In December 2020, the Centers for Medicare & Medicaid Services (“CMS”) issued long-awaited final rules revising the Stark Law regulatory framework and updating the 2021 Medicare Physician Fee Schedule (“MPFS”). Though many health care organizations considered both updated regulatory frameworks when establishing their physician compensation programs for 2021, stakeholders in the industry continue to evaluate the changes to the Stark Law Final Rule and 2021 MPFS and what they mean for the future of health care and already complex financial relationships with physicians.

This article will summarize the Stark Law Final Rule and 2021 MPFS changes related to physician compensation as well as examine how these changes might impact health care organizations into the future.

Stark Law Final Rule

On December 2, 2020, CMS published a Stark Law final rule, providing the most substantive updates and additions to the Stark Law in over a decade (“Stark Law Final Rule”). The Stark Law Final Rule finalized changes to three core concepts under the Stark Law – commercial reasonableness, fair market value (“FMV”) and volume or value standards – and also added a new framework of exceptions for value-based arrangements.

Commercial Reasonableness

Under the Stark Law Final Rule, CMS adopted its first definition of “commercially reasonable:”

Commercially reasonable means that 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 and scope. An arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.

The Stark Law Final Rule confirmed that commercially reasonable arrangements should further a legitimate business purpose of the parties, and be sensible, considering the particular characteristics of the parties to the arrangement. Additionally, CMS clarified that commercial reasonableness does not hinge on whether an arrangement is profitable, a significant development for health care organizations. As part of its discussion on profitability, CMS provided a non-exhaustive list of reasons why parties might appropriately enter into arrangements that will generate losses, including: 1) community need; 2) fulfillment of licensure or regulatory obligations; 3) timely access to health care services; and 4) the improvement of quality and health outcomes.

The new commercial reasonableness definition may allow health care organizations to avoid potential compliance issues, including whistleblowers, and should be carefully woven into documentation supporting the health care organization’s physician arrangements.

FMV

The Stark Law Final Rule reorganized the definition of FMV but left the substantive guidance on FMV largely unaltered. However, while CMS reiterated its guidance that health care organizations should look to salary survey data to defend their compensation arrangements, CMS also affirmed its guidance in the proposed rule that the approach to the salary survey data should be health care organization specific. In its commentary, CMS recognized that the particular facts and circumstances, such as national recognition of the physician, cost-of-living and reimbursement rates, may warrant an FMV determination above or below the expected ranges reflected by salary survey data alone.

Volume or Value Standard

CMS also issued new regulations addressing the Stark Law’s volume or value standard. Under the Final Rule, compensation violates the volume or value standard only if: 1) the mathematical formula used to calculate the amount of the compensation includes referrals for Designated Health Services or other business generated as a variable; and 2) the amount of the compensation correlates with the number or value of the physician’s referrals to, or the physician’s generation of other business for the entity. The prescriptive nature of the Stark Law Final Rule’s volume or value standard should further reduce physician compensation regulatory risk for health care organizations.

Directed Referrals

The Stark Law Final Rule further implemented changes to the Stark Law’s special rule on directed referrals. Specifically, under the revised special rule, neither the existence of a physician’s compensation arrangement nor the amount of a physician’s compensation can be contingent solely on the number or value of a physician’s referrals to a particular physician, practitioner or supplier. With that said, CMS acknowledged that health care organizations may still establish a percentage or ratio of the physician’s referrals to a particular physician, practitioner or supplier. Ultimately, under the Stark Law Final Rule, health care organizations should analyze the directed referral language in their current contracts for continued compliance and must be careful when establishing any new directed referral requirements.

Value-Based Framework

In addition to the above-mentioned changes, CMS also provided new definitions and exceptions under the Stark Law Final Rule to help health care organizations transition toward value-based care models. The government’s value-based framework outlined six new definitions for 1) value-based enterprise; 2) value-based enterprise participant; 3) value-based arrangement; 4) value-based activity; 5) value-based purpose; and 6) target patient population, all of which must be met before an arrangement can meet one of the Stark Law’s new value-based care exceptions under the Stark Law Final Rule. Those arrangements that meet the requisite definitions, however, have a unique opportunity to engage in models that provide flexibility beyond what is achievable under the standard Stark Law requirements, such as FMV. As the government’s push toward value-based care continues, health care organizations proactively evaluating how they might meet this framework will be better positioned to experience the full benefit of value-based reimbursement changes.

2021 Medicare Physician Fee Schedule

Adding to the complexity, just weeks before the Stark Law Final Rule went into effect, CMS finalized changes to the Medicare Physician Fee Schedule (“MPFS”) for Calendar Year 2021 (“MPFS Final Rule”). The MPFS Final Rule increased the number of work relative value units (“wRVUs”) attributable to certain evaluation and management services (“E&M Services”). As a result, assuming an equivalent level of work effort to prior years, heavily E&M Service based physicians will produce more wRVUs in 2021. Additionally, under the MPFS Final Rule, CMS revised the MPFS conversion factor from $36.09 in 2020 to $34.89 in 2021. Ultimately, the impact of these changes will vary for each health care organization. Health care organizations with a significant number of primary care physicians, who are expected to benefit most from the increased wRVU allocation for common E&M Services, may see total reimbursement under the MPFS increase in 2021. On the other hand, health care organizations with a focus on specialty care may not see any rise in their overall reimbursement under the MPFS. However, regardless of whether a health care organization focuses on primary care or specialty care, the impact of the MPFS changes on the health care organization’s financial performance will likely depend on their physician compensation models. As pressure continues to mount on health care organizations to rein in health care spending, the type of changes found in the MPFS Final Rule may become a trend, and, as such, health care organizations may want to consider how to protect themselves against future changes to the MPFS before those changes arise.

Practical Takeaways

The physician compensation landscape in 2021 is already seeing significant changes due to changes made by the Stark Law Final Rule and the MPFS Final Rule.  In the first half of 2021, many health care organizations continued to develop quality/value-based metrics for their physician compensation plans and sought guidance on how to avail themselves to the new value-based exceptions. For health care organizations that obtained valuation opinions in the first half of 2021, it has been important to include the new regulatory definitions and ensure that consultants appropriately address those definitions based on the underlying CMS commentary. Health care organizations also continue to evaluate their ability to pool compensation for their physicians in a legally compliant way. While the steps taken in the front half of 2021 are critical to address these regulatory changes, health care organizations should also consider taking the following additional steps to remain competitive in the physician compensation marketplace:

  • Re-evaluate compensation strategies to understand whether your organization may have opportunities to protect some of the compensation paid to physicians under a value-based framework.
  • Engage compliance, legal and business teams to develop an approach for calculating compensation that contemplates changes to conversion factors for 2021 and beyond.
  • Educate leadership on regulatory changes to ensure that physician contracts stay in compliance with the current regulatory framework.
  • Perform audits of physician contracts to understand future risks posed to the organization by regulatory changes and to stay ahead of any costly compliance issues.