Fraud and Abuse Rules Part V: Easing Stark Law Compliance

February 16, 2021

Update (Feb. 22, 2021): As discussed below, the final rules discussed in the alert below were given a Jan. 19, 2021, effective date, but some ambiguity existed with respect to their effective status. Since publication, according to an industry publication, CMS has now clarified its view that the regulations finalized in the final rule are effective. McGuireWoods will continue to review further guidance from the new administration to understand if the policies in this final review are otherwise modified or retracted.


As discussed in a previous McGuireWoods alert, the U.S. Department of Health and Human Services (HHS) published final rules that significantly amend the regulations to the Physician Self-Referral Law (Stark Law), the federal Anti-Kickback Statute (AKS) and the Civil Monetary Penalties (CMP) Law. This client alert, the final in McGuireWoods’ summary series on these final rules, focuses on new exceptions, guidance and other policies to aid in Stark Law compliance.

The Stark Law final rule discussed in this alert was originally given a Jan. 19, 2021, effective date. Since publication, however, the Government Accountability Office concluded that the final rules did not incorporate a required 60-day delay in their effective date. Meanwhile, on Jan. 20, 2021, the Biden administration paused final rules from the Trump administration from taking effect. McGuireWoods will review further guidance from the new administration to understand if the policies in this final review are modified, retracted or corrected with a new effective date, although such a statement has not been made to date.

The Stark Law policy changes in the final rule include (1) a new exception for limited monetary compensation; (2) changes to the group practice definition, particularly on physician profit-sharing; (3) definitional clarification for interpreting the regulations and application of the exceptions; and (4) other clarifications to ease compliance. By implementing these changes, the Centers for Medicare & Medicaid Services (CMS) expressly noted its intent is to interpret the Stark Law “prohibitions narrowly and the exceptions broadly.” Therefore, the final rule permits more flexibility for compensation arrangements that could, in the absence of these changes, be deemed a prohibited financial relationship between a physician referrer and a provider of designated health services (DHS) that did not squarely meet an exception to the Stark Law. In finalizing this rule, CMS provided additional clarification and bright-line rules based in part on knowledge gained from receiving more than 1,200 Self-Referral Disclosure Protocol voluntary filings.

Notably, the final rule largely adopts the policies in its proposed rule, discussed in a Nov. 7, 2019, McGuireWoods alert, with certain key changes to the proposals discussed below. This alert outlines CMS’ changes to modernize its Stark Law regulations and provides eight key takeaways for healthcare providers.

  1. CMS finalized a new exception for limited monetary physician compensation, capped at $5,000 per year. CMS added a new limited monetary compensation exception, which would allow physicians to be paid up to $5,000 per calendar year (adjusted for inflation), in the aggregate, for items or services provided by the physician (directly or through employees, a wholly owned entity or through locum tenens physicians) without a signed writing or compensation set in advance. This $5,000 limit was increased from CMS’ initial proposal of $3,500, following industry comment. CMS, however, still requires that the compensation (a) not take into account the volume or value of referrals or other business generated, (b) not exceed fair market value, (c) be commercially reasonable and (d) if conditioned on the physician’s referrals to a particular provider, satisfy the special rules on compensation discussed further below. The final rule also limits the use of this exception to protect percentage-based and per-click equipment and space leasing arrangements.

    CMS noted as a basis for this new exception that, through the Self-Referral Disclosure Protocol, it regularly encountered arrangements it deemed non-abusive but which failed to meet the requirements for a Stark Law exception (e.g., where a hospital paid a physician a fair market value amount and had a legitimate need for physician services, yet failed to satisfy an exception because the arrangement was not in writing).

    Importantly, the $5,000 limit does not include amounts paid for items or services if that compensation is itself protected under a different exception. However, if an entity has multiple undocumented, unsigned agreements under which it provides compensation to a physician, CMS will treat these as a single compensation arrangement, the aggregate of which cannot exceed the limit under this exception during a calendar year. CMS also clarified this exception might allow a grace period at the outset of a financial arrangement before the elements of another exception are met, specifically adding language to the personal services arrangements and fair market value exceptions indicating they can be used in conjunction with this exception.

  2. Changes to the group practice definition may necessitate certain revisions to compensation plans before 2022. The nuanced, technical definition of “group practice” is a critical concept under the Stark Law. Congress created certain exceptions for referrals within group practices, including the in-office ancillary services exception, understanding that internal DHS referrals are commonplace and foster continuity of care and patient convenience. Therefore, even minor changes to the group practice definition can have significant impacts necessitating changes to, among other things, the way in which physicians in a group practice are compensated.

    Here, most significantly, CMS finalized a deemed-compliant methodology for distribution of profits related to participation in a value-based enterprise or VBE (that is, a practice may distribute to a physician profits derived from such physician’s participation in a VBE). CMS also finalized several clarifying revisions to the group practice profit-sharing rules (including that practices may not separately pool different categories of DHS revenue for distribution to different groups of physicians). In addition, CMS removed the reference to Medicaid from the definition of “overall profits,” which historically created certain compliance ambiguity. To allow group practices time to revise their compensation plans consistent with these regulatory changes, CMS delayed the effectiveness of these changes to Jan. 1, 2022.

    McGuireWoods anticipates providing additional specific guidance on these group practice rule changes later this year before the official effective date.

  3. CMS clarified key terms to alleviate the compliance burden. In the final rule, CMS clarified key terms frequently cited in the Stark Law by detangling the following three distinct elements so as to “reduce the burden” of providers’ compliance with the Stark Law:

    1. “Commercially Reasonable” Element. For the first time, CMS defined “commercially reasonable,” adopting a meaning “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.” CMS chose this definition instead of two alternative proposed definitions. In defining this term, CMS codified a favorable response to recent court decisions that a “commercially reasonable” arrangement does not need to be profitable (e.g., certain hospital call coverages are necessary to keep the hospital open but payment for coverage may exceed the patient fees generated). CMS reiterated in the final rule that papering an arrangement as commercially reasonable does not alone satisfy this element, and instead, determinations will be made on a case-by-case, facts and circumstances basis primarily asking whether the arrangement “makes sense as a means to accomplish the parties’ goals.”

    2. “Volume or Value” and “Other Business Generated” Bright-Line Standards. CMS finalized special rules for the “volume or value” and “other business generated” standards to create more bright-line, objective tests. These special rules effectively ask if the compensation paid to or received from a physician increases or decreases as the value of the referrals or other business generated increases or decreases. CMS explained that, effectively, if the amount of a physician’s referrals to an entity is a variable in the mathematical formula used to calculate the physician’s compensation, such compensation would be considered to take into account the volume or value of referrals or business generated.

    3. “Fair Market Value” and “General Market Value” Definitions. CMS finalized three separate definitions for “fair market value” that will apply separately to equipment rentals, to office space rentals and to all other arrangements generally. The definitions did not substantially alter the statutory definition; however, the proposed definitions specifically included a reference to “general market value” regarding assets, compensation and rental of equipment or office space, noting that it would be the amount “as the result of bona fide bargaining between well-informed” parties not “in a position to generate business for each other.” CMS did not finalize a proposal that these definitions would refer to arrangements “with like parties and under like circumstances, of like assets,” responding to commenters who expressed concerns with this language’s applicability to unique arrangements.

  4. CMS made additional clarifications to ease Stark Law compliance burdens.

    1. Definitional Changes.

      1. DHS. For inpatient hospital services, CMS finalized changes to the definition of DHS to carve out inpatient services that do not increase Medicare’s payment under a prospective payment system (PPS), such as an X-ray that is ordered after the PPS rate has been established by the relevant payment rules for inpatient hospitals, inpatient rehabilitation facilities, inpatient psychiatric facilities and long-term care hospitals. However, the finalized carve-out does not apply to hospital services furnished in the outpatient setting.

      2. Remuneration. CMS finalized its proposed changes clarifying the “used solely” requirement for items that are excluded from the definition of remuneration. Specifically, the furnishing of surgical items, devices and supplies that might have alternative purposes will not be considered remuneration if such items are in fact used for one of six explicitly designated statutory purposes. Notwithstanding this change, CMS continued to emphasize that items like sterile gloves, essential to the specimen collection process, are fungible and therefore cannot qualify for this remuneration carve-out.

      3. Isolated Financial Transaction. CMS finalized changes to the definition of “isolated financial transaction” to specify that it includes arrangements beyond a one-time sale of a property or a practice. The final rule limits use of this change for forgiveness for an amount or owed as part of settlement of a bona fide dispute under certain conditions. CMS continued to limit the use of the definition (and by extension, the exception) that the forgiveness must be fair market value, the amount must not be determined in a way that takes into account the volume or value of referrals generated, and that the forgiveness cannot be used for multiple services provided over an extended period, even if there is only one payment for all of those services.

    2. Writing and Signature Requirements. CMS codified its policy that electronic signatures could fulfill signature requirements. In addition, CMS finalized its proposal to give a 90-day grace period to satisfy the writing requirement (consistent with the prior grace period granted for obtaining signatures). Importantly, however, this grace period is not available for amending compensation in existing arrangements. In addition, CMS stressed and reiterated that this grace period for documenting an arrangement does not alleviate the need that compensation be set in advance.

    3. Non-exclusive Rental Arrangements. Under current exceptions, a lessee must have exclusive use of the office or equipment being rented. CMS finalized its clarification giving greater freedom by allowing multiple lessees to rent the same space as long as the lessor does not have access to the space.

    4. Expanding Relevance of Two Existing Exceptions. CMS liberalized two existing exceptions that past rulemaking had significantly limited. First, CMS expanded the reach of the payments by a physician exception allowing its use even if another regulatory exception could apply. (Statutory exceptions still cannot.) Second, CMS finalized changing the fair market value exception for use with short-term equipment and office space rentals less than one year in length. CMS did decline to finalize its proposed significant rewrite for remuneration unrelated to DHS from hospitals, but indicated that it may consider a regulatory change here again in the future.

    5. Physician Recruitment. CMS modified the signature requirement for physician recruitment arrangements so a physician practice has to sign the writing only if it is receiving a financial benefit from the arrangement, but not if the practice merely passes the compensation through to the recruited physician.

    6. Remuneration for Non-physician Practitioner (NPP) Patient Care Services. CMS revised the exception allowing a hospital, a federally qualified health center or a rural health clinic to assist a physician in hiring an NPP, previously discussed in a Sept. 1, 2015, client alert. CMS clarified numerous service area questions, including that a nurse who had not previously been an NPP (and thus has not provided “NPP patient care services”) could remain in his or her community and a physician or physician practice can receive this support to compensate such individual after he or she becomes a nurse practitioner. CMS also revised the exception to require that the arrangement between the NPP and physician/physician practice begin on or after the commencement of the assistance arrangement.

    7. Ownership or Investment Interests. CMS finalized, without modification, its proposal regarding the definition of ownership or investment interests. CMS affirmed that a titular ownership or investment would not be considered ownership because a physician would not be entitled to receive the financial benefits of ownership or investment such as profit distributions, dividends or sale proceeds. This may be beneficial for some corporate practice-of-medicine arrangements, although in many cases, the in-office ancillary services exception already protects physician ownership in a practice. In addition, CMS finalized changes to remove employee stock ownership plans, or ESOPs, from its meaning of ownership so ownership and investment interests do not include interests in an entity arising from participation in an ESOP.

    8. Decoupling the AKS From the Stark Law. CMS removed the requirement that providers comply with the AKS to meet most exceptions where this language existed. Although the practical effect may be small, this removed ambiguity to meet a strict liability statute by also having to meet an intent-based criminal statute with narrower safe harbors. CMS noted the AKS separately remains a “backstop” for problematic arrangements that would no longer be restricted under the Stark Law, despite this change. Note, CMS did not make this change with respect to the AKS element within the fair market value exception despite proposing to do so, believing this to be a substitute safeguard for requirements included in other exceptions but omitted from the fair market value exception.

  5. CMS finalized its proposal to expand the directed referral requirement in Stark Law exceptions. Prior to the final rule, Stark Law regulations contained a special rule that allowed a physician’s compensation under an employment arrangement, personal service arrangement or managed care contract to be conditioned on referrals to a particular provider, if certain conditions were met. One of the conditions provides that the referral could not be required if (a) the patient expresses a preference for a different provider, (b) the patient's insurer determines the provider, or (c) the referral is not in the patient's best medical interests. CMS finalized its proposal to utilize this special rule on directed referrals with Stark Law exceptions for academic medical centers, physician incentive plans, group practice arrangements with a hospital, fair market value compensation, and indirect compensation arrangements.

    Notably, CMS added a condition to referral requirements that “neither the existence of the compensation arrangement nor the amount of the compensation is contingent on the number or value of the physician’s referrals to the particular provider, practitioner, or supplier.” CMS explained that, as an example, if an employer increases a physician’s compensation in a renewal term only if the physician met his or her targeted numbers for referrals for DHS, the compensation arrangement would not comply with this new condition in the special rule; however, if an employer increases a physician’s compensation in a renewal term only if the physician referred a certain percentage of his or her patients to a particular provider, the compensation arrangement would meet the new requirement in the special rule. In other words, requiring a percentage or ratio of a physician’s referrals to a particular DHS entity is allowed.

  6. CMS finalized its proposal to delete its “period of disallowance” rule and provide greater flexibility in curing noncompliance and reconciling compensation. For purposes of the DHS referral prohibition, CMS developed a “period of disallowance” concept to identify the time period when a physician would be prohibited from making referrals. CMS has now deleted its existing language for this concept. Instead, CMS provided a general principle that the period of disallowance “should begin on the date when a financial relationship fails to satisfy all requirements of any applicable exception and end on the date that the financial relationship ends or is brought back into compliance” by satisfying all requirements of an applicable exception. This period of disallowance will be determined on a case-by-case basis in light of the relevant facts and circumstances.

    Further, CMS finalized guidance to permit curing potential noncompliant compensation arrangements related to administrative errors, operational errors or payment discrepancies during the course of an arrangement to avoid triggering a period of disallowance. However, CMS noted that retroactively curing previous noncompliance by recovering or repaying problematic compensation after an arrangement ends is still prohibited. Therefore, if a provider reconciles compensation to satisfy this new regulatory language, it must be done within 90 calendar days of termination or expiration of an arrangement.

  7. CMS finalized a new exception and modifications to the electronic health record (EHR) exception to extend protections for cybersecurity technology. As discussed in a Jan. 12, 2021, McGuireWoods alert, CMS joined the Office of the Inspector General (OIG) in finalizing a new exception and modifications of an existing exception to protect cybersecurity technology. The cybersecurity technology donation exception does not require the donation recipient to cover any of the costs of the technology, and CMS did not finalize a proposal that a risk assessment be conducted to determine if the technology was reasonably necessary. In addition, CMS finalized the following changes to the existing EHR exception: (a) the addition of cybersecurity technology and services, (b) modernization updates regarding interoperability provisions, (c) changes to cost-sharing requirements to allow payments at reasonable intervals, (d) removal of the replacement technology donation prohibition and (e) removal of sunset provisions.

  8. CMS adopted value-based exceptions. As discussed in a Jan. 20, 2021, McGuireWoods alert, CMS, in an effort to foster a greater emphasis on value-based care, finalized three new Stark Law compensation exceptions, in conjunction with OIG’s proposed safe harbors to the AKS. Specifically, the Stark Law now will allow remuneration exchanged between or among participants in certain value-based arrangements (e.g., care coordination arrangements designed to improve quality, health outcomes and efficiency). CMS structured the requirements for these value-based exceptions around whether the value-based arrangement (a) has full financial risk, (b) has meaningful downside financial risk or (c) is another value-based arrangement, with the most significant regulatory burden for this third exception falling on those without financial risk. In adding these exceptions, CMS finalized a new value-based enterprise definition that would allow multiple entities to collaborate to achieve value-based purposes

In implementing this final rule, CMS sought to balance a need for innovation with the potential for improper inducements prohibited by the Stark Law, by removing certain burdens while clarifying the law and adding new exceptions. As noted, CMS expressed a desire to allow providers to consider the Stark Law’s prohibition narrowly, while considering its exceptions broadly, which may open additional avenues to argue that an arrangement is compliant. The industry appears receptive to these changes to a strict liability statute that otherwise prohibits a physician referring DHS when a financial relationship does not meet an exception.

Contact a McGuireWoods attorney or one of the authors of this alert for more information regarding these final rules. Given the significance of these changes, McGuireWoods has been providing additional analysis and summaries.

To review additional guidance on the final rules, see the following McGuireWoods legal alerts:

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