News
November 25, 2020

HHS Finalizes New Protections Under the Stark Law for Value-Based Arrangements and Makes Other Critical Revisions and Clarifications to the Regulations that Physicians and Designated Health Service Entities Must Understand

Advisory

On Friday, November 20, 2020, the Department of Health and Human Services (HHS) released four significant Final Rules, including the Centers for Medicare and Medicaid Services (CMS) rule: Medicare Program; Modernizing and Clarifying the Physician Self-Referral Regulations (the Final Rule) as well as the Office of Inspector General (OIG) rule: Medicare and State Health Care Programs: Fraud and Abuse; Revisions to Safe Harbors under the Anti-Kickback Statute, and Civil Monetary Penalty Rules Regarding Beneficiary Inducements. These two separate, but related, final rules comprise the core activities of the Trump administration's "Regulatory Sprint to Coordinated Care." This Advisory summarizes key aspects of the CMS Physician Self-Referral rulemaking, which was published in the Federal Register on December 2, 2020.1

The Final Rule completes the rulemaking cycle started with the publication of a Proposed Rule in the Federal Register on October 17, 2019 (Proposed Rule)2 to establish new regulations under the Physician Self-Referral Law (hereinafter referred to as the Stark Law). The changes:

  1. permit certain value-based compensation arrangements where physicians and other healthcare providers and suppliers have greater financial accountability for cost-effective, high-quality, coordinated care;
  2. permit certain arrangements under which a physician receives limited remuneration for item and services provided by the physician;
  3. permit certain donations of cybersecurity technology and related services; and
  4. amend the exception for electronic health records.

In addition, the Final Rule attempts to provide guidance for interpreting what is one of the most complicated federal health care laws and regulatory schemes impacting the everyday business operations of physicians, providers and suppliers.

Except for specific changes to the criteria required for a physician practice to meet the Stark Law regulatory definition of a "Group Practice"3 that will become effective January 1, 2022, the final rules announced November 20th will become effective on January 19, 2021.

This summary is not an exhaustive review of all the changes and information included in the Final Rule; it highlights key aspects. To ease tracking this summary to the rulemaking, we have divided the content into five (5) sections that follow the CMS Final Rule sections.

The Stark Law Prohibitions

The Stark Law prohibits physicians from referring Medicare patients for certain "designated health services" (DHS) to entities with which the physician (or an immediate family member of the physician) has an ownership or compensation relationship, unless a specific exception applies permitting the referral. In turn, the DHS entity may not submit claims for items or services arising from prohibited referrals. The application of the Stark Law to the myriad of compensation arrangements physicians may have with DHS entities is much more complex, the subject of hundreds of pages of evolving rulemaking text (including the this Final Rule) and plagued by ambiguities as compared to rules related to ownership relationships. This has led to many regulated parties discovering they have inadvertently violated the prohibition. Before entering into any type of financial arrangement with physicians, DHS entities are best served by assuring the proposed arrangement complies with the Stark Law.

Facilitating the Transition to Value-Based Care and Fostering Care Coordination

To account for the innovations in health care delivery since the initial promulgation of the Stark Law regulations, CMS finalized new exceptions for value-based arrangements to be codified at 42 C.F.R. § 411.357(aa). The first exception applies to value-based arrangements where a value-based enterprise (VBE) has assumed full financial risk from a payor for patient care services for a target patient population for the entire duration of the arrangement. The second exception applies to a value-based arrangement where the physician is at meaningful downside financial risk for failure to achieve the value-based purpose(s) of the VBE for the entire duration of the arrangement. The third exception is more general and applies to other value-based arrangements that meet the requirements of this exception.

Key Definitions

CMS finalized several definitions, to be codified at 42 C.F.R. § 411.351, that are essential to the implementation and interpretation of the above exceptions.

"Target patient population" means an identified patient population selected by a VBE or its participants based on legitimate and verifiable criteria that are set out in writing in advance of the commencement of the value-based arrangement and further the VBE's value-based purpose(s).

"Value-based activity" means any of the following activities that is reasonably designed to achieve at least one value-based purpose of the VBE: (1) the provision of an item or service; (2) the taking of an action; or (3) the refraining from taking an action. CMS notes that the activities conducted by the parties to a compensation arrangement are "key to the arrangement qualifying as a 'value-based arrangement' to which the exceptions at 411.357(aa) apply." Therefore, ensuring that parties to an arrangement are engaged in a value-based activity is a threshold matter in evaluating compliance under the value-based arrangement exceptions. In the proposed rule, CMS stated it would expressly exclude the making of a referral from this definition. However, in response to various comments, CMS decided not to finalize this proposal because it could inadvertently exclude the development of a care plan that includes the furnishing of DHS and otherwise unduly limit the applicability of the exceptions.

"Value-based arrangement" is defined as an arrangement for the provision of "at least one value-based activity for a target patient population to which the only parties are . . . [t]he [VBE] and one or more of its VBE participants; or . . . VBE participants in the same [VBE]." CMS revised this definition in the Final Rule to replace the phrase "between or among" with "to which the only parties are" to clarify that all parties to the value-based arrangement must be VBE participants in the same VBE. CMS also noted that the value-based arrangement must be a compensation arrangement and not another type of financial relationship (e.g., ownership interests) because the value-based arrangement exceptions only apply to compensation arrangements.

"Value-based enterprise," a key concept to the exceptions, means two or more VBE participants (1) collaborating to achieve at least one value-based purpose; (2) each of which is a party to a value-based arrangement with the other or at least one other VBE participant in the VBE; (3) who have an accountable body or person responsible for the financial and operational oversight of the VBE; and (4) who have a governing document that describes the VBE and how the VBE participants intend to achieve the VBE's value-based purpose(s). CMS further explained that a VBE may be a distinct legal entity, such as an accountable care organization, or only consist of the two parties to a value-based arrangement. At its core, however, a VBE is a network of participants collaborating with respect to a target patient population through care coordination, increase efficiencies in the delivery of care, and improve outcomes for patients. Ultimately, this definition focuses on the functions of the VBE rather than its legal structure.

"Value-based purpose" is any of the following: (1) coordinating and managing the care of a target patient population; (2) improving the quality of care for a target patient population; (3) appropriately reducing the costs to or growth in expenditures of payors without reducing the quality of care for a target patient population; or (4) transitioning from health care delivery and payment mechanisms based on the volume of items and services provided to mechanisms based on the quality of care and control of costs of care for a target patient population.

"VBE participant" is a person or entity that engages in at least one value-based activity as part of a VBE. CMS revised this definition in the Final Rule to use the phrase "person or entity" due to common use of this phrase throughout CMS regulations. More notably, in the Proposed Rule, CMS considered excluding various entities from this definition due to historic fraud and abuse risks, such as laboratories, suppliers of durable medical equipment, prosthetics, orthotics, and supplies, pharmaceutical manufacturers, pharmacy benefit managers, wholesalers, and distributors. However, CMS ultimately decided to finalize this definition without such exclusions

The Exceptions

Full Financial Risk

The full financial risk exception applies to remuneration paid under a value-based arrangement provided:

  • (i) The VBE is at, or contractually obligated within the 12 months following the commencement of the value-based arrangement to assume, "full financial risk" for the entire duration of the VBE;
  • (ii) The remuneration is for, or results from, "the value-based activities undertaken by the recipient of the remuneration for patients in the target patient population";
  • (iii) The remuneration is not "an inducement to reduce or limit medically necessary items or services to any patient";
  • (iv) the remuneration is not "conditioned on referrals of patients who are not part of the target patient population or business not covered under the value-based arrangement";
  • (v) If remuneration paid to the physician is "conditioned on the physician's referrals to a particular provider, practitioner, or supplier" then this requirement must be set out in writing and signed by the parties and must not apply if the patient expresses a preference for a different provider, practitioner, or supplier, the patient's insurer determines the provider, practitioner, or supplier, or the referral is not in the patient's best medical interests in the physician's judgment; and
  • (vi) Records of "the methodology for determining and the actual amount of remuneration paid under the value-based arrangement must be maintained for a period of at least 6 years" and made available to the Secretary of Health and Human Services upon request.

CMS defines "full financial risk" to mean that the VBE is financially responsible on a "prospective basis for the cost of all patient care items and services covered by the applicable payor for each patient in the target patient population for a specified period of time." CMS also defines "prospective basis" to mean that the VBE "has assumed financial responsibility for the cost of all patient care items and services covered by the applicable payor prior to providing patient care items and services to patients in the target patient population."

In response to comments, CMS extended the proposed requirement that the VBE be contractually obligated to be financially responsible within the 6 months following the commencement date of the value-based arrangement to within 12 months. CMS believes such extension is consistent with the timeframe established in the Shared Savings Program pre-participation waiver and does pose a risk of program or patient abuse.

Meaningful Downside Financial Risk

The meaningful downside financial risk exception applies to remuneration paid under a value-based arrangement provided:

  • (i) The physician is at "meaningful downside financial risk for failure to achieve the value-based purpose(s) of the [VBE] during the entire duration of the value-based arrangement";
  • (ii) A description of the "nature and extent of the physician's downside financial risk" is set forth in writing;
  • (iii) The methodology used to determine the amount of the remuneration is set in advance of engaging in value-based activities for which the remuneration is paid;
  • (iv) The remuneration is for, or results from, "value-based activities undertaken by the recipient of the remuneration for patients in the target patient population";
  • (v) The remuneration is not "an inducement to reduce or limit medically necessary items or services to any patient";
  • (vi) The remuneration is not "conditioned on referrals of patients who are not part of the target patient population or business not covered under the value-based arrangement";
  • (vii) If remuneration paid to the physician is "conditioned on the physician's referrals to a particular provider, practitioner, or supplier" then this requirement must be set out in writing and signed by the parties and must not apply if the patient expresses a preference for a different provider, practitioner, or supplier, the patient's insurer determines the provider, practitioner, or supplier, or the referral is not in the patient's best medical interests in the physician's judgment; and
  • (viii) Records of "the methodology for determining and the actual amount of remuneration paid under the value-based arrangement must be maintained for a period of at least 6 years" and made available to the Secretary upon request.

CMS defines "meaningful downside financial risk" to mean that the physician is responsible to repay or forgo no less than 10 percent of the total value of the remuneration the physician receives under the value-based arrangement. CMS reduces this threshold to 10 percent from the proposed 25 percent and also notes that the scope of this exception is not limited to value-based arrangements under which a physician is required to repay remuneration already received from the entity. CMS also declines to finalize an alternative proposed definition of "meaningful downside financial risk" where the physician would be financially responsible to the entity on a prospective basis for the cost of all or a defined set of patient care items and services covered by the applicable payor for each patient in the target patient population for a specified period of time.

Other Value-Based Arrangements

Perhaps the most complex exception for value-based arrangements, this general exception applies to remuneration where a variety of conditions are satisfied. First, the arrangement must be set forth in writing, signed by the parties, and include a description of the value-based activities to be undertaken; how the value-based activities are expected to further the value-based purpose(s) of the VBE; the target patient population for the arrangement; the type, nature of, and methodology used to determine, the remuneration; and the outcome measures against which the recipient of the remuneration is assessed, if any. Second, such outcome measures must be objective, measurable, and selected based on clinical evidence or credible medical support. Third, any changes to such outcome measures must be made prospectively and set forth in writing as noted above. Fourth, the methodology used to determine the amount of the remuneration is set in advance of engaging in value-based activities for which the remuneration is paid. Fifth, the remuneration is for, or results from, value-based activities undertaken by the recipient of the remuneration for patients in the target patient population. Sixth, the arrangement must be commercially reasonable.

The seventh condition sets forth various monitoring requirements that the parties to the value-based arrangement must implement at least annually. Parties to the value-based arrangement must check to ensure that the parties furnished their required respective value-based activities, the value-based activities further the value-based purpose(s) of the VBE, and progress is being made toward attainment of any outcome measures. In addition, in response to comments raising concerns about potential program or patient abuse risks, CMS finalized specific timeframes in these requirements during which identified deficiencies must be addressed and, if necessary, the arrangement terminated. The parties have 30 consecutive calendar days to terminate the arrangement and 90 consecutive calendar days to modify the arrangement. In addition, the parties must terminate or replace an unattainable outcome measure within 90 consecutive calendar days.

The remaining conditions of the exception mirror those in the other two exceptions, namely (i) the remuneration is not an inducement to reduce or limit medically necessary items or services to any patient or conditioned on referrals of patients who are not part of the target patient population or business not covered under the value-based arrangement; (ii) if remuneration paid to the physician is conditioned on the physician's referrals to a particular provider, practitioner, or supplier then this requirement must be set out in writing and signed by the parties and must not apply if the patient expresses a preference for a different provider, practitioner, or supplier, the patient's insurer determines the provider, practitioner, or supplier, or the referral is not in the patient's best medical interests in the physician's judgment; and (iii) records of the methodology for determining and the actual amount of remuneration paid under the value-based arrangement must be maintained for a period of at least 6 years and made available to the Secretary upon request.

CMS defines an "outcome measure" as a benchmark that quantifies either "improvements in or maintenance of the quality of patient care" or "reductions in the costs to or reductions in growth in expenditures of payors while maintaining or improving the quality of patient care." CMS added this term in the Final Rule as a replacement for "performance and quality standards" initially contained in the Proposed Rule. However, CMS declines to implement an alternative proposal to require that outcome measures to drive meaningful improvements in physician performance, quality, health outcomes, or efficiencies in care delivery.

Indirect Compensation Arrangements with VBA Component

The Final Rule also implements exceptions, subject to special rules, for certain indirect compensation arrangements that include a value-based arrangement in the unbroken chain of financial relationships codified at 42 C.F.R. § 411.354(c)(4)(iii). Under these special rules, the value-based arrangement exceptions discussed above shall apply regardless of whether the entity furnishing designated health services is a managed care organization (MCO) or independent practice association (IPA).

Fundamental Terminology and Requirements

CMS finalized clarifications to certain "fundamental terminology" used in many of the statutory and regulatory exceptions and that are key to interpreting and complying with the Stark Law. CMS' stated purpose is to establish bright-line, objective regulations that would be more easily applied. Specifically, the Final Rule includes new or modified regulatory definitions for the terms "commercially reasonable," "fair market value," and "general market value" as well as terms particular to the definition of a "Group Practice." CMS also created new special rules for compensation under 42 C.F.R. § 411.354(d) (i.e., for the "volume or value" and the "other business generated" standards, and for patient choice and directed referrals).

In finalizing these new rules, CMS underscores that the "cornerstones" of the Stark Law exceptions are separate and distinct requirements that each must be satisfied when included in an exception to the Stark Law. These cornerstones are (1) the compensation arrangement is commercially reasonable; (2) the compensation is not determined in any manner that takes into account the volume or value of a physician's referrals or the other business generated by a physician for the entity; and (3) the amount of compensation is fair market value for the items or services furnished under the arrangement.

New and Revised Definitions, 42 C.F.R. § 411.351

Commercially Reasonable

CMS adopts the following for the definition of "commercially reasonable": "the particular arrangement furthers a legitimate business purpose of the parties to the arrangement and is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty." Of note, CMS acknowledges that an arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties. The agency also warns that although the definition adopted for "commercially reasonable" does not include the qualifying language found in many existing exceptions -- that an arrangement be commercially reasonable "even if no referrals were made between the parties" or "even if no referrals were made to the employer," it considers this requirement as important qualifier to the interpretation of commercially reasonableness.

CMS reiterates that, when determining commercial reasonableness, the question to ask is whether the arrangement makes sense to accomplish the parties' goal(s) rather than whether the compensation terms alone make sense as a means to accomplish the parties' goal(s), although the compensation terms are an integral part of an arrangement.

CMS declines to adopt the request of some commenters that it create an irrebuttable presumption of commercial reasonableness (shielding parties from allegations of violation of the False Claims Act) where a party to an arrangement documents that the arrangement furthers a legitimate business need or where the arrangement ultimately achieves its intended purpose.

Fair Market Value

As a preliminary matter, CMS reminds regulated entities that the requirement found in many of the exceptions that compensation be "fair market value" is separate and distinct from the requirement that compensation not be determined based on the "volume or value" or "other business generated" standards. Accordingly, in order to satisfy the requirements of any exception in which these concepts appear, compensation must satisfy each of these conditions independently. CMS finalizes its proposal to eliminate the connection to the volume or value standard in the definitions of "fair market value" and "general market value."

CMS modifies the definition of "fair market value" to provide for: (1) a definition for general application; (2) a definition applicable to the rental of equipment; and (3) a definition applicable to the rental of office space.

  • General Application: Fair market value is the value in an arm's-length transaction, consistent with the general market value of the subject transaction
  • Equipment Rental Application: Fair market value is the value in an arm's-length transaction of rental property for general commercial purposes (not taking into account its intended use), consistent with the general market value of the subject transaction.
  • Office Space Rental Application: Fair market value is the value in an arm's length transaction of rental property for general commercial purposes (not taking into account its intended use), without adjustment to reflect the additional value the prospective lessee or lessor would attribute to the proximity or convenience to the lessor where the lessor is a potential source of patient referrals to the lessee, and consistent with the general market value of the subject transaction.

In response to concerns from the valuation community that confusion could be created from CMS's statements in the Proposed Rule equating the Stark Law term "general market value" with the valuation industry term "market value," the agency retracts its statements to this end. CMS does, however, reiterate its continued belief that the general market value of a transaction is based solely on consideration of the economics of the subject transaction and should not include any consideration of other business the parties may have with one another.

CMS finalized the definition of "general market value" as it applies to asset acquisitions, compensation for services, and rental of equipment of office space as follows:

  • Asset Acquisition Application: The price that an asset would bring on the date of acquisition of the asset as the result of bona fide bargaining between a well-informed buyer and seller that are not otherwise in a position to generate business for each other.
  • Compensation For Services Application: The compensation that would be paid at the time the parties enter into the service arrangement as the result of bona fide bargaining between well-informed parties that are not otherwise in a position to generate business for each other.
  • Equipment or Office Space Rental Application: The price that rental property would bring at the time the parties enter into the rental arrangement as the result of bona fide bargaining between a well-informed lessor and lessee that are not otherwise in a position to generate business for each other.

CMS again declines, as it did in Phases I, II, and III of Stark Law rulemaking, to establish a rebuttable presumption that would deem compensation to be fair market value if certain conditions are met. CMS also notes that it does not have a policy that compensation set at or below the 75th percentile in a salary schedule is presumptively appropriate and compensation set above the 75th percentile is suspect, if not presumed inappropriate. This latter point provides some long-needed guidance that compensation rates may incorporate the facts and circumstances of a particular arrangement.

Special Rules Related to Compensation, 42 C.F.R. § 411.354(d)

The Volume or Value and the Other Business Generated Standard

In the Proposed Rule, CMS set out for comment two special rules for compensation to create a clear, objective, bright-line test for determining whether compensation takes into account the volume or value of referrals, or the value of other business generated by the physician on behalf of the DHS entity. Such rules consider whether the mathematical formula used to calculate the amount of compensation includes, as a variable, referrals or other business generated and whether the resulting amount of compensation correlates with the volume or value of referrals or business generated. CMS finalizes both rules, with modification.

Under the Final Rule, if the methodology used to determine a physician's compensation from a DHS entity or payment from the physician to a DHS entity does not fit squarely within the defined circumstances, the compensation is not considered to take into account the volume or value of the physician's referrals or other business generated by the physician.

For compensation a DHS entity to a physician (§ 411.354(d)(5)), the compensation only will be deemed to take into account the volume or value of referrals or business generated if the compensation positively correlates with the volume or value of the referrals or business generated (i.e., the physician receives additional compensation as referrals or business generated increase). Inversely, for compensation to a DHS entity from a physician (§ 411.354(d)(6)), the compensation will only be deemed to take into account the volume or value of referrals or business generated if the compensation negatively correlates with the volume or value of referrals or business generated (i.e., the physician pays less to the DHS entity as referrals or business generated increase). For both types of compensation, CMS finalizes a policy that neither the existence of the compensation arrangement nor the amount of the compensation may be contingent on the volume or value of the physician's referrals to the particular provider, practitioner, or supplier, regardless of whether the physician's compensation takes into account the volume or value of referrals by the physician.

These final special rules do not apply to the following exceptions, which have "unique" volume or value requirements: medical staff incidental benefits at §411.357(m), professional courtesy at §411.357(s), community-wide health information systems at §411.357(u), electronic prescribing items and services at §411.357(v), electronic health records items and services at §411.357(w), and the new cybersecurity technology and related services at §411.357(bb).

CMS does not finalize its proposals for any additional special rules outlining the circumstances under which it would consider fixed-rate compensation to be determined in a manner that takes into account the volume or value of referrals or other business generated by a physician for the entity paying the compensation, including if fixed-rate compensation (e.g., a fixed annual salary) is set using a predetermined tiered approach that considers the volume or value of past referrals or business generated.

Unit-Based Compensation, 411.354(d)(2) & (3)

CMS reaffirms that under a bona fide employment relationship, personal service arrangement, or indirect compensation arrangement, a physician may be compensated for his or her personally performed services using a unit-based compensation formula, even when the entity with which the physician has a direct or indirect compensation arrangement bills for designated health services that correspond to such personally performed services (e.g., where a hospital outpatient department bills for a facility payment that correspond to a physician's professional service). The physician's unit-based compensation will not take be considered to take into account the volume or value of the physician's referrals if the compensation is fair market value for services or items actually provided and does not vary during the course of the compensation arrangement in any manner that takes into account referrals of DHS or other business generated by the referring physician, including private pay health care business.

CMS also clarifies that if compensation takes into account the volume or value of referrals or the volume or value of other business generated under § 411.354(d)(5) or (6), that determination is final and no special rules, including the unit-based compensation provisions at § 411.354(d)(2) and (3) may be applied to then deem the compensation not to take into account the volume or value of referrals or other business generated.

Thus, CMS retracts statements to the contrary in the Proposed Rule. Additionally, CMS notes that, based on the final special rules under § 411.354(d)(5) and (6), the special rules at §411.354(d)(2) and (3) regarding unit-based compensation will be either unnecessary or inapplicable to deem unit-based compensation not to take into account the volume or value of a physician's referrals or other business generated by a physician. CMS, however, is preserving these regulations "to assist parties, CMS, and law enforcement in applying the historical policies in effect at the time of the existence of the compensation arrangement being analyzed for compliance."

Patient Choice and Directed Referrals, 411.354(d)(4)

The Stark Law permits compensation arrangements under certain circumstances to be conditioned on referrals from the physician to the DHS entity or an organization affiliated with a DHS entity. CMS finalizes a new condition at §411.354(d)(4)(vi) requiring that neither the existence of the compensation arrangement nor the amount of the compensation paid to the physician may be contingent on the number or value of the physician's referrals to the particular provider, practitioner, or supplier; however, it may be an established percentage or ratio of the physician's referrals to a particular provider, practitioner, or supplier. CMS notes that merely reviewing the mathematical formula established under the new rules at §411.354(d)(5)(i) and (6)(i) (discussed above) that determines the amount of the physician's compensation would be insufficient to identify a referral requirement that could lead to program or patient abuse. Instead, payment conditioned on the physician's referrals of designated health services to a given entity, such as an employer or an affiliated entity, should be evaluated for compliance with the special rule at §411.354(d)(4).

Compliance with the 411.354(d)(4) conditions also is a new affirmative requirement for certain other regulatory exceptions, that is for academic medical centers at § 411.355(e), for bona fide employment relationships at § 411.357(c), for personal services arrangements at § 411.357(d)(1), for physician incentive plans at § 411.357(d)(2), for group practice arrangements with a hospital at § 411.357(h), for fair market value compensation at § 411.357(l), for indirect compensation arrangements at § 411.357(p), and for the new exception for limited remuneration to a physician (411.357(z).

Group Practices, 42 C.F.R § 411.352

CMS finalizes revisions to the criteria for a physician organization to be considered a "Group Practice" to bring them into conformity with several of the changes discussed above. In addition, CMS advises regarding its expectation related to distribution of overall profits.

"Volume or Value Standard" for Purposes of the Group Practice Regulation, 411.352(g) & (i)

CMS affirms that it interprets the requirements of § 411.352(g) and (i) to incorporate the volume or value standard as it relates to a physician's referrals (e.g., that compensation to a physician who is a member of a group practice may not be determined in any manner that the volume or value of referrals, and that profit shares and productivity bonuses paid to a physician in a group may not be determined in any manner that takes into account the volume or value of the physician's referrals, except as otherwise provided for in the applicable sections. This interpretation aligns with other conforming changes throughout the Final Rule to standardized language (e.g., the variations in uses of "based on", "related to", and "takes into account" used throughout the Group Practice regulations). However, since the language in § 411.352(g) and (i) is taken directly from statutory language, CMS does not make such language changes in the Final Rule.

Special Rules for Profit Shares and Productivity Bonuses, 411.352(i)

Overall Profits

CMS advises the "overall profits" means the profits derived from all the designated health services of any component of the group that consists of at least five physicians, which may include all physicians in the group. Additionally, CMS clarifies that if there are fewer than five physicians in the group, "overall profits" means the profits derived from all the DHS of the group. Under this interpretation, the profits from all DHS of any component of the group that consists of at least five physicians must be aggregated distribution and distribution may not occur on a service-by-service basis. In other words, it is not permissible to distribute the profits from clinical laboratory testing to one subset of physicians in a group and the profits from diagnostic imaging to a different subset physicians.

CMS also removes the reference to Medicaid from the definition of "overall profits." Under the current definition, "[o]verall profits means the group's entire profits derived from DHS payable by Medicare or Medicaid or the profits derived from DHS payable by Medicare or Medicaid of any component of the group practice that consists of at least five physicians."4 CMS, however, notes that the definition of "designated health services" includes only those services payable in whole or in part by Medicare and makes no mention of Medicaid.5 According to CMS, the overall profits language does not require a different definition of DHS, and, therefore the language should be consistent. CMS makes conforming changes to §411.352(i)(1)(iii)(B) which states that overall profits "will be deemed not to relate directly to the volume or value of referrals if. . . [r]evenues derived from DHS are distributed based on the distribution of the group practice's revenues attributed to services that are not DHS payable by any Federal health care program or private payer" by replacing the underlined text with "and would not be considered designated health services if they were payable by Medicare."

Based on examples noted in the Proposed Rule, commenters asked whether a group practice must use a single methodology for distributing the shares of overall profits attributable to each of its designated components of five physicians. CMS clarifies such interpretation was not its intent and that a group practice may utilize different distribution methodologies to distribute shares of the overall profits from all the designated health services of each of its components of at least five physicians, provided that the distribution to any physician is not directly related to the volume or value of the physician's referrals.

Of critical note is CMS's decision to correct its varying use in the deeming provisions of the Special Rules for Profit Shares and Productivity Bonuses of the words "profits" and "revenues" to eliminate references to the later to more clearly articulate that that the regulations permit distribution of profits, not revenues.

CMS delays the effective date of § 411.352(i)(1) until January 1, 2022, to permit group practices to make any changes to compensation formulas necessitated by the Final Rule announcements. The current definition of "overall profits" will remain in place until December 31, 2021.

Productivity Bonuses

CMS adopts its proposal to revise the productivity bonus deeming provision related to the basing of physician compensation on the physician's total patient encounters or relative value units (RVUs) to state that a productivity bonus will be deemed not to relate directly to the volume or value of a physician's referrals if it is based on the physician's total patient encounters or RVUs personally performed by the physician. CMS sought comment on whether such provision should limit the methodology to physician work RVUs or whether any personally-performed RVUs (e.g., practice expense RVUs) should be an acceptable basis for calculating a productivity bonus that is deemed not to relate directly to (that is, directly take into account) the volume or value of referrals. CMS declines to limit the methodology to only physician work RVUs as requesting by some commenters.

CMS delays the effective date of § 411.352(i)(2) until January 1, 2022, and the current provisions relating to productivity bonuses will remain in place until December 31, 2021.

"Recalibration" of Existing Regulations

CMS finalizes a number of revisions to the existing Stark regulations, including deleting certain existing requirements. CMS states that it is finalizing these revisions based on experience it has gained in administering the Self-Referral Disclosure Protocol (SRDP)6, stakeholder comments and interactions, and CMS' interactions with law enforcement partners.

Decoupling Stark Law from Federal Anti-Kickback Statute and Other Laws

With one exception, CMS finalizes its proposal to "decouple" the Stark Law from the Federal Anti-Kickback Statute (AKS), and finalizes in its entirety its proposal to "decouple" the Stark law from other Federal and State laws or regulations governing billing or claims submission.

Many of the Stark exceptions include a requirement that the arrangement at issue not violate the AKS or any Federal or State law or regulation governing billing or claims submission. CMS explained in the Proposed Rule that it has come to agree, in collaboration with law enforcement officials, that including a requirement for compliance with the AKS is misplaced in a Stark exception because it introduces an intent-based requirement into a strict liability statute.

Based on comments received on the Proposed Rule, CMS concludes that it is appropriate to finalize the removal of the AKS compliance requirement from all of the regulatory exceptions except for the exception for fair market value compensation (42 C.F.R. § 441.357(l)). CMS explains that it is declining to remove this requirement from the fair market value compensation exception because, unlike other exceptions, this exception does not contain safeguards to protect against potentially abusive arrangements. CMS explains that, while the statutory and regulatory exceptions for leases of office space contain requirements that the lease not exceed what is "reasonable or necessary for the legitimate purposes of the lease," the fair market value compensation exception does not contain such restrictions. Thus, CMS concludes that there is risk that "potentially abusive arrangements" such as sham lease arrangements, could be protected under this regulatory exception even though they are not permitted under a statutory exception. Although CMS declines to finalize the removal of the AKS non-violation requirement from the fair market value compensation exception, it finalizes its proposal to "decouple" this exception (and all other regulatory exceptions) from the requirement that arrangements comply with other Federal or State laws or regulations governing billing or claims submission.

CMS reiterates and underscores in the Final Rule that the removal of the requirement that an arrangement does not violate the AKS does not affect parties' liability under any of these laws. CMS further clarifies that if a financial relationship complies with an exception to the Stark Law, it does not mean that it does not violate the AKS. Similarly, if a financial relationship complies with the AKS, that does not necessarily mean that it complies with the Stark Law. Finally, CMS emphasizes that the Secretary will monitor the impact of these changes and retains the authority to reinstate the deleted requirements if necessary, to protect against program or patient abuse.

Revisions to Certain Definitions

CMS finalizes revisions to the following definitions at 42 C.F.R. § 411.351:

  • Designated Health Services (DHS)
  • Physician
  • Referral
  • Remuneration
  • Transaction

We highlight below the key revisions to these existing definitions.

Notably, CMS finalizes revisions to the definition of DHS to clarify that a service that otherwise meets the definition of DHS when provided by a hospital to an inpatient does not constitute DHS captured by the Stark Law if the furnishing of the service does not affect Medicare's payment to the hospital under Medicare's inpatient prospective payment system (IPPS) or other prospective payment systems that CMS deems as operating similarly to IPPS: the systems for inpatient rehabilitation facilities, inpatient psychiatric facilities and long-term care hospitals. CMS solicited comment on whether to extend this policy to apply to outpatient hospital services but in the Final Rule it declines to extend this policy to the outpatient prospective payment system because the implementation and enforcement of such an extension would be "burdensome and challenging."

Section 1877(h)(1)(C)(ii) of the Social Security Act carves out from the definition of "remuneration" the furnishing of items, devices, or supplies used solely for the collection, transportation, processing, storage of specimens or for the ordering of tests or communicating results of tests. CMS previously clarified through regulation and advisory opinions that surgical items, devices and supplies were not included among the excepted products because they could be used for functions other than those enumerated. CMS finalizes its proposal to remove the exclusion of surgical items, devices or supplies, recognizing that it is not the fact that a product might have the capability to be used in a surgical function but rather how the device is "in fact" being used by the recipient. In the Final Rule, CMS replaces the "surgical" qualifier with a requirement that such items are "in fact, used solely" for one or more of the six specified purposes.

In its response to comments, CMS explains that it continues to believe that, in order to satisfy the "used solely" requirement, the "primary purpose" of the item, device, or supply must be one or more of the purposes permitted under the SSA. If the "primary purpose" of the item, device, or supply is not one of these, this exclusion from the definition of "remuneration" does not apply, regardless of whether a particular physician is using the item, device, or supply for a permitted purpose. CMS also reiterates its view that this exclusion is intended for items that have "little or no independent value" to the receiving physician. Finally, CMS notes that, despite this additional regulatory flexibility, "items, devices, and supplies that do not constitute remuneration for purposes of the physician self-referral law may nonetheless implicate the anti-kickback statute."

CMS also finalizes a stand-alone definition for "isolated financial transaction," separate from the definition of "transaction," to clarify that this term does not include a payment for multiple services provided over an extended period, even when there is only one lump-sum payment for such services. The Final Rule provides that an "isolated financial transaction" is a one-time transaction. CMS also clarifies that "a single instance of forgiveness of an amount owed in settlement of a bona fide dispute" constitutes an "isolated financial transaction," and that such an instance of forgiveness "is not part of the compensation arrangement giving rise to the bona fide dispute." CMS further clarifies in its response to comments that, while the exception for an isolated financial transactions does not cover a single payment for multiple services, it may cover a single payment for a one-time service arrangement in which the service is provided in its entirety within a short period of time (e.g., 24 hours or a weekend).

Finally, although CMS did not propose to modify the definition of "transaction" in 42 C.F.R. § 411.351, CMS modifies the definition of "transaction" to remove the phrase "or process." CMS explains that it believes this change is necessary because some stakeholders view the phrase "or process" as suggesting that this exception "is available to protect a single payment for multiple services over an extended period of time."

Period Of Disallowance

CMS finalizes its proposal to entirely remove the rules on the period of disallowance (42 C.F.R. § 411.353(c)(1)). The period of disallowance is the period of time during which referrals are prohibited. CMS acknowledges that the period of disallowance, which was initially created in an attempt to create a bright-line rule, is not always practical or clear cut. Rather, in order to establish when a financial relationship has ended, each relationship should be looked at on a case-by-case basis.

CMS also reiterates clarifications made in the preamble to the Proposed Rule relating to CMS' statements from the FY 2009 IPPS rule regarding whether parties may retroactively cure noncompliance. CMS acknowledges, and desires to encourage, that it is normal business practice to actively monitor and correct administrative and operational errors or discrepancies during the course of "live financial relationships." However, once a financial relationship has been ended, CMS notes that parties have lost the ability to retroactively correct or "cure" noncompliance.

Ownership or Investment Interests

While CMS' regulatory changes focus largely on compensation arrangements between DHS entities and physicians, the agency also finalized two changes to the types of ownership or investment interests outlined in 42 C.F.R. § 411.354(b). First, CMS excludes titular ownership or investment interest from the reach of the self-referral prohibition. CMS defines "titular ownership or investment interest" to be "an interest that excludes the ability or right to receive the financial benefits of ownership or investment, including but not limited to the distribution of profits, dividends, proceeds of sale, or similar returns on investment." CMS states that because a physician with only titular ownership or investment interest does not have any rights to the financial benefits, there is no incentive to make referrals to the entity in which the physician has such ownership or investment interest. CMS clarifies, however, that "any compensation arrangement between a physician and an entity in which the physician or an immediate family member of the physician holds only a titular ownership or investment interest" must nonetheless satisfy the requirements of an exception in 42 C.F.R. § 411.355 or 42 C.F.R § 411.357.

CMS finalizes its proposal to exclude any interest in an entity which arises from participation in an employee stock ownership plan (ESOP). CMS notes that safeguards are already in place due to the requirements of ESOPs under the Employee Retirement Income Security Act of 1973, and concludes that such safeguards are sufficient to prevent program or patient abuse.

CMS finalizes revisions to the following existing exceptions:

  • Rental of Office Space (42 C.F.R. § 411.357(a))
  • Rental of Equipment (42 C.F.R. § 411.357(b))
  • Physician Recruitment (42 C.F.R. § 411.357(e))
  • Payments by a Physician (42 C.F.R. § 411.357(i))
  • Fair Market Value Compensation (42 C.F.R. § 411.357(l))
  • Electronic Health Records Items and Services (42 C.F.R. § 411.357(w))
  • Assistance to Compensate a Nonphysician Practitioner (42 C.F.R. § 411.351(x))

CMS declines to finalize revisions to the existing exception for Remuneration Unrelated to the Provision of Designated Health Services (42 C.F.R. § 411.357(g)). We highlight below the key types of revisions that CMS is finalizing to these existing exceptions.

CMS finalizes the creation of a "grace period" of 90 days in order to satisfy the writing requirement included in many exceptions under § 42 C.F.R. § 411.357, including the exceptions for the rental of office space, the rental of equipment, personal service arrangements, and fair market value compensation. Specifically, the writing requirement would be satisfied if: (1) the compensation arrangement satisfies all requirements of an applicable exception other than the writing or signature requirements; and (2) the parties obtain the required writing or signatures within 90 consecutive calendar days of when the arrangement failed to satisfy the requirements of the applicable exception. CMS notes that any formula for calculating the compensation under the arrangement should be documented in some way before the start of the arrangement. Such documentation can include informal communication, internal notes, fee schedules, or similar payments between the parties from prior arrangements.

While CMS did not propose to amend the "special rule on compensation that is considered to be set in advance"7, the agency finalizes modifications to this rule to make clear that the 90-day grace period applies only to compensation that is set in advance and is not modified during the course of an arrangement. Under the Final Rule, if compensation is modified during the course of an arrangement, this 90-day grace period does not apply, and the modified compensation must be set out in writing prior to the furnishing of goods or services. Finally, CMS reiterates that this rule is not available for short-term arrangements of 90 days or less.

CMS finalizes a clarification of the "exclusive use" requirement for office space and equipment leases. CMS explains that it is adding language to clarify that the exclusive use requirement does not bar multiple lessees from using a rented space or equipment at the same time when the lessor is excluded from the premise. CMS also notes that for the purposes of the exception, the lessor (or any person or entity related to the lessor) may not be an invitee of the lessee to use the space or equipment rented pursuant to the exception.

The Final Rule expands the universe of arrangements permitted under the fair market value compensation exception to protect arrangements for the rental or lease of office space. Historically, CMS has specifically disallowed reliance on the fair market value compensation exception for office space lease arrangements.

The fair market value compensation exception differs from the rental of office space exception in two key areas: (1) it does not require a 1-year term and (2) it requires that arrangements do not involve counseling or promotion of a business arrangement or other activity that violates a Federal or State law.

Regarding the lack of 1-year term requirement, CMS notes that the parties would only be allowed to enter into one arrangement for rental space during the course of a year, although the arrangement could be renewed "on the same terms and conditions any number of times."

CMS notes a continued concern about compensation determined using either a percentage-based compensation formula or per-click compensation formulas. CMS, therefore, finalizes a prohibition on such formulas for determining rental charges for office spaces.

Finally, CMS reorganizes the text of the fair market value compensation regulation at 42 C.F.R. § 411.357(l)(1) to make clear that the arrangement must be in writing and signed by the parties, and to list the information that must be in writing. CMS notes that this reorganization is not intended to affect the requirements of this exception.

Information Blocking. CMS declines to finalize its proposal to revise 42 U.S.C. § 411.357(w)(3) to specify that a donor may not engage in information blocking with respect to donated electronic health record ("EHR") items or services, and may not use donated EHR items or services to engage in information blocking. Instead, the Final Rule deletes 42 U.S.C. § 411.357(w)(3). CMS explains that this provision is no longer necessary because the Department of Health and Human Services now has other enforcement mechanisms to address information blocking, and that these mechanisms are "better suited than a requirement of an exception to the physician self-referral law to deter information blocking."

Cybersecurity. The Final Rule expands the EHR exception at 42 C.F.R. § 411.357(w) to explicitly include the donation of cybersecurity software and services to protect electronic health records. The donation must satisfy all of the requirements of the EHR exception.

Additional Proposals and Considerations

15 Percent Recipient Contribution

In the preamble to the proposed rule, CMS solicited comments regarding two alternatives to the physician cost-sharing requirement in 42 C.F.R. § 411.357(w)(4). This provision requires that a physician must pay 15 percent of a donor's costs of donated EHR items or services prior to receiving such items or services. CMS sought comments on eliminating or reducing the amount of the cost-sharing requirement applicable to a "small or rural physician organization," and asked for stakeholder input on whether there were other subsets of physician recipients for whom the 15 percent cost-sharing requirement is a "particular burden." CMS solicited comments on an alternative of eliminating this cost-sharing requirement for all physician recipients. In the Final Rule, CMS retains the 15 percent cost-sharing requirement for all physician recipients. However, the Final Rule adjusts the time by which physician recipients must pay the cost-sharing amount for donations other than an initial donation. While a physician recipient must pay the cost-sharing amount prior to the receipt of an initial donation, the Final Rule provides that for any subsequent donations the physician recipient may pay this amount at "reasonable intervals".

Equivalent Items and Services

The Final Rule revises 42 C.F.R § 411.357(w)(8) to permit the donation of EHR items and services that are "equivalent" to items or services that the physician recipient has already obtained. CMS explains that this revision is intended to allow for the donation of replacement EHR technology in the same manner as new EHR technology.

Providing Flexibility For Non-Abusive Practices

Limited Remuneration to a Physician, 411.357(z)

CMS finalizes a new exception that would allow for limited financial arrangements with physicians at § 411.357(z). This exception is met when: (1) the arrangement is for items or services actually provided by the physician; (2) the amount of the remuneration to the physician is limited; (3) the arrangement furthers a legitimate business purpose of the parties and is on similar terms and conditions as like arrangements; (4) the remuneration is not determined in any manner that takes into account the volume or value of referrals or other business generated by the physician; and (5) the remuneration does not exceed the fair market value for the items or services. This exception can be used in succession with another applicable exception to protect an ongoing arrangement (e.g., if parties do not initially document an equipment lease arrangement, the arrangement may be excepted under § 411,357(z), if all requirements are met).

We highlight the following key points from the Final Rule:

  • Annual Aggregate: CMS has set the finalized cap at a $5,000 annual aggregate, to be adjusted annually for inflation (as opposed to the $3,500 cap in the Proposed Rule).
  • Applicable Parties: Under the Final Rule, physicians can provide items or services through employees, a wholly owned entity, or through locum tenens physicians. CMS does not extend this exception to either payments to a physician's immediate family member for items or services provided by the family member or to items or services provided by independent contractors.
  • Commercial Reasonableness: In order for this exception to be met, the arrangement must be commercially reasonable (even if no referrals were made between the parties) and there must be compliance with §411.354(d)(4) if remuneration to the physician is conditioned on the physician's referrals to a particular provider, practitioner, or supplier.
  • Per-Click and Percentage-Based Compensation: The per-click and percentage-based compensation provisions at §411.357(z)(1)(v) only apply to timeshare arrangements for the use of premises or equipment.
  • Timeline for Reliance: An entity may rely on this exception up to the point in a calendar year immediately prior to when the annual aggregate remuneration limit is exceeded. If, after that point, the arrangement does not fit into another applicable exception, the physician is not permitted to make referrals to the entity for designated health services, and the entity may not bill Medicare for such improperly referred services. The annual aggregate limit resets each calendar year

CMS also reiterates that this exception applies to the provision of both items and services by a physician and is available to protect compensation arrangements involving the lease of office space or equipment from a physician. Compensation to a physician for items or services provided outside of the arrangement will not count towards the annual aggregate limit if the items or services are protected under another exception in § 411.355 or the arrangement for the other items or services fully complies with the requirements of another exception in § 411.357. However, when an entity has multiple undocumented, unsigned compensation arrangements, the parties are considered to have only one compensation arrangement for all items and services under this exception.

Cybersecurity Technology and Related Services, 411.357(bb)

CMS finalizes the creation of the new Cybersecurity Technology exception at § 411.357(bb). The new exception was developed in coordination with a parallel OIG proposed Anti-Kickback Statute safe harbor and is designed to allow industry stakeholders to mitigate the risk of cyberattacks. It will protect non-monetary donations of software and certain hardware (as limited by the conditions of the exception) used for cybersecurity purposes. We highlight the following key points:

  • "Necessary and used predominantly" standard: To meet the Stark Law exception, the donated technology (both software and hardware) must be "necessary and used predominantly" for cybersecurity purposes.
  • Definition of Cybersecurity: CMS finalizes the definition of cybersecurity to be: "the process of protecting information by preventing, detecting, and responding to cyberattacks."
  • Definition of Technology: CMS finalizes the definition of technology to be: "any software or other types of information technology."
  • Donors: In the proposed rule, CMS solicited comments on the types of donors who should be protected under this exception. In the Final Rule, CMS declines to finalize limits on the types of donors protected under this exception; instead, the Final Rule protects all donors. However, neither the eligibility of a physician for the technology or services, nor the amount or nature of the technology or services, should be determined in any manner that directly takes into account the volume or value of referrals or other business generated between the parties. CMS declined to include a list of selection criteria that, if met, would mean a donation would be deemed to meet this requirement.
  • Recipients: CMS finalizes the proposed requirement that neither the physician nor the physician's practice can make the receipt of cybersecurity technology or services, or the amount or nature of the technology or services, a condition of doing business with the donor.
  • Written requirement: CMS finalizes the requirement that an arrangement for the provision of cybersecurity technology and related services be documented in writing.This requirement is fulfilled if contemporaneous documents would permit a reasonable person to verify compliance with the exception at the time that a referral is made.
  • No Monetary Cap: CMS declines to finalize a monetary cap in the Final Rule.

As stated at the outset, the Stark Law has been and will continue to be a compliance challenge from the sheer number of nuances that are applicable to various exceptions. Physicians and DHS entities should take careful consideration of every financial relationship to which they enter to avoid possible inadvertent violation of these provisions.

*Jessica Morris contributed to this Advisory. Ms. Morris is a graduate of American University Washington College of Law and is employed at Arnold & Porter's Washington, DC office. Ms. Morris is admitted only in New York.

© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

  1. https://www.federalregister.gov/public-inspection/2020-26140/medicare-program-modernizing-and-clarifying-the-physician-self-referral-regulations

  2. 84 Fed. Reg 55766 (Oct. 17, 2019).

  3. 42 C.F.R. § 411.352(g)

  4. 42 C.F.R. § 411.352(i)(2).

  5. Id at 411.351.

  6. CMS notes that it has received more than 1200 SRDP submissions since the inception of the program in 2010.

  7. 42 C.F.R. § 411.354(d)(1).

People

Thomas A. Gustafson, PhD
Thomas A. Gustafson, PhD
Senior Policy Advisor*
Washington, DC
Phillip DeFedele
Phillip V. DeFedele
Senior Associate
Subscribe
Subscribe Link

Email Disclaimer