* The following alert was originally published in Health Law360. To read it on the Health Law360 website, click here.

In an unexpected development, the Centers for Medicare and Medicaid Services recently proposed several changes that will generally add greater flexibility to Stark Law regulations in the proposed physician fee schedule for calendar year 2016, which was published on July 15, 2015.[1] Many of these changes appear to respond to concerns the provider community has raised over the years regarding the difficulty of complying with the Stark Law’s complex requirements. The proposed rule also contains many specific requests for comment. If the proposed rule is finalized, hundreds, if not thousands, of contracts could be affected, and the revised regulations could make a tremendous difference to most hospitals and other providers’ efforts to ensure Stark Law compliance. Below, we summarize many of the key provisions in the proposed rule related to the Stark Law.

Given CMS’ current apparent willingness to listen to the provider community’s concerns, health care providers should carefully evaluate the proposed regulations and take advantage of the opportunity to submit comments. It is likely that some commenters will object to some or all of these changes on the theory that they will lead to greater fraud and abuse. Therefore, it could be particularly helpful for individual providers to submit comments, in addition to whatever comments are submitted by their trade associations, in order to demonstrate to CMS the widespread support for these types of revisions to Stark Law regulations. Comments on the proposed rule must be received by CMS no later than Sept. 8.

Overview of Key Stark Law Provisions in the Proposed Rule

Simplifying Compliance with the Stark Law

For the most part, the proposed rule attempts to make it easier for providers to comply with the Stark Law, noting that many of the proposed changes are intended to address issues submitted under the self-referral disclosure protocol and to reduce uncertainty created by recent court decisions. These types of changes, described in more detail below, will make it easier for providers to ensure that their financial arrangements with physicians are fully compliant with the appropriate Stark Law exception.

The proposed changes would impact the Stark Law exceptions related to the rental of office space, rental of equipment, personal services arrangements, fair market value, and indirect compensation arrangements, among others, and include:

  • Clarifying that the “writing” or “written agreement” required by numerous Stark Law exceptions does not have to be a single formal contract; it can be a collection of documents;
  • Clarifying that a lease or personal services arrangement does not need to include a specific written “term” provision as long as the arrangement lasts for at least one year;
  • Permitting expired leases and personal services arrangements to continue on the same terms and conditions as the original arrangement for more than the six months currently permitted by the regulations, as long as the holdover arrangement remains in compliance with the other requirements of the applicable exception and certain additional safeguards are met. The length of the permissible holdover period will be determined based on comments on the alternatives proposed by CMS;
  • Allowing 90 days after an agreement’s effective date to obtain missing signatures, regardless of whether the failure to obtain the signature was deliberate or inadvertent;
  • Permitting arrangements of any length covered by the fair market value exception, not just those lasting less than one year, to be renewed any number of times;
  • Modernizing the exception for ownership in certain publicly traded securities and mutual funds to cover securities listed for trading on an electronic stock market or over-the-counter quotation system meeting certain standards;
  • Establishing a narrow new exception to permit certain timeshare arrangements between a hospital or physician organization (as licensor) and a physician (as licensee) for the use of office space, equipment, personnel, supplies and other services;
  • Clarifying confusion related to discussion in U.S. ex rel. Kosenske v. Carlisle HMA, 554 F.3d 88 (3d Cir. 2009), on so-called split bill arrangements. CMS specifically states that a physician’s use of a hospital’s resources, such as an exam room, supplies and personnel, when treating hospital patients does not constitute remuneration from the hospital to the physician as long as the physician only bills for his or her professional fees;
  • Revising the definition of “stand in the shoes” to clarify that only a physician standing in the shoes of a physician organization, usually an owner, is considered a party to the arrangement for purposes of the signature requirement of an applicable exception. As a result, such a physician has satisfied the signature requirement of the applicable Stark Law exception when the authorized signatory of the physician organization has signed the required writing. However, for other purposes, all physicians in a physician organization are considered parties to the arrangement. Accordingly, compensation to a physician organization from an entity furnishing designated health services cannot take into account referrals or other business generated by any of the physicians, whether they are owners, employees or independent contractors of a physician organization;
  • Revising the definitions of “remuneration” and “locum tenens physician” to remove potential confusion arising from the current wording of these definitions; and
  • Confirming that there is only one standard in the various compensation exceptions related to the requirement that compensation paid to a physician should not be determined in a manner that takes into account the volume or value of a physician’s referrals. (The standard is the same regardless of whether the phrase “takes into account,” “based on” or without regard to” are used.)

Recruitment and Retention

CMS also proposes a new exception to permit hospitals, federally qualified health centers (“FQHCs”) and rural health clinics (“RHCs”) to provide financial assistance to physicians in order for the physicians to employ nonphysician practitioners (“NPPs”).

The newly proposed exception has numerous complex requirements, for example, the NPP must be a bona fide employee of the physician or the physician’s group and the purpose of the employment must be to provide primary care (general family practice, internal medicine, pediatrics, geriatrics and OB-GYN services). An NPP is defined to include physician assistants, nurse practitioners, clinical nurse specialists and certified nurse midwives, but would not, for example, include certified registered nurse anesthetists. The NPP must furnish a specified minimum amount of primary care services to patients of the physician’s practice. In addition, the amount of recruitment assistance is capped, and the assistance cannot be provided for more than the first two consecutive years of the NPP’s employment by the physician.

The NPP’s salary, signing bonus and benefits do not need to be set in advance, but they must be fair market value. There are numerous other requirements, ranging from expanded record keeping to requirements designed to prevent “cycling” NPPs through multiple physician practices located in the relevant geographic area. CMS requests comments on numerous aspects of the new exception, including whether additional safeguards are necessary.

Modifications to Existing Recruitment/Retention Exceptions

CMS also sets forth alternative proposals for defining the geographic area that FQHCs and RHCs serve for the purposes of the existing recruitment and retention exceptions and proposes technical revisions to the retention exception to more closely align the regulatory language with the applicable discussion included by CMS in prior rule-makings.

Physician-Owned Hospital Requirements

CMS provides numerous important clarifications about the Stark Law requirement that hospitals must disclose any physician ownership on any public website or in any public advertising for the hospital. In light of the numerous questions and self-disclosures CMS has received on this issue, CMS recently implemented an expedited self-disclosure process for these types of “violations.” In an apparent attempt to proactively reduce the number of these self-disclosures, CMS now is proposing to clarify various regulatory requirements. As a result, physician-owned hospitals are likely to find it easier to satisfy the disclosure requirement.

For example, the proposed rule states that certain types of websites are not “public websites” subject to the disclosure requirement, including social media websites and websites that are not available to the general public, such as electronic patient payment and care portals. “Public advertising for the hospital” would be defined to include a “public communication paid for by the hospital that is primarily intended to persuade individuals to seek care at the hospital,” and would not include communications such as those primarily intended for recruitment, public service announcements or community outreach. Further, the proposed rule indicates that the disclosure language can be “any language that would put a reasonable person on notice that the hospital may be physician-owned.” Notably, the name of a hospital, in and of itself, could satisfy this standard in certain circumstances, for example, “Doctors Hospital at Main Street, USA.”

Calculating the Bona Fide Investment Level

CMS also proposes changing the methodology for calculating the baseline bona fide investment level and the bona fide investment level for physician owners/investors in physician-owned hospitals to include direct and indirect ownership interests held by a physician, even if the physician does not refer patients to the hospital (e.g., physicians who may have retired or moved away). To accomplish this change, CMS proposes establishing a new definition of ownership or investment interest that would apply solely for the purposes of calculating the baseline bona fide investment level and the bona fide investment level. Since physician-owned hospitals are not allowed to increase the investment level of physician owners from the level that existed on March 23, 2010, and the current regulations do not require counting ownership interests held by physicians who do not refer patients to the hospital, the proposed revision could put some currently compliant hospitals in violation of the Stark Law. For this reason, CMS is proposing to delay the effective date of this provision and seeks comments on how long the effective date should be delayed.

Health Care Delivery System Reform

Finally, in addition to the proposed changes, CMS is soliciting comments on the impact of the Stark Law on health care delivery and payment reforms, including any perceived barriers to achieving clinical and financial integration. CMS is particularly interested in barriers posed by the “volume or value” and “other business generated” standards included in many exceptions. CMS also has asked stakeholders to comment on whether additional guidance is needed on the application of the Stark Law regulations as they relate to physician compensation in general. Among numerous other subjects, CMS specifically requests comments on whether litigation and judicial rulings on issues such as compensation methodologies, fair market value or commercial reasonableness have generated a need for additional guidance from CMS.

Opportunity to Seek Modifications That Will Facilitate Stark Law Compliance and Reduce Liability

While the changes proposed by CMS appear to be generally beneficial, some of the revisions raise practical implementation questions. Further, in a number of cases, CMS proposes several options and providers may well have a preference for one of the specified alternatives. Thus, providers may want to submit comments to ensure that the final provisions are clear and as helpful as possible. Among many others, potential subjects for comments include:

  • How the signature requirement can be met when the “writing” establishing an arrangement is composed of a collection of documents;
  • How often compensation must be checked to ensure that it still complies with the fair market value standard when an arrangement remains in place under the proposed extended holdover provision. (For example, if a lease is “held over” for two years, the proposed rule would require that the lease continue to satisfy the requirement that the rental payments are fair market value. Further guidance is needed on whether the parties have an obligation to confirm the fair market value has not changed and how often do they have to check. Every year? Every six months? Some other time period?)
  • Why is the newly proposed exception for NPPs limited to hospitals, FQHCs and RHCs, and not made available to nursing homes?

Finally, the proposed rule suggests that comments would be welcomed on a wide range of topics. Most providers have found it extremely challenging to comply with the current regulations and should make the effort to provide CMS with comments that will make compliance easier (and less risky).


The proposed rule contains numerous efforts to simplify compliance with the Stark Law. Providers could benefit tremendously from such efforts since the Stark Law is a strict liability statute and increasingly is being used by both whistleblowers and the government to impose multimillion-dollar judgments and settlements on hospitals and other types of providers, such as the recent $237 million judgment in U.S. ex rel Drakeford v. Tuomey Healthcare Systems Inc.[2] In addition, because many aspects of the current Stark Law regulations are unclear or impractical, many hospitals and other providers have spent an enormous amount of time and money only to have the government claim that they are not in compliance.

It is also important to remember that there likely will be commenters who will argue against the additional flexibility that CMS has proposed in order to eliminate any perceived risk of fraud and abuse. Accordingly, it is in providers’ best interests to provide comments to CMS in order to increase the likelihood that the agency will go forward with helpful revisions to the Stark Law regulations.