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December 2020 Stark Law Rule Changes


Relating to Fair Market Value, Commercial Reasonableness, Remuneration Varying on Volume and Value, and Related Matters

Effective December 2, 2020, the Center for Medicare and Medicaid Services (CMS or the Agency) will implement a broad range of regulatory changes to the Stark Law, billed as the “Regulatory Sprint to Coordinated Care.” In connection with that endeavor, the Agency has adopted a number of important updates to the fundamental and foundational requirements of the Stark Law. A review of those changes to the foundational requirements is fundamental to continued compliance with the Stark Law requirements as they impact hospital/physician relationships. Those changes impact the structural definitions that constitute a physician group practice and what are permissible bonus and distribution requirements within such a group practice. In addition, a number of the changes relate to value-based purchasing arrangements and these will be addressed in a future update.

There are several significant changes to consider. First, the Agency provided a specific definition of what is commercially reasonable - although the definition is not limiting. 42 C.F.R. § 411.351. Moreover, it decoupled the concept of commercial reasonableness from the fundamental prohibition on an arrangement where compensation or remuneration varies with the volume or value of referrals for designated health services. In that regard, the Agency provided a precise arithmetic test for determining whether remuneration varies directly or indirectly with the volume or value of designated health services. Second, the Agency also provided an update to the definition of what is fair market value, creating a definition of general applicability, and one that specifically applies to equipment rental, and one to space rental. Id. As a result, “fair market value” is now defined to mean the value of assets or services in an arms-length transaction with like parties and under like circumstances, consistent with the general market value. In so doing, CMS makes clear that fair market value cannot consider the value of referrals for designated health services (DHS). CMS is also updating its definition of “general market value.”

As to all of these issues, commentary by the Agency provides certain helpful guidance for hospital and physician counsel and compliance officers to assess the legality of certain arrangements. In other respects, the Agency in its commentary creates more confusion than clarity. Importantly, the Agency emphasized that its guidance is not binding on the Office of Inspector General (OIG). It also would not supersede other or contrary inclusions that might be reached under analysis of the same arrangement under the Anti-Kickback Statute. This is an important point when reviewing the hospital/physician relationships that have drawn the most scrutiny and notoriety in terms of large settlements, as invariably issues under the Anti-Kickback Statute have been brought forward. Those would not necessarily be governed by the new Stark Law changes.

In addition, the Agency provided important updates and clarification for other fundamental aspects of the Stark Law. These include an updated definition of what constitutes a “designated health service” regarding hospital services, an updated definition of the term “remuneration”, important clarification as to what is an “isolated financial transaction”, and other matters.

Commercial Reasonableness

In an effort to provide greater regulatory certainty and clarity regarding the requirement that an arrangement be commercially reasonable, CMS has provided a definition of “commercial reasonableness” that is as follows:

Commercial 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.”

However, such a definition begs the observer to travel down the regulatory rabbit hole and ask when a transaction is commercially reasonable, if it does not result in a profitable financial relationship, setting aside a prohibited motive for a hospital to access designated health services. CMS made such a chase difficult by declining to specify various arrangements that would be reasonable, yet CMS dropped some strong suggestions as to what parties may consider in determining commercial reasonableness and what would be prohibited. Hospitals and physicians can set aside the notion that commercial reasonableness relates to fair market value because CMS explains that the “determination of commercial reasonableness is not one valuation.” Therefore, it is unlikely that a valuation firm should prospectively comment on the notion of commercial reasonableness, nor is profit a determinative driver of reasonableness because CMS asserts “compensation arrangements that do not result in profit for one or more of the parties may nonetheless be commercially reasonable.”

Yet there are limited examples of commercial reasonableness that CMS provides, including: community need, timely access to healthcare services, fulfillment of licensure or regulatory obligations, (including those under the Emergency Medical Treatment and Labor Act), the provision of charity care, and the improvement of quality and health outcomes. Another caveat is that the arrangement must also be appropriate given the size, type, scope, and specialty of the parties. To this point, CMS indicates its definition “appropriately considers the characteristics of the parties to the actual arrangement being assessed for its commercial reasonableness and will adequately ensure that parties cannot protect abusive arrangements under the guise of ‘commercial reasonableness.’” One example CMS provides of a legitimate business purpose that would not be commercially reasonable is entering into arrangements for personal services of a physician that would duplicate other service arrangements such as in the medical directorship or other contexts. CMS also briefly dwells on the observation that an unscrupulous party could allege a compensation arrangement is commercially reasonable by claiming that attracting a physician’s business is a “legitimate business purpose”, an assertion that CMS discounts as unreasonable. In this regard, CMS remarks that an unprofitable arrangement is unlikely to be commercially reasonable “in a case where the parties enter into an arrangement aware of a certain unprofitability and there exists no identifiable need or justification – other than to capture the physician’s referrals – for the arrangement.”

The agency emphasized that most of the other exceptions to the Stark Law requirements make it clear that the compensation arrangement must be commercially reasonable even if no referrals are made between the parties. For this reason, CMS is not including that requirement in the definition of commercial reasonableness but it has added such language to the exception for fair market value compensation at § 411.357(l) and the new exception for a limited remuneration to a physician at § 411.357(z).

Volume or Value Standard Defined

In contrast to its stance on commercial reasonableness, CMS provided, for the first time, 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. As set forth now in 42 C.F.R. §§ 411.354(5) and (6), 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. CMS states, “only when the mathematical formula used to calculate the amount of compensation includes referrals or other business generated as a variable, and amount of compensation correlates with the number or value of the physicians referrals to or for the physicians generation of other business for the entity,” would the volume or value standard be violated. CMS emphasizes that this mathematical formula applies both to an increase as well as a decrease in the physician’s compensation.

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. As to the meaning of the term variable, CMS emphasizes that its meaning is the same as with respect to general mathematical principles, a symbol for a number that is not yet known. For example, if a bonus pool is created so that a physician’s bonus would include collections from the set of services by an entity that includes designated health, the value of the referrals to the entity is a variable, as is the value of other business generated by the physician, and thus prohibited.

In its commentary, CMS makes clear that 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. This outcome seems commonplace under current language but CMS was determined to emphasize and clarify it. CMS also touched on its observation that outcomes-based bonuses, dependent upon a hospital’s achievement of overall financial goals including achievement of certain margin targets and requirements, could fall within the prohibition. That will depend on how they are structured and whether referrals are variables anywhere in the mathematical formula for determining compensation.

Fair Market Value Considerations

CMS has now further defined “fair market value,” and has a refined definition for “general market value.” It also provided helpful commentary on common problems in fair market valuation of employment relationships in particular. As for fair market value, CMS amends the regulatory definition in 42 C.F.R. § 411.351 to provide that 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.” (Emphasis added). CMS is clear that fair market value cannot consider the value of referrals for DHS. Respecting “general market value,” CMS is finalizing its definition specific to each of the types of the transactions where it is a component of the relevant Stark Law exceptions. Those include asset acquisition, compensation for services, and rental of equipment or office space.  The final definition of “general market value” is, “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.” For services, “general market value” is “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.” For rental of equipment or office space “general market value” is “the price that rental property would bring at the time the parties entered 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.” The Agency’s commentary is clear that 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 propose with one another. The Agency points to a medical directorship arrangement as an example of one transaction where the value of the services must be isolated from the value of referrals that a physician otherwise might make. However, such an example would have broad applicability in a range of regulated circumstances.

In finalizing the definition of fair market value and general market value, the Agency waded into several issues. It indicates 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. For example, the Agency provides a highly soughtafter orthopedic surgeon that commands a significantly higher salary in the market than salary surveys. The Agency implies it may be reasonable and within fair market and general market value to pay such a higher salary. However, the Agency provides an example of a family practitioner working in an area where there is a poor payor mix and a lower cost of living. This is a tenuous situation for a hospital where fair market value surveys may overstate the value of the physician services. Thus, CMS notes that it is not its position, contrary to the understanding of a number of market observers, that compensation cannot go above 75% and still be within the range of fair market value, nor is it its position that compensation under the 75th percentile is necessarily within the range of fair market value.

At the same time, the Agency opined that 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 potential different buyer of items or services. Therefore a hospital may not value physician services at a higher rate than a private equity investor or another physician practice where a designated health service that is referred by the physician would be billed under the OPPS, although the physician practice or private equity investor would bill for same under the physician fee schedule. The CMS commentary is helpful to the marketplace but also creates a level of uncertainty, suggesting that a deviation from market surveys can be permissible. That is due to a subjective standard that can be a very slippery slope for parties to a transaction.

Group Practice Issues

CMS also made important changes to the group practice rules at 42 CFR § 411.352 clarifying that the special rule regarding compensation that is directly or indirectly related to referrals for designated health services at 42 CFR § 411.354(d)(5) applies also to physician referrals to a group practice at 42 CFR §§ 411.352(g) & (i). 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. Therefore, a physician bonus cannot rise or fall based on the variable of the amount of individual physician’s referrals of designated health services.

In its commentary, CMS emphasizes that any group or part of a group of physicians consisting of at least five members, is subject to this rule. Moreover, CMS makes it abundantly clear that the rule and prohibition applies to the entire bucket of profits from designated health services. In other words, a bonus pool must consider all profits from designated health services, and not be separately divided by individual service line profits. Additionally, a physician group may not separately calculate and distribute profits to physicians from imaging services, or physical therapy services, or infusion services provided within the same group. Rather, designated health services must be considered in the aggregate. Therefore, CMS is making a clarifying change to 42 CFR § 411.35(i)(l)(ii) to make clear that overall profits means “the profits derived from all the designated health services.”

Simultaneously, in the exception for value-based arrangements at new 42 CFR § 411.357(aa), CMS does not prohibit remuneration that takes into account the volume or value of a physician’s referrals. Therefore, CMS set forth a new final policy at 42 CFR § 411.352(i)(3) that profits from designated health services 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. Thus, in a 100 physician group, if only 15 physicians participate in a value-based enterprise and generates profits, then each of the physicians could receive a profit distribution that considers his or her referrals to the group that are directly attributable to his or her participation in the value-based enterprise.

Mandatory Referral/Steerage Arrangements

CMS now also adopts a new rule at § 411.354(vi) regarding steerage requirements in bona fide employment relationships. This new regulatory standard prohibits 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 designated health services, or if the value of physicians referrals of designated health services failed to achieve the target established under a directed referral arrangement, it would be impermissible and the compensation arrangement unlawful. In its commentary, CMS emphasizes the importance of preserving patient choice and protecting a physician’s professional medical judgment. It also refers to such mandated arrangements as potentially abusive. To that end, it has sought to define and clarify through a bright line rule what is possible under such an arrangement.

Decoupling Stark Law and Anti-Kickback Statute

In the majority of instances, the Agency decoupled the requirements of the Stark Law from those of the Anti-Kickback Statute as well as billing and compliance requirements. The Agency explained that it is aware of no instances where non-compliance with the Stark Law turn solely on an underlying violation of the Anti-Kickback Statute or any federal or state laws governing billing or claims submission. Therefore, the Agency deemed it appropriate to remove those requirements from most exceptions. It further explained that a number of the exceptions have internal safeguards that prohibit cham arrangements such as the exclusive use requirement in the statutory exceptions for the rental of office space and equipment. However, the Agency excluded from that decoupling the fair market value exception at § 411.357(l). No such guardrails exist within the language of the fair market value exception which has broad applicability and therefore the Agency did not finalize its initial proposal to delete from that exception the requirement that the arrangement does not violate the Anti-Kickback Statute. It is worth noting in this respect that noncompliance with fair market value standards provide the prohibited intent under the Anti-Kickback Statute so the continued inclusion in that exception is consistent with the underlying requirements.

Designated Health Services Definition

The Agency is also revising the definition of “designated health services” to state that for services furnished to inpatient by a hospital, a service is not a designated health service if the furnishing of the service does not increase the amount of Medicare’s payment to the hospital under the IPPPS, the IRF PPS, the IPF PPS, or the LTCH PPS. The Agency’s rationale for this change is that no additional payment would be available where additional hospital services are ordered after a patient’s admission by a physician who is not responsible for the patient’s admission. This new definition of designated health services would not apply if the ordering of the service does result in additional remuneration for the hospital. That would be true, however, in the case of outlier claims. The Agency rejected the assertion that it would be difficult to identify such instances by hospitals seeking to comply with the law, noting that there should be ready access to this information within the hospital’s electronic health record. Interestingly, the Agency did not extend this change to hospital outpatient services. In that regard, it noted that program integrity and compliance with laws counsel against the exclusion of such services from the definition of designated health services even if the ordering physician is not the one who initially referred the patient to the hospital.

Definition of Remuneration

Again, visiting and altering one of the fundamental definitions in the Stark Law, the Agency’s final rule changes the definition of remuneration. Under the Stark Law a compensation arrangement is any arrangement involving any remuneration between a physician and an entity (as defined in § 411.351). However, under section 1877(h)(1)(c)(ii) of the Stark Law, the provision of certain items does not create a compensation arrangement and the Agency’s definition of remuneration did not include the following items: 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. In its new definition of remuneration at § 411.351, the Agency eliminates the carve-out to the definition of remuneration that it does not apply to surgical items, devices, or supplies. If the item, device, or supply is in fact only used for one or more of the six purposes outlined in the statute, it will not be considered remuneration. Recognizing the possibility that such a change could be a slippery slope on the road to abuse the Agency emphasized that the “used solely” requirement will mitigate against abuse.

Isolated Transaction Exception Updated

Tightening up the requirements of the Stark Law’s isolated transaction exception, the Agency provided important clarifying guidance in the definition of an isolated financial transaction at § 411.351. The Agency makes clear that an isolated financial transaction does not include a single payment for multiple services over an extended period. The caveat that the Agency makes in § 411.357(f) is that an isolated financial transaction can be a single instance of forgiveness of an amount owed and settlement of a bona fide dispute. However, the Agency makes clear that 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. The Agency specifically discussed the example of an ongoing negotiation of a hospital services contract, stating that the exception cannot be used to protect services provided while such a contract or a renewal of a contract is negotiated. The Agency pointed out that the exception for isolated transactions does not limit permissible compensation, does not require the arrangement to ever be in writing, and does not require compensation to be set in advance. Given these limited safeguards, it squarely rejected the notion that ongoing service arrangements could be characterized somehow as an isolated transaction. That conclusion makes perfect sense, particularly in light of other requirements such as those of personal services arrangements.

CMS has emphasized that its intent in implementing these changes is to reduce regulatory burden and provide regulatory clarity. As indicated herein, its regulations, as amended, achieve some of those goals, although falls short on others.