Morris Manning & Martin, LLP

Year End Stark Law Updates and Structural Changes


Effective December 2, 2020, the Center for Medicare and Medicaid Services (CMS) implemented multiple regulatory changes to the Stark Law to reduce regulatory burden and provide regulatory clarity.  A number of the most significant changes are described below. CMS emphasized that its guidance is not binding on the Office of Inspector General (OIG), and would not supersede other or contrary inclusions that might be reached under analysis of the same arrangement under the Anti-Kickback Statute. CMS also implemented regulations respecting value based purchasing and bundled payment arrangements, which are separate from the matters we discuss herein. 

Commercial Reasonableness

First, CMS added a specific definition of “commercially reasonable,” stating: [c]ommercial reasonableness furthers a legitimate business purpose of the parties regarding their particular arrangement and consideration of the parties’ characteristics, including their size, type, scope, and specialty. An arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.” The arrangement must be appropriate given the size, type, scope, and specialty of the parties. Commercial reasonableness does not relate to fair market value, nor is profit a determinative driver of reasonableness. Therefore, a valuation firm should not prospectively comment on the notion of commercial reasonableness. Examples of commercial reasonableness include community need, timely access to healthcare services, fulfillment of licensure or regulatory obligations, the provision of charity care, and the improvement of quality and health outcomes. However, it does not include arrangements for personal services of a physician that would duplicate other service arrangements.

Volume or Value Standard Defined

CMS also established a bright line rule as to when compensation would be deemed to vary directly or indirectly with the volume or value of referrals for designated health services. Pursuant to this rule, compensation will not be taken into account for the volume or value of referrals or other generated business between the parties unless a specific mathematical formula exists that would establish the same. However, if the method used to determine the compensation does not fall squarely within the defined circumstances then “the compensation will not be considered to take into account” volume or value of referrals. Compensation based on personally-performed services is appropriate under the standard even if the entity paying the compensation receives designated health services as a result of the personally-performed services. Additionally, outcomes-based bonuses, dependent upon a hospital’s achievement of overall financial goals, could fall within the prohibition depending on how they are structured and whether referrals are variables anywhere in the mathematical formula for determining compensation.

Fair Market Value Considerations

CMS further defined fair market value, and refined the definition for general market value. The term fair market value means “the value in an arms-length transaction with like parties and under like circumstances, of assets or services, consistent with the general market value.” 42 C.F.R. § 411.351 (Emphasis added). Fair market value cannot consider the value of referrals for DHS.

General market value is now defined as “the price that an asset would bring on the date of its acquisition 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.” General market value should be based solely on consideration of the economics of the subject transaction and must not include consideration of other business the parties may have or may propose with one another. CMS acknowledged that extenuating circumstances may dictate that parties to an arm’s-length transaction veer from data that is set forth in salary surveys and other evaluation data compilations. At the same time, compensation to a physician cannot be inflated or reduced simply because the entity paying or receiving the compensation values the referrals or other business that the physician may generate more than a different buyer of items or services. 

Group Practice Issues

CMS also made important changes to the group practice rules, clarifying that the special rule regarding compensation that is directly or indirectly related to referrals for the Department of Human Services (DHS) applies also to physician referrals to a group practice. Therefore, the special rule applies when determining whether a physician’s compensation, share of overall practice profits, or productivity bonus from a group practice is based on, is directly or indirectly related to, or takes into account the volume or value of the physician’s referrals to the group practice. Moreover, the rule and prohibition applies to the entire bucket of profits from DHS.  Simultaneously, in the exception for value-based arrangements, CMS does not prohibit remuneration that takes into account the volume or value of a physician’s referrals. Therefore, profits from DHS that are directly attributable to a physician’s participation in a value-based enterprise may be distributed to the participating physician and will not be prohibited.

Mandatory Referral/Steerage Arrangements

CMS adopted a new rule regarding steerage requirements in bona fide employment relationships, prohibiting the existence or renewal of a compensation arrangement contingent on the number or value of a physician’s referrals to a particular provider, practitioner, or supplier. If the compensation arrangement would be terminated due to the physician’s failure to refer a sufficient number of patients for DHS, or if the value of physicians referrals of DHS failed to achieve the target established under a directed referral arrangement, it would be impermissible and the compensation arrangement unlawful.

Decoupling Stark Law and Anti-Kickback Statute

In the majority of instances, CMS decoupled the requirements of the Stark Law from those of the Anti-Kickback Statute as well as billing and compliance requirements, however, CMS excluded from that decoupling the fair market value exception at § 411.357(l).

DHS Definition

CMS revised the definition of DHS to state that for services furnished to inpatients by a hospital, a service is not a DHS-related service if it does not increase the amount of Medicare’s payment to the hospital under the inpatient, inpatient rehabilitation facility, inpatient psychiatric facility, or long-term care hospital prospective payment systems. Interestingly, CMS did not extend this change to hospital outpatient services.

Definition of Remuneration

In its new definition of remuneration, CMS eliminates the carve-out to the definition of remuneration, which stated that it does not apply to devices or supplies that are used solely to collect, transport, process or store specimens for the entity providing items, devices or supplies, or to order or communicate the results of tests or procedures for such entity.

Isolated Transaction Exception Updated

CMS revised the Stark Law’s isolated transaction exception by explaining that an isolated financial transaction does not include a single payment for multiple services over an extended period. However, an isolated financial transaction can be a single instance of forgiveness of an amount owed and settlement of a bona fide dispute, but the exception itself is not applicable to the compensation arrangement which results in a payment dispute. It also cannot be used to show up compliance if services are provided over a long period of time without strict compliance with the requirements of having a written agreement.

If you have any questions about this legal update, please contact a member of the MMM healthcare group.