Key Takeaways from the Revised and Clarified Stark Law Regulations – Part 1

21 January 2021 Health Care Law Today Blog
Author(s): Jana L. Kolarik

CMS made impactful changes to the Federal physician self-referral law’s (i.e., Stark Law’s) regulations in its Final Rule that were effective January 19, 2021 (with the exception of the changes to 42 C.F.R. § 411.352(i) that are effective January 1, 2022). Although lengthy (190 pages/3-column format), the Final Rule is worth the read with multiple clarifications and revisions to the dense regulations.

In this first part of our two-part blog, each reader will find gems in the Final Rule that are impactful, but we note particularly the following key changes, clarification, and discussion:

1.  New Value-Based Exceptions (§ 411.357(aa))

The new value-based (VB) exceptions offer three (3) options to arrangements involving remuneration paid under a VB arrangement:

  1. full financial risk for which the VB enterprise (VBE) is at “full financial risk”—meaning that the VBE is financially responsible on a prospective basis for the cost of all patient care items and services covered by the applicable payer for each patient in the target patient population for a specified period of time. 42 C.F.R. § 411.357(aa)(1)(vii)—(or is contractually obligated to be at full financial risk within the 12 months following the commencement of the VB arrangement) during the entire duration of the VB arrangement;

  2. meaningful downside risk for which the physician is at “meaningful downside risk”—meaning that the physician is responsible to repay or forgo no less than 10% of the total value of the remuneration the physician received under the value-based arrangement. 42 C.F.R. § 411.357(aa)(2)(ix)—for failure to achieve the VB purpose(s) of the VBE during the entire duration of the VB arrangement and the nature and extent of that risk is set forth in writing; and

  3. value-based arrangements for which the arrangement is set forth in writing and signed by the parties and includes a description of (A) the VB activities to be undertaken under the arrangement, (B) how those activities are expected to further the VB purposes of the VBE; (C) the target patient population for the arrangement; (D) the type/nature of the (monetary or nonmonetary) remuneration; (E) the methodology used to determine the remuneration; and (F) the outcome measures against which the recipient of the remuneration is assessed (if any). (NOTE: The title of this 3rd exception is confusing because it is called “value-based arrangements” despite all three exceptions applying to VB arrangements.)

With regard to all three (3) VB exception options:

  • The exceptions have additional requirements, and there are multiple definitions that need attention.

  • VB exceptions do not include fair market value, set in advance, volume or value of referrals or other business-generated requirements. However, the VB arrangement exception does expressly require that the compensation arrangement is commercially reasonable (the full financial risk and meaningful downside risk exceptions do not).

2.  New Exception for Limited Remuneration to a Physician (§ 411.357(z))

CMS finalized a new exception to protect compensation not exceeding an aggregate amount of $5,000 per calendar year, as adjusted for inflation, to a physician for the provision of items and services (including the lease of office space or equipment) without the need for a signed writing.

  • CMS noted that if an entity has multiple arrangements with a physician that are undocumented and unsigned, it will consider the parties to have a single compensation arrangement for the various items and services, and the aggregate compensation for all those items and services may not exceed the $5,000 annual limit (See 85 Fed. Reg. at 77,624).

  • That annual aggregate remuneration limit resets each calendar year.

  • The exception permits the physician to provide services directly or through employees hired for the purpose of performing the services, a wholly-owned entity or through locum tenens physicians (but not through independent contractors).

  • The writing and set in advance requirements are only triggered if there is a directed referral arrangement.

  • The limited remuneration to a physician exception is intended to apply to a physician, not to a physician organization. (Id. at 77,626) Be careful how these arrangements are structured, because if “stand in the shoes” compensation is received by a physician organization, then that compensation counts to all physician who “stand in the shoes” of the organization.

3.  New Cybersecurity Technology and Related Services Exception (§ 411.357(bb))

CMS adopted a new cybersecurity technology and related services exception that incorporates many of the same requirements of the EHR exception.

  • The exception covers cybersecurity software (e.g., malware prevention, data protection and encryption); cybersecurity-related hardware; and cybersecurity-related services (e.g., cybersecurity training services, services associated with performing a cybersecurity risk assessment). Examples are fleshed out in the Final Rule, and are illustrative, not exhaustive. (Id. at 77,634)

  • The exception only applies to technology and services that are necessary and used predominantly to implement, maintain, and reestablish cybersecurity.

  • The exception is limited to nonmonetary compensation (i.e., no subsidies are permitted under this exception and no ransom payments).

  • CMS did not exclude any particular type of technology or services—including patches and updates—from the application of the final cybersecurity exception. There is no financial contribution requirement so the initial writing and meeting the exception’s other requirements can cover patches.

  • The exception does not apply to donations of installation, improvement, or repair of infrastructure related to physical safeguards even if they could improve cybersecurity (e.g., upgraded wiring or high security doors) because such donations have benefits outside cybersecurity.

  • Physicians cannot make the receipt of cybersecurity technology and services a condition of doing business.

  • The exception does not require the parties to sign the writing that documents the arrangement, nor do they need to draft the writing as a formal contract. The writing requirement is satisfied if contemporaneous documents would permit a reasonable person to verify compliance with the exception at a time the referral is made. (Id. at 77,642)

4.  New Commercially Reasonable Definition (§ 411.351)

CMS added a 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, scope, and specialty.

  • Commercial reasonableness is not a valuation determination.

  • Compensation arrangements that do not result in profit for one or more of the parties may nonetheless be commercially reasonable. Examples of why parties would enter into such arrangements include community need, timely access to healthcare services, fulfillment of licensure or regulatory obligations (e.g., EMTALA obligations), the provision of charity care, and the improvement of quality and health outcomes.

This definition and discussion of commercially reasonable was incredibly helpful given the prior opinions of government experts regarding commercial reasonableness involving health systems that were not making a profit on certain physician practices. We have argued the examples noted above for commercial reasonableness, and now have confirmation from CMS.

5.  New Tests Related to Volume or Value Standard and Other Business Generated Standard (§ 411.354(d)(5), (6))

CMS created objective tests for determining whether the compensation is determined in any manner that takes into account the volume or value of referrals or takes into account other business generated between the parties at 42 C.F.R. § 411.354(d)(5) and (6).

  • Only when the mathematical formula used to calculate the amount of the compensation includes referrals or other business generated as a variable, and the amount of compensation correlates with the number or value of the physician’s referrals to or the physician’s generation of other business for the entity, is the compensation considered to take into account the volume or value of referrals or take into account the volume or value of other business generated. (Id. at 77,537)

  • “Directly or indirectly” is implicit in the requirements that compensation is not determined in any manner that takes into account the volume or value of referrals or the volume or value of other business generated.

  • CMS also clarified uncertainty around the Tuomey correlation theory noting:

    We reaffirmed the position we took in the Phase II regulation. …[W]ith respect to employed physicians, a productivity bonus will 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. We also clarified that our guidance extends to compensation arrangements that do not rely on the exception for bona fide employment relationship at § 411.357(c), and under which a physician is paid using a unit-based compensation formula for his or her personally performed services, provided that the compensation meets the conditions in the special rule at § 411.354(d)(2). That is, under a personal services arrangement, an entity may compensate a physician for his or her personally performed services using a unit-based compensation formula – even when the entity bills for designed health services that correspond to such personally performed services – and the compensation will not take into account the volume or value of the physician’s referrals if the compensation meet the conditions in the special rule at 411.354(d)(2) (see 69 FR 16067). This is true whether the compensation arrangement is analyzed under an exception applicable to compensation arrangements directly between an entity and a physician or is an indirect compensation arrangement analyzed under the exception at 411.357(p). … An association between personally performed physician services and designated health services furnished by an entity does not convert compensation tied solely to the physician’s personal productivity into compensation that takes into account the volume or value of a physician’s referrals to the entity or the volume or value of other business generated by the physician for the entity. (Id. at 77,540-541)

6.  Revisions to the Indirect Compensation Definition (§ 411.354(c)(2))

CMS revised the definition for “indirect compensation arrangements” adding that any one of the following are true:

  1. The individual unit of compensation received by the physician (or immediate family member) is not fair market value for items or services actually provided;

  2. the individual unit of compensation received by the physician (or immediate family member) is calculated using a formula that includes the physician’s referral to the entity furnishing designated health services as a variable, resulting in an increase or decrease in the physician’s (or immediate family member’s) compensation that positively correlates with the number or value of the physician’s referrals to the entity; OR

  3. the individual unit of compensation received by the physician (or immediate family member) is calculated using a formula that includes other business generated by the physician for the entity furnishing designated health services as a variable, resulting in an increase or decrease in the physician’s (or immediate family member’s) compensation that positively correlates with the physician’s generation of other business for the entity.

With this revised analysis, fewer indirect arrangements will meet the definition, and therefore, CMS acknowledges that less indirect arrangements will be in writing.

*          *          *          *          *

In evaluating your financial arrangements, we recommend that you also consider the changes to the Federal anti-kickback statute safe harbors that were also effective on January 19, 2021. See 85 Fed. Reg. 77,684 (OIG Final Rule Dec. 2, 2020). Stay tuned for part 2 of this blog series, which will drop tomorrow!

Foley is here to help you address the short- and long-term impacts in the wake of regulatory changes. We have the resources to help you navigate these and other important legal considerations related to business operations and industry-specific issues.  Please reach out to Jana Kolarik, your Foley relationship partner, or to our Health Care Practice Group with any questions.

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary. The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites. In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome. Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status.

Related Services