While new value-based exceptions headline the federal physician self-referral law (Stark) rule proposed by the Centers for Medicare & Medicaid Services (CMS) as part of the Department of Health & Human Services’ (HHS) “Regulatory Sprint to Coordinated Care” on October 17, 2019, arguably the most valuable proposals address current Stark regulations.

The proposed Stark rule advances the goals of CMS’ Patients Over Paperwork initiative, launched in 2017 to evaluate and streamline regulations with a goal of reducing unnecessary burden, increasing efficiencies and improving the beneficiary experience. The Stark proposals both clarify the agency’s position on current Stark regulations and introduce changes intended to ease regulatory burdens. In its proposed rule, CMS drew upon its experience administering the CMS Voluntary Self-Referral Disclosure Protocol (SRDP) since 2010 and recognized that the majority of the more than 1,100 SRDP submissions it reviewed represented technical violations concerning compensation arrangements posing no real risk of Medicare program or patient abuse. Notably, numerous provisions of the proposed Stark rule clarify CMS’ current position and do not require a final rule in order to be effective. While the rule introduces sweeping changes to the Stark regulatory framework, CMS was limited by the statutory requirements of Stark. The agency is accepting comments through December 31, 2019 and will likely implement many of its proposals.

Key Compensation Provisions

CMS tackles head-on certain controversial interpretations of Stark promoted in high-profile False Claims Act litigation, including United States ex rel. Drakeford v. Tuomey Healthcare System, Inc. and U.S. ex rel Bookwalter v. UPMC, leading to costly financial penalties (on top of litigation expense) but also introducing uncertainty in structuring compensation arrangements with physicians.

  • Commercial reasonableness. Although many of the Stark exceptions require an arrangement to be “commercially reasonable,” the term has not been defined and CMS had addressed the concept only once, in the preamble to its 1998 proposed rule. Importantly, CMS addressed the “widespread misconception” about its position on commercial reasonableness anchoring the “practice loss theory” litigated in the Tuomey and UPMC cases. CMS clarified that the determination of commercial reasonableness is not one of valuation or profitability and that many arrangements that are not profitable may nonetheless be commercially reasonable. CMS proposed two alternate definitions for commercially reasonable. The first proposed definition of commercially reasonable means that the particular arrangement “furthers a legitimate business purpose of the parties and is on similar terms and conditions as like arrangements.” The alternative definition of commercially reasonable means “the arrangement makes commercial sense and is entered into by a reasonable entity of similar type and size and a reasonable physician of similar scope and specialty.”
  • Fair market value. CMS acknowledged that it missed the mark in describing “fair market value” in its prior rulemaking and addresses certain misconceptions regarding the term. In connection with its rulemaking, CMS carefully studied the statutory requirements of Stark and confirmed that the definition of fair market value is distinct from any requirement that compensation be unrelated to the volume or value of referrals. CMS proposes a modified definition of fair market value to include a definition of general application, a definition applicable to the rental of equipment and a definition applicable to the rental of office space.

Under the proposed rule, fair market value means:

  1. General. The value in an arm’s-length transaction, with like parties and under like circumstances, of like assets or services, consistent with the general market value of the subject transaction.
  2. Rental of equipment. With respect to the rental of equipment, the value in an arm’s-length transaction, with like parties and under like circumstances, of rental property for general commercial purposes (not taking into account its intended use), consistent with the general market value of the subject transaction.
  3. Rental of office space. With respect to the rental of office space, the value in an arm’s-length transaction, with like parties and under like circumstances, 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.

“General market value” is redefined to be consistent with the valuation industry’s definition of market value. CMS asserts that the concept of fair market value relates to the value of an asset or service to hypothetical parties in a hypothetical transaction, while general market value relates to the value of an asset or service to the actual parties to a transaction that is set to occur within a specified time frame. These definitional changes and the requirement that value must be consistent with general market value to be fair market value, would allow or require appraisers to take different approaches to valuations and look beyond market survey data, perhaps even including a qualitative analysis of facts and circumstances of the arrangement. This will represent a tremendous shift, and further guidance may be needed on certain points addressed in the rulemaking.

  • Volume or value standard. To address uncertainty about the volume or value standard used in certain Stark exceptions, CMS proposes an objective test for determining whether compensation is determined in any manner that takes into account the volume or value of referrals or takes into account other business generated by the parties. The new “bright-line” definition provides that compensation takes into account the volume or value referrals or other business generated only when (1) the mathematical formula used to calculate the amount of the compensation includes as a variable referrals or other business generated, 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. CMS additionally explains that “[m]erely hoping for or even anticipating future referrals or other business is not enough to show that compensation is determined in a manner that takes into account the volume or value of referrals or other business generated by the physician for the entity.”
  • Designated health services. The proposed rule also refines the definition of “designated health services” to clarify that a service provided by a hospital to an inpatient does not constitute a designated health service if the furnishing of the service does not affect the amount of Medicare payment to the hospital under the Acute Care Hospital Inpatient Prospective Payment System. This change limits the application of Stark to certain arrangements and referrals for inpatient services.

Stark Technical Changes and Clarifications

CMS “recalibrated” the scope and application of its Stark regulations to reflect intent to interpret the referral and billing prohibitions narrowly and the exceptions broadly. Building on its 2015 rulemaking, which loosened some of Stark’s strict technical requirements and opened up additional exceptions, CMS proposed numerous changes to the Stark rules that mainly ease the compliance burden on providers.

  • Decoupling Stark and the AKS. CMS removed compliance with the AKS from its regulatory exceptions to eliminate the “intent” element introduced into the strict liability statute.
  • Temporary noncompliance. CMS extended its deeming provision for temporary noncompliance with signature requirements to also extend to failure to have a writing during the 90-day cure period.
  • Physician recruitment. Based on its experience with the SRDP, CMS proposes to modify the signature requirement in the physician recruitment exception to require the physician practice to sign the writing documenting the recruitment arrangement only when remuneration is provided indirectly to the physician through payments to the physician practice and the practice does not pass through all the remuneration from the hospital.
  • Payments by a physician. CMS acknowledges that the existing exception for payments by a physician should not be limited in scope by other regulatory exceptions but maintains that the exception does not protect compensation arrangements addressed in one of the statutory compensation exceptions.
  • Compensation unrelated to designated health services. CMS proposes modifications to the exception for compensation unrelated to designated health services to replace the requirement that it not be allocated in whole or in part to Medicare or Medicaid under cost reporting principles with a requirement that the items or services are not related to the provision of patient care services, which is further defined.
  • Fair market value exception. CMS proposes to revise the exception for fair market value compensation to make it applicable to leases of space and equipment, provided the rent is not per click or percentage-based. CMS proposes this change based on its review of non-abusive leases reviewed through the SRDP that failed to meet the one-year term requirement of applicable rental exceptions.
  • Limited remuneration to a physician. CMS proposed a new exception that would allow limited remuneration to a physician, not exceeding $3,500 per year (adjusted annually for inflation), if (1) the compensation is not determined in any manner that takes into account the volume or value of referrals or other business generated by the physician, (2) the compensation does not exceed fair market value of the items or services, and (3) the arrangement is commercially reasonable. The preamble acknowledges the exception could be used in conjunction with other exceptions, including during times that may otherwise be periods of disallowance.
  • Rental of office space and equipment. CMS proposes to modify the “exclusive use” requirement of the rental exceptions to restrict only the lessor from using the space or equipment, even as an invitee. This would permit multiple lessees to use the same rented space or equipment contemporaneously or in close succession.
  • Remuneration. CMS proposes to remove the parenthetical carve-out of surgical items, devices or supplies (that are not single-use) from the exclusion of “remuneration” in its definition.
  • Ownership or investment interests. CMS removes from the definition of “ownership or investment interests” (1) “titular” interests excluding the right to financial benefits of ownership, such as profits, dividends, proceeds of sale and other returns on investment, and (2) an interest that arises from a qualified employee stock ownership plan. The preamble explains that ownership without rights to profit distributions or sale proceeds reduces the risk of abuse because the physician would not have a financial incentive to make referrals to the entity.
  • Period of disallowance. CMS proposes to eliminate its attempted bright-line guidance on when a non-excepted financial relationship has ended, instead emphasizing that the determination must be made on a case-by-case basis. The preamble describes the ability of parties to cure clerical errors or technical omissions during the term of the arrangement but emphasizes that a cure cannot be effected after the term.
  • Indirect compensation exception. CMS proposes to provide that only the indirect compensation arrangement exception and general exceptions applicable to both ownership and compensation arrangements are applicable to indirect compensation arrangements, which could impact any arrangements structured in reliance on another compensation exception.
  • Group practice. CMS proposes to restructure and clarify the special rules for profit shares and productivity bonuses available to a group practice. To address informal stakeholder inquiries regarding distributions within groups comprising fewer than five physicians, CMS explains that for these small groups, “overall profits” means the profits derived from all the designated health services of the group. CMS then further clarifies its guidelines for the distribution of “overall profits” and explains that under its proposal, a group practice could not distribute profits from designated health services on a service-by-service basis. CMS proposes a number of other deeming and clarifying provisions.
  • Isolated transactions. In the rulemaking, CMS clarifies its position that the isolated transactions exception is not available to except payments for multiple services provided over a single period of time, even if there is only a single payment for all the services. CMS notes that through the SRDP, it has observed misconceptions of its policy and explains that the exception is not available to retroactively cure noncompliance with Stark.

Looking Ahead

In its Regulatory Sprint rulemaking, CMS performed a thorough job in critically examining the 20 year history of Stark, including the challenges it poses in implementing value-based reforms and the potential for technical violations or litigation risk based on current interpretations of its requirements. If implemented, the proposals will be the most dramatic regulatory change in the history of Stark and, as announced by HHS Deputy Secretary Eric Hargan, part of “a historic reform of how healthcare is regulated in America.”