CMS Proposes Revisions to Stark Law

16 October 2019 Health Care Law Today Blog
Authors: Judith A. Waltz

This post was originally published on Law360 on October 15, 2019, and is republished here with permission.

On October 9, 2019, the Centers for Medicare & Medicaid Services (CMS) of the Department of Health and Human Services (HHS) released its long-awaited Proposed Rule (Proposed Rule) updating and clarifying the physician self-referral (Stark Law) regulations.  It will be published in the Federal Register on October 17, 2019.  

CMS’ Proposed Rule was released together with the HHS Office of Inspector General’s (OIG) proposed rule updating the anti-kickback statute and civil monetary penalty law regulations as part of HHS’s Regulatory Sprint to Coordinated Care, which aims to promote value-based care.  This overview addresses the highlights of CMS’ Proposed Rule.  

Unlike the anti-kickback statute, violations of the Stark Law are not dependent upon intent; the tainted referral alone makes the designated health service not payable by Medicare.  In addition to an overpayment resulting from the payment of non-payable claims, the Stark Law may also be enforced by civil monetary penalties and allegations under the False Claims Act.  A Stark Law exception means that the specified conduct will not violate the Stark Law.

Modernizing the Stark Law to Advance Value-Based Care

The Proposed Rule would make numerous substantive and clarifying changes to existing Stark regulations, many of which would remove barriers to value-based arrangements and encourage the transition to value-based payment models.  The Proposed Rule adds three new exceptions for value-based care arrangements and corresponding definitions for such arrangements, which are discussed below. 

Value-Based Care Exceptions

The proposed value-based care exceptions and related definitions are drafted to allow flexibility and to encourage physician participation and the broader transition to a value-based care.  A value-based enterprise (VBE) can consist of as few as two VBE participants and need not be organized with legal formality but can include networks of physicians, entities furnishing designated health services, and others.  The three proposed exceptions are:

(1) Full Financial Risk: exception applies to a value-based arrangement where a value-based enterprise has, during the entire term of the arrangement, assumed full financial risk from a payer for patient care services for a target patient population.  

Full financial risk may take the form of capitation payments or global budget payments from a payer compensating the value-based enterprise with a fixed reimbursement amount for a fixed period for the target patient population.

(2) Meaningful Downside Financial Risk to a Physician: exception applies to a value-based arrangement under which the physician is at meaningful downside financial risk for failure to achieve the value-based purposes of the value-based enterprise during the entire term of the arrangement.  

“Meaningful downside financial risk” would mean (a) the physician is responsible to pay the entity no less than 25 percent (a risk level chosen for consistency with the exception for physician incentive plans) of the value of the remuneration the physician receives under the value-based arrangement, or (b) the physician assumes “full” financial risk (for example, the physician receives capitated payment, global budget payment).

(3) Value-Based Arrangements: exception applies to any value-based arrangement, regardless of the level of risk undertaken by the value-based enterprise or any of its VBE participants, provided that the arrangement satisfies specified requirements.  

This exception would allow arrangements where physicians share in healthcare savings but are not required to bear the risk of losses.  

Although each value-based exception would have unique requirements, all three exceptions would include five basic safeguards aimed at risks associated with value-based arrangements.  The proposed exceptions would not prohibit remuneration that takes into account the volume or value of a physician’s referrals, but the exceptions would prohibit remuneration that is conditioned on referrals of patients who are not part of the target patient population or business not covered under the value-based arrangement.  

Each value-based exception would also require that remuneration be for or result from the recipient’s value-based activities for the target patient population and that the remuneration not be an inducement to reduce medically necessary items or services.  If the remuneration is conditioned on referrals, the arrangement must meet the directed referral requirements at 42 C.F.R. § 411.354(d)(4)(iv), including protecting patient choice. Parties must also maintain records of the methodology used to determine, and the actual amount of, remuneration paid.  Finally, the exceptions for meaningful downside financial risk to the physician and value-based arrangements would also require that the methodology for determining remuneration be set in advance.

Revisions Extend Beyond Value-Based Care 

Although much of the focus is on value-based payments, CMS also provides guidance on critical terms and concepts in the Stark regulations, including commercial reasonableness, compensation that “takes into account” the volume or value of referrals and is “set in advance,” fair market value, and designated health services.  The revisions and clarifications to these key terms may have a greater immediate effect on a larger number of providers than the proposed exceptions for value-based arrangements.  

For example, the proposed revision to the definition of designated health services would clarify that a service provided by a hospital to an inpatient does not constitute a Medicare payable designated health service “if the furnishing of the service does not affect the amount of Medicare’s payment to the hospital under the Acute Care Hospital Inpatient Prospective Payment System (IPPS).”  

CMS used the example of a specialist ordering an X-ray for a hospital inpatient who had already been admitted under an established DRG (a bundled payment reflecting the inpatient prospective payment system) and who the specialist was not responsible for admitting.  Unless the X-ray results in an outlier payment, the hospital will not receive any additional payment for the service above the payment rate established by the DRG. If the x-ray does not increase the payment rate, the physician has no financial incentive to over-prescribe the service.  In this example, CMS does not believe the X-ray is a designated health service that is payable by Medicare, and the proposed rule would exclude the service from the definition of designated health services, even though it falls within a category of services that, when billed separately, would be “designated health services.”  If the specialist had an unexcepted financial relationship with the hospital at the time the X-ray was ordered, the inpatient hospital services would not be tainted, and the hospital would not be prohibited from billing Medicare for the admission. However, if the physician who ordered the inpatient admission had an unexcepted financial relationship with the hospital, 42 C.F.R. § 411.353(b) would prohibit the hospital from billing for the inpatient hospital services.  If implemented, the revised definition could significantly reduce Stark Law violations and resulting penalties.

The Proposed Rule also includes new exceptions for cybersecurity technology and for limited remuneration from an entity to a physician for items or services actually provided.  

Revisions and Clarifications to Fundamental Terminology and Requirements

CMS’ proposals also respond to commenters’ requests for guidance on terminology and concepts critical to the Stark Law, including commercial reasonableness, fair market value, and compensation that “takes into account” the volume or value of referrals and is “set in advance.”

Commercially reasonable.  The Proposed Rule includes two alternative definitions for the term “commercially reasonable” and would specifically state in the regulatory text that an arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.  (Arrangements that are not demonstrably commercially reasonable may invoke scrutiny as potentially representing improper referral relationships.) 

The definition that appears in the proposed regulation text provides that “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.  CMS also proposes an alternative definition in the preamble, which would define “commercially reasonable” to mean that 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. 

The Volume or Value Standard and the Other Business Generated Standard.  CMS takes a new approach, which is intended to create bright-line rules, with its proposals for the volume or value and other business generated requirements.  Rather than providing safe harbors that deem compensation does not take into account the volume or value of referrals or other business generated, the Proposed Rule defines when compensation would be considered to take into account volume or value.

As described in the preamble, compensation would take into account the volume or value of referrals or other business generated “only when the mathematical formula used to calculate the amount of the compensation includes as a variable referrals or other business generated, and 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 also responded to questions about the Court’s decision in United States ex rel. Drakeford v. Tuomey Healthcare System, Inc., 792 F.3d 364, 2015 WL 4036166 (4th Cir. 2015), reaffirming and clarifying its position in the Phase II regulation that, for employed physicians, a productivity bonus does not take into account the volume or value of the physician’s referrals solely because corresponding hospital services (that is, designated health services) are billed each time the employed physician personally performs a service.  

Fair Market Value.  CMS proposes changes to the definitions of fair market value and general market value to better reflect terms used in the valuation industry.  The revised definitions reflect CMS’ view that “fair market value relates to the value of an asset or service to hypothetical parties in a hypothetical transaction (that is, typical transactions for like assets or services, with like buyers and sellers, and under like circumstances), while general market value (or 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 timeframe.”

Group Practices.  The Proposed Rule would revise the group practice regulations, including by removing the reference to Medicaid from the definition of overall profits, and restructuring and renumbering the special rule for productivity bonuses and profit shares at 42 C.F.R. § 411.352(i).  The proposal includes a deeming provision stating that profits from designated health services directly attributable to a physician’s participation in a value-based enterprise are distributed to the participating physician.

Recalibrating the Scope and Application of the Regulations

CMS proposes revisions to definitions, special rules on compensation arrangements, and exceptions for compensation arrangements to “interpret the [referral and billing] prohibitions narrowly and the exceptions broadly, to the extent consistent with statutory language and intent.”  

In the Proposed Rule, CMS reconsidered its prior positions on several topics.  CMS proposes to remove reference to anti-kickback statute and laws or regulations governing billing or claims submission, in part because they are applicable independent of Stark Law compliance.  CMS also proposes to remove the period of disallowance rules.  The rules were added in 2009 and were intended to help determine the period of time during which a physician may not make referrals for designated health services to an entity and the entity may not bill Medicare for the services when the parties have a financial relationship that does not meet an exception.  This proposal is meant to address confusion by some parties who may believe that the only way to establish the end of a period of disallowance is to follow the steps outlined in those rules.

The Proposed Rule would revise the special rule on compensation arrangements, which allows for the writing requirement to be met by a collection of documents, to give parties up to 90 consecutive days to document and sign a compensation arrangement, provided the arrangement meets all other requirements of an applicable exception.

Based on its experience with the self-referral disclosure protocol, CMS proposes to make the exception for fair market value compensation available to protect arrangements for the rental of office space or equipment.  Because rentals and leases of office space could be protected, the fair market value compensation exception would be revised to include a prohibition on percentage-based compensation and per-click compensation formulas.  The exceptions for the rental of office space or rental of equipment were also revised to clarify that “exclusive use” means that the lessee (and other lessees of the same office space) uses the space or equipment to the exclusion of the lessor (or any person or entity related to the lessor).

Two Other New Exceptions

The proposed exception for limited ($3,500 annually) remuneration to a physician would not require that the arrangement be documented in writing or that compensation be set in advance.  Although the exception would protect arrangements of short duration with no written agreement, CMS does not intend it to preclude the use of the personal services arrangement exception or the fair market value exception.  If an arrangement meets the exception, CMS would not require it to be listed in a personal services arrangement or in a master list of contracts, and CMS would not consider it to violate the fair market value exception’s prohibition on entering into an arrangement for the same items and services during a calendar year. This exception would be particularly useful given that CMS clarified elsewhere in the Proposed Rule that the isolated financial transaction exception is not available to retroactively cure noncompliance.

The Proposed Rule would remove the sunset provision for the EHR exception, update interoperability requirements and information blocking prohibitions, and clarify that the exception includes software that “protects” EHRs and services related to cybersecurity.  The proposed cybersecurity exception would be broader and include fewer requirements than the EHR exception and would specifically protect the donation of cybersecurity technology and related services.

Take Aways

CMS has responded to providers’ requests for guidance by proposing real changes and clarifications to the Stark Law regulations to address the industry’s most frequently stated concerns.  The Proposed Rule contains valuable commentary and insight into CMS’ interpretations of fundamental Stark Law concepts.  

Although CMS has reconsidered many previous policy positions, it should be noted that CMS’ reasoning and guidance related to certain proposals cannot be taken out of context and would not likely be applicable unless the proposals are finalized.  For example, in its discussion of the proposed changes to the volume or value and other business generated standards, CMS noted that if not finalized, the proposals and corresponding policies are not applicable to the determination of whether compensation takes into account the volume or value of referrals or other business generated.

Comments Due by December 31, 2019

CMS has invited comment on many of the proposed changes, and given its efforts to respond to provider concerns, interested parties should carefully review the Proposed Rule and consider whether to submit comments.  Comments are due by December 31, 2019.

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