How increased regulatory scrutiny is raising expectations for fair market value and commercial reasonableness in management fees for skilled nursing facilities.
As oversight of public healthcare funding intensifies, skilled nursing facilities must be prepared to defend not only the terms of their management agreements, but also the assumptions behind them. When Medicare and Medicaid dollars are involved, regulators are paying closer attention to both the structure and substance of these arrangements, including how fees are set, how services are defined, and whether compensation meets fair market value and commercial reasonableness standards.
In today’s regulatory environment, skilled nursing facilities and management companies can no longer assume that management arrangements will be accepted at face value. Management agreements must be clearly defined, defensible, and grounded in sound analysis.
What Regulators Expect in Administrative Service Agreements
Administrative Services Agreements (ASAs) have long been part of the skilled nursing operating model. These agreements outline the services management companies provide and the fees paid for core outsourced functions, such as billing, human resources, compliance, purchasing, and operational leadership.
Regulators are now examining whether the financial assumptions behind these arrangements justify the use of public funds. Oversight bodies, including state Medicaid Fraud Control Units, the Centers for Medicare and Medicaid Services, and the Office of Inspector General, are focused on whether management arrangements meet several key standards.
Generally, regulators look for evidence that:
- Management fees reflect fair market value. Fees should align with what an independent party would pay for comparable services.
- The arrangement is commercially reasonable. The agreement should make operational and economic sense based on the services provided and the facility’s needs.
- Payments are not related to referrals or patient volume. Fee structures must avoid any direct or indirect linkage to census levels, referral patterns, or other forms of business generation.
- Services are necessary and appropriately structured. Services should be clearly defined, operationally necessary, and consistent with the facility’s structure and needs.
Why Specialized, Independent Analysis Matters
Fair market value analysis must reflect the operational realities of skilled nursing and post acute care. That analysis must be grounded in credible industry data and supported by defensible assumptions.
Grassi Healthcare Services brings a blend of valuation rigor and deep long-term care expertise. Through our fair valuation services to facilities and management companies, we offer the following:
- Industry benchmarking rooted in skilled nursing and post-acute data: Market comparisons based on data drawn from skilled nursing and post acute providers, rather than broad healthcare benchmarks that may overlook the complexity of long-term care operations.
- Clear separation between administrative services and clinical influence: Distinct boundaries between administrative and operational support and clinical decision making, preserving appropriate governance and reducing compliance risk.
- Commercial reasonableness evaluations grounded in operational realities: Consideration of whether the arrangement makes business sense based on staffing alternatives, efficiency considerations, and the facility’s operating needs.
- Audit-ready documentation with transparent and defensible methodology: Documentation that clearly outlines assumptions, data sources, and valuation methodology and can withstand regulatory, lender, or investor review.
The Bottom Line
For skilled nursing facilities and management companies, fair market value and commercial reasonableness are central to demonstrating compliance and maintaining defensible management arrangements.
Well supported agreements reduce regulatory risk, strengthen long-term service relationships, and provide clarity around how management services are structured and compensated. They also give lenders, investors, and governing boards confidence that arrangements are supported by sound assumptions and economic substance.
As regulatory expectations continue to evolve, facilities that periodically review their ASAs and maintain clear, contemporaneous documentation will be better positioned to withstand review while remaining focused on resident care and operational stability.
Grassi Healthcare Advisors Can Help
Grassi Healthcare Advisors provides independent fair market value analyses and skilled nursing-specific benchmarking designed to reflect the operational realities regulators expect to see. Our work helps organizations document how fees are determined, evaluate commercial reasonableness, and prepare for regulatory review.
For more information, reach out to a Grassi advisor today.
