Clarifying New Stark Law Changes and Modifications for 2021

On November 20, 2020, the Centers for Medicare & Medicaid Services (CMS) issued a final rule to modernize and clarify the Stark Law. This reflects the most recent efforts by the Department of Health and Human Services (HHS) to establish exceptions and safe harbors to appropriately tailor the reach of the Stark Law’s strict liability-based civil penalties and the Anti-Kickback Statute’s criminal penalties to protect from enforcement certain non-abusive and beneficial arrangements. HHS notes that these rules are the culmination of its effort to address concerns within the health care industry that these laws, as well as the Civil Monetary Penalty (CMP) Law, have operated as barriers to the delivery of value-based care to improve quality of care, health outcomes, and efficiency. The final rules discussed below were scheduled to be published in the Federal Register December 2, 2020, they take effect 60 days from then, which falls on January 31, 2021. CMS clarified on February 22, 2021 that the regulations finalized in the final rule are in effect.

Many of the exceptions to the Stark Law require that one or more of the following requirements be met:

  • That the compensation arrangement be commercially reasonable,
  • That the compensation methodology not be determined in a manner that takes into account the volume or value of referrals (or other business generated between the parties), and
  • That the amount of compensation paid be fair market value (FMV).

To provide further clarity, CMS finalized its definition of the requirements and terms as follows:

Commercial Reasonableness: “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, scope, and specialty. An arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.” This still ensures that parties cannot protect abusive arrangements under the guise of ‘commercial reasonableness.” According to CMS, some of the purposes that could qualify as “legitimate business purposes” of the parties to an arrangement includes:

  • Addressing community need,
  • Providing timely access to healthcare services,
  • Fulfilling licensure or regulatory obligations, such as under the Emergency Medical Treatment and Labor Act,
  • Providing charity care, and,
  • Improving quality and health outcomes.

Value Based Arrangements: CMS established three new, permanent exceptions to the physician self-referral law for value-based arrangements and definitions for terminology integral to such a system:

  1. Value-based arrangements with full financial risk: CMS finalized the exception to extend the time within which a value-based enterprise needs to assume full financial risk, expanding its proposed six-month window to 12 months after the commencement of the value-based arrangement. This additional time will allow participants to make structural changes and take other actions to prepare to be at full risk.
  2. Value-based arrangements with meaningful downside financial risk: CMS finalized its definition of “meaningful downside financial risk” to mean a physician is at risk for at least 10 percent of the remuneration to be received by the physician. This risk can be reflected in paybacks, withholds, incentive bonuses, and other payment structures, so long as at least 10 percent of the physician’s total remuneration is at risk to the entity remitting that remuneration. This is a substantial change from CMS’ proposal to make physicians at risk for 25 percent of their remuneration, and should provide more flexibility for those entities seeking to engage with individual physicians for risk-bearing relationship
  3. Any value-based arrangement provided the enumerated requirements are met: Most impactful is CMS’ explicit regulatory requirement that a value-based enterprise monitor and assess the success of its value-based arrangements at least annually, or once during the term of the arrangement if it is for a term of less than one year, and either terminate the arrangement or replace ineffective activities if the arrangement is found to not be working. CMS is providing parties with a grace period to terminate or revise the arrangement, allowing 30 days to terminate, and 90 days to replace, ineffective activities or outcomes measures, following a determination that the arrangement is not successful.

CMS made the new, tiered value-based exceptions available to indirect compensation arrangements that include a value-based arrangement in the unbroken chain of financial relationships between a physician and a designated health services entity, and announced its decision to not include a price transparency requirement in its value-based exceptions.

A safe harbor was added to the above: Care coordination arrangements to improve quality, health outcomes, and efficiency. Requires no assumption of downside risk by parties to a value-based arrangement in order to protect in-kind remuneration exchanged to engage in value-based activities that are directly connected to the coordination and management of care for the target patient population. Recipients are required to pay at least 15% of either the offeror costs or the fair market value of the remuneration.

CMS finalized these definitions with a few noteworthy comments and modifications, including:

  • Referrals are not explicitly excluded from the definition of “value-based activity”; however, referrals generally are not items or services for which a physician may be compensated under the Stark Law.
  • CMS finalized its definition of “value-based arrangement” to clarify that such arrangements must be among only parties within the same value-based enterprise.
  • Maintenance of quality of care will not be considered a permissible value-based purpose absent a reduction of costs to, or growth in expenditures of, the payor. While maintaining quality is important, CMS does not believe that permitting remuneration for maintenance alone is consistent with HHS’ goals.
  • No particular providers or manufacturers are excluded from eligible value-based enterprise participants, unlike OIG’s corresponding final rule for the Anti-Kickback Statute safe harbors.

Fair Market Value: CMS restructured the FMV definition by establishing three separate FMV definitions:

(1) generally,

(2) for the rental of equipment, and

(3) for the rental of office space.

CMS finalized the three separate FMV definitions as follows:

  • General—The value in an arm’s-length transaction:
    • Consistent with the general market value of the subject transaction.
  • Rental of equipment—With respect to the rental of equipment, the value in an arm’s-length transaction:
    • Of rental property for general commercial purposes (not taking into account its intended use); and,
    • Consistent with the general market value of the subject transaction.
  • Rental of office space—With respect to the rental of office space, the value in an arm’s-length transaction:
    • 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.

Notably, the revised definition of FMV eliminates the connection to the volume or value standard. CMS noted that “a careful reading of the statute shows that the FMV requirement is separate and distinct from the volume or value standard and the other business generated standard,” and thus there is no need to intertwine the discrete standards.

In addition to the delineated definitions for FMV set forth above, CMS finalized its proposal to define general market value separately from FMV and delineate the definitions for general market value similar to the FMV definitions:

  • Assets: “the price that an asset would bring on the date of acquisition of the asset 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.”
  • Compensation: “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.”
  • Rental of equipment or office space: “the price that rental property would bring at the time the parties enter 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.”

CMS spent a significant amount of space in the final rule reconciling the terms FMV and general market value, stating that it: “continue[s] to believe that the [FMV] of a transaction—and particularly, compensation for physician services—may not always align with published valuation data compilations, such as salary surveys. In other words, the rate of compensation set forth in a salary survey may not always be identical to the worth of a particular physician’s services.”

In making its point, CMS discussed when “extenuating circumstances may dictate that parties to an arm’s length transaction veer from values identified in salary surveys…a hospital may find it necessary to pay a physician above what is in the salary schedule, especially where there is a compelling need for the physician’s services.”

The most significant takeaways from the Stark Law final rule stem from CMS’s acknowledgment that: not all physicians, or compensation arrangements, are the same; compensation arrangements may have qualitative benefits that outweigh quantitative costs, i.e., profitability; and salary surveys are only a starting point in the valuation of a healthcare transaction.

Other Items of Note

CMS also finalized, among other changes:

  • Providing a grace period if any non-compliance issues are reconciled within 90 calendar days of the expiration or termination of a compensation arrangement, if after the reconciliation, the entire amount of remuneration for items or services is paid as required under the terms and conditions of the arrangement.
  • Revising the definition of “designated health services” to exclude inpatient services paid for under prospective payment systems if furnishing those services does not increase the amount of Medicare’s payment to the hospital.
  • Removing its carve-out of surgical devices, items, or supplies from the definition of “remuneration.”
  • Stating policies that will reduce the number of unbroken chains of financial relationships that fall within the Stark Law’s definition of “indirect compensation.”
  • Confirming that the exception for isolated transactions does not apply to multiple services provided over a period of time, even if there is only a single payment for all the services.
  • Making changes to the definition of “group practice” to clarify circumstances under which the profits of a group practice may be shared with its members, including compensation that relates to participation in a value-based arrangement, and confirming that a physician practice that wishes to qualify as a group practice may not distribute profits from designated health services on a “service-by-service” basis.
  • Excluding titular ownership or interests arising from a qualified employee stock ownership plan from the definition of “ownership or investment interests.”
  • Confirming that the exception for Electronic Health Records (EHR) expressly includes cybersecurity software and services, and making permanent the EHR exception by removing the sunset provision.

Reach Out To Us: The Stark Law contains a large number of exceptions which describe ownership interests, compensation arrangements, and forms of remuneration which do not apply. New exceptions and safe harbors will promote coordinated services among healthcare providers and emphasize value-based payment and collaborative care. Let us assist you in finding your way through this tangled web so that you are in compliance but not missing out on any financial opportunities. These revisions demonstrate the need for tax and accounting professionals who understand the healthcare industry, so you can better practice medicine. Contact us toll free at 855-542-7537.