The release of CMS's proposal was coordinated with the contemporaneous release by the Office of Inspector General (OIG) of the Department of Health and Human Services of proposed new regulations under the Anti-Kickback Statute (AKS) and the Civil Monetary Penalties law. Together, these proposals represent sweeping changes to current federal fraud and abuse laws. In addition to the Stark Law proposals that are of general applicability, the proposals include new and revised Stark Law exceptions and AKS safe harbors for value-based arrangements and for donations of electronic health records and cybersecurity technologies.
Reed Smith is providing a series of client alerts and teleseminars that focus on analyzing key aspects of the CMS and OIG proposals and significant areas for comment. This client alert is Part Two of that series, and addresses the Stark Law proposals of general applicability. Our teleseminar discussing these proposals will take place on November 12, 2019 and you can register via On24. Part One, which focuses on the proposed AKS safe harbors and Stark Law exceptions for value-based arrangements, is available on On24 and was discussed on our teleseminar on November 5, 2019. The Part Three client alert will examine the OIG and CMS proposals involving donations of electronic health records and cybersecurity technologies, with a teleseminar following on November 21, 2019. We hope this series will give clients the context needed to consider and submit comments before December 31, 2019, the date on which comments are due.
The proposed changes to the Stark Law regulations - and particularly the portions of general applicability described in this client alert - are intended to help providers, and particularly health systems, avoid the pitfalls associated with technical violations of the Stark Law that result in repayment or self-disclosure. CMS took into account responses to its June 2018 Request for Information soliciting input on the Stark Law and leveraged its considerable experience with the self-referral disclosure protocol to offer a series of changes that would afford providers greater flexibility under the regulations. CMS is seeking comments from stakeholders in a number of places as to whether the proposed changes are sufficiently clear and flexible to avoid instances where providers find themselves facing significant penalties and legal costs to address unintended errors and technical violations. While we have attempted to describe the most relevant proposed changes, which of these changes will impact a particular provider depends on the exceptions, if any, that are applicable to the provider. The summary below begins with changes of wide and general applicability and ends with narrow, more specific changes to terminology and definitions.
II. Fundamental terminology and requirements
The Proposed Rule attempts to clarify three requirements that are common to many Stark Law exceptions: that an arrangement must be commercially reasonable, that compensation under the arrangement may not be determined in a manner that takes into account the volume or value of referrals (the volume or value standard) or other business generated between the parties (the other business generated standard), and that the compensation must be fair market value. The lack of definitive agency guidance has resulted in uncertainty concerning the application of these requirements to common physician arrangements, has resulted in allegations of Stark Law violations in False Claims Act cases that have led to significant settlements, and has produced judicial decisions that are not in accord with industry expectations and, in some cases, prior commentary of CMS.
A. Commercial reasonableness
No definition of the term "commercially reasonable" currently appears in the Stark Law regulatory text. However, under the Proposed Rule, CMS would codify a definition as follows: "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. An arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties."
The most noteworthy aspect of the proposed definition is the last sentence. Several recent False Claims Act cases that have resulted in large settlements included allegations that money-losing physician employment arrangements were commercially unreasonable. This clarification will provide great comfort for the many hospitals that employ physicians or operate medical practices whose collections are less than their associated expenses.
However, the proposed definition does not eliminate all uncertainties. For example, CMS provides little guidance on what a "legitimate business purpose" is, other than indicating that an agreement for unneeded services or relating to a criminal activity would not be for legitimate business purposes. Although one would expect that a legitimate business purpose would be one that does not involve rewarding referrals, CMS states that it is retaining language in certain exceptions to the effect that the arrangement must be commercially reasonable "even if no referrals were made" - implying that the requirement for a legitimate business purpose in the definition means something different. In addition, CMS proposes an alternative definition of "commercially reasonable" that is based on its prior guidance - 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." Stakeholders may want to comment on these aspects of the Proposed Rule.
B. The volume or value and other business generated standards
CMS is proposing to codify its interpretations of the volume or value standard and the other business generated standard, as applied to compensation both to a physician and from a physician. In each case, CMS proposes an objective test, responding to commenters' concerns that prior interpretations of these standards caused the subjective intent of the parties to be relevant for compliance. Specifically, as proposed, a formulaic compensation arrangement would violate the volume or value standard (or other business generated standard) 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 the compensation correlates with the number or value of the physician's referrals (or other business generated). For fixed-rate compensation arrangements (such as a fixed annual salary or unvarying unit of service compensation), the compensation would violate those standards only when the volume or value of a physician's prior referrals (or other business generated) is the basis for determining the rate of compensation to or from a physician.
Perhaps of even more consequence than CMS's proposed codification of these standards is its commentary in the preamble. First, CMS expressly states that "merely hoping for or even anticipating future referrals or other business is not enough" to conclude that a compensation arrangement takes into account the volume or value of referrals.
Second, CMS expressly states that the existence of a correlation between a physician's personally performed services (which may be the basis upon which the physician is paid) and the physician's referrals would not cause the physician's compensation to take into account the volume or value of the physician's referrals. CMS's interpretation appears to be an effort to address concerns about the Fourth Circuit's decision in Tuomey,1 which CMS cited in the preamble, and the Third Circuit's recent decision in Bookwalter.2 Both courts ruled that compensating physicians for their personally performed services could violate the volume or value standard if there are referred designated health services (DHS) that are associated with those personally performed services. While CMS's explanation is welcome, commenters may want to seek further amplification to understand fully the implications.3
C. Fair market value
Current Stark Law regulations state that fair market value must be consistent with general market value. In order to conform the Stark Law fair market value requirements with accepted valuation principles, CMS proposes a new definition of general market value. Specifically, as proposed, general market value would be the price that assets or services would bring as the result of bona fide bargaining between the buyer and seller in the subject transaction on the date of acquisition of the assets or at the time the parties enter into the service arrangement. In making this change, CMS stated that general market value relates to the value of an asset or service to the actual parties to a transaction (rather than to hypothetical parties). Based on the new definition of general market value, then, CMS explained that in certain circumstances, it may be appropriate to pay referring physicians at rates that are above or below those revealed in independent salary surveys.
In addition, CMS has decoupled the volume or value standard from the fair market value definition, explaining that these two requirements are independent requirements in many exceptions. At the same time, however, CMS notes that under accepted valuation principles, general market value should not include any consideration of other business that the parties may have with one another. Thus, in assessing the general market value of compensation for a physician, the parties must not consider that the physician could also refer patients to the contracting entity.
Finally, CMS proposes to restructure the definition of fair market value into three components - one of general applicability, one applicable to rental of equipment, and one applicable to the rental of office space. This revised structure more clearly associates the applicable modifiers for rentals (for example, equipment or office space) to the types of compensation arrangement at issue.
III. New and revised exceptions and definitions
A. New exception for limited remuneration to physicians
Many providers have dealt with addressing technical violations of the Stark Law in which a physician was compensated for short-term services that did not fit squarely within an exception. After having reviewed many self-disclosures seeking to resolve this type of situations, CMS has recognized that there may be "nonabusive arrangements" that involve providing limited remuneration to physicians.
Accordingly, CMS has proposed a new exception for arrangements that provide limited remuneration to physicians - despite not having written documentation or setting the remuneration in advance - so long as:
- the arrangement is for items or services actually provided by the physician;
- the amount of the remuneration to the physician is limited ($3,500 per calendar year, adjusted for inflation);
- the arrangement furthers a legitimate business purpose of the parties and is on similar terms and conditions as like arrangements, regardless of whether it results in a profit for either or both of the parties;
- the remuneration is not determined in any manner that takes into account the volume or value of referrals or other business generated by the physician; and
- the remuneration does not exceed the fair market value for the items or services.
If this exception is finalized, providers will have more protection for these short-term or low-dollar arrangements with physicians. CMS proposed the annual aggregate limit of $3,500 "to cover the typical range of commercially reasonable arrangements for the provision of items and services that a physician might provide to an entity on an infrequent or short-term basis," and invited comments as to whether $3,500 is appropriate, too high, or too low.
Notably, the proposed exception would apply to the provision of both items and services by a physician, although CMS has asked for comments on whether the physician must personally perform the services or provide the items. Consistent with CMS's proposal to decouple Stark Law exceptions from the AKS (discussed below), this proposed exception for limited remuneration would not include a requirement that the arrangement does not violate the AKS; CMS has asked for comments as to whether that safeguard would be necessary. CMS has also proposed that it would not require these types of arrangements to be set forth in a master list of contracts, further easing the burden of satisfying this exception.
This new exception - if finalized along the lines of the proposal - should help health systems avoid the need to repay or self-disclose low-dollar arrangements with physicians for short-term services that they may identify through routine compliance review, through an investigation, or through due diligence related to a potential transaction.
B. Decoupling Stark Law from AKS and other laws
CMS proposes to remove the requirements pertaining to compliance with the AKS from various exceptions. For example, the exception for fair market value compensation would be revised to delete the fifth element requiring that the "arrangement does not violate the anti-kickback statute (section 1128B(b) of the Act), or any Federal or State law or regulation governing billing or claims submission."
In the commentary to the Proposed Rule, CMS is careful to point out that the fact that a financial arrangement complies with the Stark Law does not give the arrangement a pass under the AKS. If an arrangement implicates both laws, then it must comply with both laws, albeit separately. In proposing this change, CMS notes the concern raised by stakeholders concerning the difficulty of harmonizing compliance with the Stark Law’s strict liability and its mandatory exceptions with the AKS's intent-based criminal penalties and nonmandatory safe harbors.
The proposal would leave intact the requirement to comply with certain AKS safe harbors in order to comply with the Stark Law exceptions for (1) referral services and (2) obstetrical malpractice subsidies. Other than these two exception, the Stark Law regulations would place no additional obligation to comply with the AKS.
C. Further relaxation of writing-and-signature requirements
CMS proposes to expand the special rule for compensation arrangements - which currently provides that the requirement for compensation arrangements to be in writing can be satisfied by a collection of documents as opposed to a single document - to also provide parties with the ability to satisfy writing-and-signature requirements after compensation arrangements begin. Under the proposed expansion, in those instances where a compensation arrangement must be in writing and signed, the parties can still be compliant if: (1) the only defect in the payment arrangement is that it has not been reduced to writing or signed; and (2) the parties "obtain the required writing(s) or signature(s) within 90 consecutive calendar days immediately following the date on which the compensation arrangement became noncompliant with" the writing-and-signature requirements. According to CMS, its experience with the self-referral disclosure protocol indicated that there were often short periods of noncompliance with the writing-or-signature requirements at the outset of a compensation arrangement that, if they had been fixed within 90 days, would not pose a significant risk of program or patient abuse.
At the same time, CMS warns that its proposal "does not amend, nor does it affect, the requirement under various exceptions...that compensation be set in advance..." In other words, while the Proposed Rule provides that the writing-and-signature requirements could be satisfied after a payment arrangement goes into effect, compensation must still be set in advance. On this score, however, CMS uses the Proposed Rule to formally retract a suggestion made in an earlier rulemaking, explaining: "[R]ecords of a consistent rate of payment over the course of an arrangement, from the first payment to the last, typically support the inference that the rate of compensation was set in advance. To the extent that our preamble discussion in [a previous rulemaking] suggested that the rate of compensation must be set out in writing before the furnishing of items or services in order to meet the "set in advance" requirement of an applicable exception, we are retracting that statement..." CMS also uses the Proposed Rule as an "opportunity to clarify [its] longstanding policy that an electronic signature that is legally valid under Federal or State law is sufficient to satisfy the signature requirement of various exceptions in our regulations."
These particular proposals come across as common-sense measures reflecting the day-to-day business reality. However, even if the proposed changes are implemented, providers must remain vigilant that compensation terms are, in fact, set in advance even if they are not yet reduced to writing and signed. The best way to demonstrate compliance with the "set in advance" requirement (and avoid potential scrutiny after the fact) remains having a single signed writing executed before the provision of services.
D. Narrowing of DHS for certain inpatient services
CMS proposes to revise the definition of designated health services to exclude services provided by a hospital to an inpatient if the furnishing of such services do not affect the amount of Medicare payment to the hospital under the Medicare Inpatient Prospective Payment System (IPPS).
In order to illustrate how this change in the definition would work, CMS provides an example of a physician ordering an X-ray for an inpatient. According to CMS, a specialist who is treating an inpatient has no financial incentive to over-utilize X-rays performed in the hospital if the X-ray is bundled into the payment for the inpatient admission. Even though an X-ray would otherwise fall within the category of services that, when billed separately, would be DHS, the proposed definition would exclude this type of service from the definition of DHS and, therefore, make the Stark Law inapplicable in this case. Nevertheless, the Stark Law may still be applicable for an X-ray provided to a patient if the hospital's Medicare payment is affected by the ordering of an X-ray, such as an outlier patient under IPPS.
This change would have no impact on hospital outpatient services. Although outpatient services are also paid on a composite or bundled rate, CMS draws a distinction in how outpatient services are ordered by noting that there is typically only one ordering physician for outpatient services, while inpatients services may be ordered by a variety of specialists or hospitalists.
CMS is seeking comments on whether this proposal should apply to hospitals that are not paid under IPPS. This raises the question of whether this policy should apply to certain specialty hospitals paid under separate prospective payment systems for long-term care hospitals, inpatient rehabilitation facilities or inpatient psychiatric facilities.
E. Period of disallowance
Generally speaking, no Medicare payment may be made for designated health services that are furnished pursuant to prohibited referrals. But when does that nonpayment window - the "period of disallowance" in CMS parlance - end? CMS's regulations ostensibly provide an answer depending on whether the underlying noncompliance involves physician compensation or not.
CMS now proposes to eliminate the latter regulatory language altogether while retaining the payment-prohibition portion. Citing alleged confusion regarding whether the enumerated process for determining the end of the disallowance period is the only way to do so (CMS now says it was never meant to be exclusive), the preamble takes the opportunity to provide "general guidance on how to remedy compensation problems that occur during the course of an arrangement and, when a remedy is not available, how to determine when the period of disallowance ends." The generally preferred "how" is through the use of "effective compliance programs that identify these types of errors [referring to such things as ministerial mistakes causing payments to be made to physicians in excess of contracted-for amounts] and rectify them promptly," as in before the end of the payment arrangement in question. Otherwise, CMS warns, "if the parties fail to identify the error during the term of the arrangement...they cannot simply "unring the bell" by correcting it at some date after the termination of the arrangement. Rather, the failure to timely identify and rectify the error through an effective compliance program would expose the parties to the referral and billing prohibitions of the physician self-referral law during the entirety of the arrangement."
Thus, a key takeaway here is that those affected by the Stark Law are well advised to have compliance programs that actively monitor payments to physicians and whether they match the terms of underlying contracts. And if discrepancies occur, one should investigate them promptly and correct them in time to eliminate the disallowance period altogether by bringing the relationships in line before the arrangements end.
F. Definition of transaction
No policy changes are suggested in the proposed changes to the definition of "isolated transaction." Instead, CMS is only offering its interpretation of the rule to clarify instances when the exception for isolated transaction is not applicable. In particular, the exception for isolated transactions is not available to protect payments to physicians for multiple services provided over an extended period of time even if there is only a single payment for all services. According to CMS, some stakeholders had suggested that the exception for isolated transaction could be used, as a last resort, to protect the payment for multiple services provided over a period of time.
G. Special rules for group practices on profit shares and productivity bonuses
To incorporate the concept of the new exceptions to value-based compensation, CMS proposes to revise the group practice rules to permit payment to a physician participating in a value-based enterprise of the profits from DHS that are directly attributable to such physician's participation in the value-based enterprise. This change is intended to expressly allow downstream compensation to physicians in exchange for their participation in value-based arrangements.
CMS also proposes some technical changes to the special rules applicable to the distribution of profit shares and productivity bonuses. The proposed changes would make clear that a physician practice could not distribute profits from DHS on a service-by-service basis. For example, a group practice may not distribute profits from clinical labs to one subset of physicians or under a particular methodology and distribute profits from diagnostic imaging to a different subset of physicians or under a separate methodology. The distribution of profits from all DHS must be applied consistently by the group practice in order to comply with the special rules.
In addition, CMS proposes to update the group practice rules to eliminate the references to Medicaid in the definition of overall profits. CMS suggests this change for purposes of making the special rules on profit shares and productivity bonuses consistent with the definition of DHS, which applies only those specified items or services payable, in whole or in part, by Medicare.
Finally, the Proposed Rule would deem the payment of a productivity bonus not to directly take into account the volume or value of a physician's referrals if the services on which the productivity bonus is based are not revenues derived from DHS and would not be considered DHS if payable by Medicare. Thus, overall profits could be distributed based on the distribution of the group practice's revenues from services other than those in the categories of services that are DHS in order to deem the payment of a profit share not to directly take into account the volume or value of a physician's referral.
H. Revival of exception for remuneration unrelated to the provision of DHS
CMS proposed language to clarify the applicability of the Stark Law's exception for hospital remuneration to a physician that is unrelated to the provision of DHS. CMS's prior interpretations of this exception have been so narrow as to make it virtually meaningless. Acknowledging the difficulty in applying this standard, CMS now propose a "patient care services" concept to distinguish when remuneration is deemed "related" or "unrelated" to the provision of DHS. Namely, if a hospital payment to a physician sufficiently relates to the physician's furnishing of "patient care services" (or items used in the process of furnishing patient care services), such remuneration would "relate to" the provision of DHS, eliminating the exception's applicability.
In finalizing the new standard, the agency specifically requested further input while also setting forth concrete examples of how it might apply. CMS's proposal would, for example, classify emergency department call coverage, medical director services, and utilization services as being "related to" the furnishing of DHS, given each service's nexus to providing "patient care services." Stipends or meals served in connection with a physician's administrative services on a hospital governing board, on the other hand, may not constitute patient care services, so long as: (a) the same stipends or meals are also provided to non-licensed individuals serving on the board, and (b) such remuneration complies with the volume or value standard.
Under CMS's proposal, payment would be considered "unrelated to" the provision of DHS if the compensated service may legally be provided by a person not licensed as a medical professional, and if the service is typically provided by such non-licensed persons. CMS also proposed language clarifying that payment for an item, supply, device, equipment, or space "relates to" the provision of DHS if it is used in the diagnosis and treatment of patients, such as the rental or purchase of medical equipment or office space used to provide "patient care services." By contrast, a departing physician's sale of furniture to a hospital for the hospital's use in its own facilities would not relate to the provision of DHS.
I. Broader applicability of exception for payments made by a physician
CMS proposed clarifying the Stark Law exception for payments made by a physician to an entity. Currently, the physician payments exception allows certain payments made by a physician in exchange for items or services furnished by an applicable entity. However, based on CMS's prior guidance, this exception has limited value because it is generally not available to payment arrangements that may be covered by another Stark Law exception, such as the rental of office space or equipment or the fair market value exception.
In the Proposed Rule, CMS primarily focused this proposal on the interplay between the physician payments exception and other Stark Law exceptions, ultimately reaffirming its position that the physician payments exception acts as a catch-all to protect legitimate arrangements not otherwise covered under immediately preceding regulatory exceptions. In doing so, CMS cautioned that the exception should not operate as a side-stepping mechanism for providers to avoid more stringent requirements associated with other Stark Law exceptions. The agency's Proposed Rule instead involves clarifying exactly which Stark Law exceptions supersede the physician payments exception. Specifically, CMS proposes that the physician payments exception cannot be invoked where another, more specific statutory Stark Law exception exists, but that the exception's scope should not be limited by Stark Law regulatory exceptions not codified by statute. This proposal would allow a provider to invoke the physician payments exception even if, for example, the separate exception for physician charitable donations is available.
J. Expansion of exception for fair market value compensation
As proposed, the exception for fair market value compensation would be expanded to apply to the rental of office space or equipment. Because the fair market value exception does not require a one-year term, short-term arrangements for the rental of office space for less than one year would be permissible so long as the arrangements meet all of the exception's requirements.
In order to ensure that the conditions on rental arrangements appearing in other exceptions also apply to such arrangements relying on the expanded fair market value exception, the Proposed Rule would prohibit rental charges calculated by a percentage-based formula (that is, a percentage of the revenue raised from business generated in the office space) or a per-click compensation formula (that is, per-unit of service rental charges).
CMS is seeking comments on whether the prohibition on counseling or promotion of a business arrangement is necessary to protect against program or patient abuse or if it should be removed from the exception. It is also looking for input on whether substitute safeguards, such as those included in many of the statutory or regulatory exceptions to the Stark Law, would be appropriate.
IV. Other clarifications
The Proposed Rule includes a number of less significant, but noteworthy, changes to terminology, definitions, and elements of certain exceptions. We provide a short summary of these proposals below.
A. Share of overall profits of the group
As noted above, CMS is proposing new special rules for compensation that would codify its interpretation regarding when compensation takes into account the volume or value of referrals or other business generated. The current rule states that a physician in a group practice may be paid a share of the overall profits of the group practice "provided that the share is not determined in a manner that is directly related to the volume or value of referrals by the physician." CMS proposes to change this language to make it consistent with how this concept would be used in other parts of the regulations. Under the Proposed Rule, a physician in a group practice could be paid a share of overall profits of the group "that is indirectly related to the volume or value of the physician's referrals." Consistent with existing regulations, the Proposed Rule would continue to describe how overall profits may be divided among a group of physicians.
B. Definition of physician
The Stark Law regulations currently provide a definition describing who qualifies as a physician subject to the referral prohibition. CMS is proposing to delate this description and instead include a cross-reference to the definition of a physician in section 1861(r) of the Social Security Act. The current differences between the Stark Law regulation's definition of physician and the definition found in section 1861(r) is subtle. For example, the Stark Law regulations refer to "a doctor of medicine or osteopathy," while section 1861(r) refers to "a doctor of medicine or osteopathy legally authorized to practice medicine and surgery by the State in which he performs such function or action." Under this proposal, doctors of dental surgery, dental medicine, podiatric medicine, optometry, and chiropractic medicine would all continue to fall within the definition of physician.
C. Definition of referral
CMS proposes to clarify in the definition of referral that a referral itself is not an item or service under the Stark Law regulations, and, therefore, it is not possible to apply the exception for fair market value compensation to an arrangement involving payment for a referral. This change is consistent with long-standing CMS policy.
D. Definition of remuneration
The Stark Law regulations have long excluded from the definition of remuneration certain items, devices, or supplies used solely for collecting, transporting, processing, and storing specimens, ordering tests or procedures, or communicating the results of tests or procedures. However, under the current rules, giving a physician surgical items, devices, or supplies would constitute remuneration to the physician and implicate the Stark Law. CMS now proposes to allow surgical items, devices, or supplies to be excluded from the definition, like any other items, devices, or supplies, if the surgical items, devices, or supplies are otherwise used solely for one or more of the purposes itemized in the definition, regardless of whether the device is classified as a surgical device. In addition, CMS seeks to clarify that the "used solely" standard that determines whether a device is excluded from the definition of remuneration should be determined based on whether or not, as a factual matter, the device is used for one of the permitted purposes, not whether it could be used for other purposes.
These changes, when taken together, would exclude from the definition of remuneration items, devices, or supplies that are, in fact, used solely for collecting, transporting, processing, and storing specimens, ordering tests or procedures, or communicating the results of tests or procedures, regardless of whether such items are surgical devices.4
E. Patient choice and directed referrals
Stark Law regulations allow a provider of DHS to condition physicians' compensation on their referrals to a particular provider or supplier - but only if there are exceptions to the referral requirement where the patient expresses a preference for another provider or supplier, the patient's insurer determines the provider or supplier, or the referral is not in the patient's best medical interests in the physician's judgment. Currently, this limited allowance for required referrals is treated as an exception to the volume or value standard. However, because CMS is narrowing its interpretation of the volume or value standard, CMS is concerned that the patient choice and other exceptions would apply in fewer instances involving required referrals. To remedy this, CMS proposes to establish the limited allowance for required referrals as a separate element in relevant exceptions.
F. Titular ownership and ESOPs
Consistent with its prior guidance, CMS proposes to amend its definition of "ownership or investment interest," the possession of which by a physician can trigger the Stark Law's prohibition against self-referrals, to exclude instances of so-called "titular ownership" as well as interests that arise from certain investments or a qualified employee stock ownership plan (ESOP). If amended as proposed, a "titular ownership or investment interest that excludes the ability or right to receive the financial benefits of ownership or investment, including, but not limited to, the distribution of profits, dividends, proceeds of sale, or similar returns on investment" would not be considered an "ownership or investment interest." Similarly, the Proposed Rule provides that an interest in an entity that arises from an ESOP that is qualified under Internal Revenue Code section 401(a) would not be considered an "ownership or investment interest."
G. Exclusive use under rental of office space exceptions
CMS proposes new language to clarify that the "exclusive use" requirements under the Stark Law's leasing exceptions do not preclude arrangements involving multiple lessees using the same space or equipment. Current Stark Law exceptions exist for office space and equipment rentals, but require that the lessee must use the leased property "exclusively" during applicable rental periods. According to CMS, this exclusivity requirement is designed to prevent "sham" lease arrangements, whereby a lessor continues to use the space or equipment despite ostensibly "renting" the property to the lessee.
CMS's proposed additional regulatory language clarifying that the Stark Law's rental of office space or equipment exceptions require the lessee to utilize rented property "to the exclusion of the lessor." In other words, leasing arrangements would comply with the "exclusive use" requirements - even if concurrently used by multiple lessees or invitees - so long as (a) the lessor is prohibited from such concurrent use, and (b) all other requirements of the applicable Stark Law exception are met.
H. Signature requirements under physician recruitment exception
CMS has proposed eliminating a signature requirement for certain physician practices involved in recruiting arrangements under the terms of the Stark Law's recruitment exception. In instances where recruiting-related payment is made to the physician's new practice, current Stark Law guidance requires a writing signed by (a) the recruiting provider, (b) the practice, and (c) the physician. According to CMS, this technicality has unduly caused otherwise legitimate recruitment arrangements to forfeit the protection of Stark Law's recruitment exception. As a proposed fix, CMS suggests excusing the practice from complying with the signed writing requirement under circumstances where recruitment payments involve no financial benefit to the practice. Specifically, under the agency's proposal, the relevant practice must sign a writing that documents the recruiting arrangement only if (a) the remuneration is paid to the recruited physician indirectly through the practice, and (b) the practice does not pass directly through to the physician all recruitment-related remuneration. If the hospital (or other qualifying provider) pays the physician directly, or if the practice passes all recruitment payment through to the physician, no practice signature would be required.
I. Exception for assistance to compensate a nonphysician practitioner
Current Stark Law regulations include a limited exception that allows hospitals, federally qualified health centers (FQHCs), and rural health clinics (RHCs) to provide remuneration to a physician to assist with the employment of a nonphysician practitioner (NPP). The limitations of the exception include that the NPP cannot have furnished patient care services as an employee of a physician or medical practice in the same geographic area within one year of the assistance arrangement. This has led to questions about the availability of the exception where, for example, the individual NPP had practiced as a nurse (rather than as an NPP) in the geographic area immediately prior to the assistance arrangement. CMS now proposes to clarify that the provision of non-NPP patient care services would not preclude the availability of this exception. In addition, in the Proposed Rule, CMS seeks to revise the exception to expressly state that a compensation arrangement between the hospital, FQHC, or RHC and the physician must commence before the physician (or his practice) enters into a compensation arrangement with the NPP. In other words, the exception will not apply to after-the-fact reimbursement by a hospital, FQHC, or RHC for preexisting NPP costs.
J. Updating and eliminating out-of-date references
The Stark Law refers to the Medicare+Choice program that was established in 1997. However, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 renamed the Medicare+Choice program as the Medicare Advantage program. In order to update the Stark Law and make it consistent with other program regulations, the Proposed Rule will revise the regulations to more accurately reference Medicare Advantage plans.
CMS is seeking comments on whether the revised language is broad enough to protect designated health services furnished to enrollees in the full range of Medicare Advantage plans that exist today and that do not pose a risk of program or patient abuse. CMS is particularly interested in whether it should include additional Medicare Advantage plans within the scope of the Proposed Rule.
The Proposed Rule offers the most significant changes to the regulations under the Stark Law in many years. Many of these changes, if adopted, could be used to protect financial arrangements with physicians that in the past may have failed to comply with the applicable exceptions. Some proposals, as noted above, would benefit from greater clarity and additional guidance. Stakeholders who want to provide input on the scope and substance of the Proposed Rule should submit comments by 5 p.m. Eastern Time on December 31, 2019.
For questions regarding the Proposed Rule or for assistance in preparing comments, please contact one of the authors or any Reed Smith attorney with whom you work.
- U.S. ex rel. Drakeford v. Tuomey, 792 F.3d 364 (4th Cir. 2015). In Toumey, employed surgeons' base salaries and productivity bonuses were dependent upon their personally performed services. The court decided that, because of the correlation between the surgeons' personally performed services and the hospital's facility fees, a jury could reasonably conclude that their compensation varied with the volume or value of referrals.
- U.S. ex rel. Bookwalter v. UPMC, __ F.3d __, No. 18-1693 (3d Cir. Sept. 17, 2019). In Bookwalter, the court concluded that, because of the correlation between employed surgeons' personally performed services and their referrals to a hospital, the employed surgeons' relative value unit-based compensation varies with the volume or value of referrals.
- For example, both the Tuomey and Bookwalter courts were applying the indirect compensation exception definition, where one trigger is that a physician's aggregate compensation "varies with, or takes into account" the volume or value of referrals, rather than the indirect compensation arrangements exception, which includes the requirement that compensation cannot "take into account" the volume or value of referrals. The "varies with" language in the definition was critical to the Tuomey and Bookwalter courts. In the Proposed Rule, without discussion, CMS indicated that it would remove the "varies with" language from the definition, but it retains the requirement that aggregate compensation cannot take into account the volume or value of referrals. It would be helpful to have a clearer explanation of how the volume or value standard is to be applied in the indirect compensation arrangement's definition and the differences, if any, in its application in the indirect compensation arrangement's exception.
- CMS also clarifies in the comments to the Proposed Rule that providing sterile gloves would not be excluded from the definition of remuneration because CMS believes it is impractical to determine whether such gloves are in fact used solely for the permitted purposes, rather than the general purpose of preventing infection.
Client Alert 2019-262