the technical aspects of the regulation that few have ever attempted before. Don’t miss out on the essential revelations that this guide can provide. You can learn more about the guide here.


6 CMS-2018-0082-0523. The footnotes for this submission are included herein.

7 84 F.R. 55840.

8 In a market of unlike buyers, FMV is usually determined based on a financial buyer as the typical type of buyer.

9 When the market consists of hospitals or health systems as the predominant or single type of buyer, FMV for Stark regulatory compliance purposes would not reflect all the motivations and economic interests of this buyer type. Any financial benefits from referrals should not be included in the valuation because of the larger context of regulatory compliance under Stark. The purpose and intended use of the valuation, (i.e., Stark compliance), would supersede and modify any application of general valuation concepts and principles related to FMV. See further discussion of this issue in section 5.F.