With the benefit of more than three decades of rulemaking and hundreds of submissions under the Self-Referral Disclosure Protocol, CMS has seized the opportunity in the final Sprint Regulations to adopt a number of significant changes to the Stark Law. These regulations redefine key terms, create new exceptions, streamline existing exceptions, and expand exceptions the agency had previously narrowed beyond recognition.
The Sprint Regulations reflect the wisdom that comes from CMS' hard-won experience in interpreting and applying this challenging statute. While the language of the Stark Law continues to constrain the agency and the amendments offer only partial relief from the vagaries of Stark, the Sprint Regulations nevertheless reflect an admirable effort to improve the regulatory landscape.
Many of the noteworthy amendments to the Stark Law included in the Sprint Regulations (apart from the value based and EMR/cybersecurity exceptions which are addressed in other advisories) are summarized below. With the exception of the changes relating to group practice productivity compensation (42 CFR 411.352(i)), these regulations go into effect January 19, 2021.
Fair Market Value
Fair market value is defined to mean the "value in an arm's length transaction, consistent with general market value of the subject transaction" (42 CFR 411.351). The fair market value of equipment and office space leases is determined without taking into account intended use or, in the case of office space, proximity to the lessor if the lessor is a potential source of referrals.
CMS abandoned its proposal to equate general market value with "market value." In the final rule, "general market value" is defined as "the price that assets or services would bring as the result of bona fide bargaining between well informed parties that are not otherwise in a position to generate business for each other." CMS provides separate definitions of "general market value" for purposes of asset acquisitions, compensation for services, rental of office space, and rental of equipment.
Volume or Value of Referrals and Other Business Generated
Many Stark exceptions require that compensation not take into account the "volume or value of referrals" or "other business generated" between the parties. Both CMS and the courts have struggled with the application of these standards, creating significant uncertainty for the industry.
The Sprint Regulations clear the slate, expressly superseding the agency's previous guidance and attempt to create a bright line or "objective test." As opposed to deeming certain arrangements or methods not to be based on volume or value, the Sprint Regulations take a proactive approach, offering a specific definition for arrangements that will be considered to take into account volume or value of referrals or other business generated.
The Sprint Regulations categorize the new volume or value definitions as "special rules on compensation." These new rules provide that compensation will be considered to take into account the volume of value of referrals or other business generated only if the formula used to calculate compensation to or from a physician includes the volume or value of referrals or other business generated as a variable, either increasing or decreasing the amount of compensation in a way that directly correlates the compensation with the physician's referrals or other business generated. As the rule explains, a "correlation between two variables exists when one variable decreases as the other variable decreases, or one variable increases as the other variable increases."
The commentary to the Sprint Regulations directly addresses the interpretation of the volume or value standards adopted by the courts in cases such as United State ex rel. Drakeford v. Tuomey Healthcare System, Inc. and U.S. ex rel Bookwalter v. UPMC. CMS expressly rejects Toumey, clarifying that a physician's compensation does not take into account the volume or value of referrals or other business generated solely because corresponding hospital services are billed each time the physician personally performs a service in a hospital setting. The new definition of volume or value combined with the explicit statements in the commentary should provide greater comfort that production-based compensation systems can be Stark compliant.
The Sprint Regulations commentary addresses, but does not resolve, whether an entity may compensate a physician based on the organization making budget or achieving a predetermined margin. The agency indicated that it had insufficient information to determine whether the calculation of a margin-based bonus would include the physician's referrals or other business generated as a variable. Instead, CMS invited the commenter to request an advisory opinion from CMS on the topic.
Many Stark exceptions require that the arrangement be commercially reasonable in addition to being fair market value. "Commercial reasonableness", however, has been interpreted inconsistently by the government and the courts.
The Sprint Regulations provide that a determination of commercially reasonableness should turn on whether the arrangement makes sense to accomplish the parties' goals. More specifically, an arrangement is "commercially reasonable" if it furthers a legitimate business purpose and is sensible in light of the characteristics of the parties, including their size, type, scope and specialty.
CMS does not specifically define "legitimate business purpose" but in its rulemaking commentary, the agency notes that conduct that violates a criminal law, such as inducing or rewarding referrals in violation of the federal Anti-Kickback Statute, would not be a legitimate business purpose. In addition, the agency notes that many of the exceptions that contain a commercial reasonableness requirement also include the qualifying language that the arrangement must be commercially reasonable "even if no referrals were made."
The Sprint Regulations explicitly acknowledge that an arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties. This last provision is noteworthy given that the government and on occasion the courts have suggested that any arrangement that involves a financial loss (for example, compensating an employed physician in excess of collections) is not commercially reasonable.
Designated Health Services
Inpatient and outpatient hospital services are among the Stark Law's designated health services (DHS). The Sprint Regulations now carve out of the definition of inpatient hospital services as any service that does not affect the amount of Medicare payment to the hospital under the:
- Acute Care Hospital Inpatient Prospective Payment System;
- Inpatient Rehabilitation Facility Prospective Payment System;
- Inpatient Psychiatric Facility Prospective Payment System; or
- Long-Term Care Hospital Prospective Payment System.
To illustrate, if a physician who is a party to a noncompliant financial arrangement with a hospital serves as a consultant for a hospital inpatient and orders diagnostic tests performed by the hospital, but those services do not affect the hospital's DRG payment, then Medicare payments for that hospital inpatient stay would not be subject to the Stark billing prohibition as a result of that non-compliant arrangement.
This is a significant change that reduces the scope of Stark's referral and billing prohibitions. Unfortunately, CMS refused to adopt a similar modification to its definition of outpatient hospital services.
Isolated Financial Transactions
The Sprint Regulations' definition of isolated financial transaction narrows the scope of the isolated transaction exception. The definition excludes "a single payment for multiple or repeated services" (such as a payment for service previously provided but not yet compensated) (42 CFR 411.351).
However, an isolated transaction continues to include a payment to settle a bona fide dispute, even if that settlement involves forgoing payments to which a party may be entitled. There appears to be room for confusion between the prohibition on applying the isolated transaction exception when there is a single payment for multiple services and the appropriate use of the exception to settle a single payment dispute relating to multiple services. CMS' commentary indicates that the touchstone is whether there is a bona fide dispute as to the terms of the arrangement.
Ownership or Investment Interests
The Sprint Regulations carve out from the definition of ownership or investment interests both (1) "titular" interests that exclude the right to financial benefits of ownership, such as profits, dividends, proceeds of sale and other returns on investment, as well as (2) interests arising from employee stock ownership plans.
Indirect Compensation Arrangements
CMS narrowed the definition of "indirect compensation arrangement" and eliminated the cross reference to the special rules on compensation. As revised, the definition now requires that the compensation arrangement closest to the referring physician meet two requirements.
- First, as the definition has previously required, the compensation to the physician must vary with the volume or value of the referrals or other business generated by the physician for the DHS entity.
- Second, CMS added the new requirement that the individual unit of compensation must also either be (i) not fair market value, or (ii) calculated using a formula that uses the physician's referrals or other business generated as a variable that positively correlates compensation with volume or value of referrals or other business generated.
CMS acknowledged that this definitional change will reduce the number of indirect arrangements that qualify as indirect compensation arrangements under Stark.
The application of the new definition is relatively straightforward in many contexts but elusive in others. One issue generating confusion is the second prong of the indirect compensation arrangement definition that focuses on the variables included in the "individual unit of compensation."
Assuming that the compensation arrangement closest to the physician is a fixed, fair market rate per service, some argue that the "unit of compensation" is not calculated using the physician's referrals as a variable and consequently no indirect compensation arrangement exists. Others take the position that if the total compensation paid under the arrangement increases as the number of the physician's referrals increases, then even though the "unit of compensation" may be a fixed amount, it nonetheless includes the physician's referrals as a variable. Further guidance from the agency on the indirect compensation arrangement exception would be helpful.
When an indirect compensation arrangement exists, the Sprint Regulations clarify that the available exceptions are limited. Although the various services exceptions under 42 CFR 411.355 as well as the indirect compensation arrangement exception (42 CFR 411.357(p)) are available, most other compensation arrangement exceptions are not.
However, an indirect compensation arrangement may qualify under either the risk sharing exception (42 CFR 411.357(n)) when the entity is an MCO or IPA, or under the new value-based arrangement exception (42 CFR 411.357(aa)).
Decoupling the Anti-Kickback Statute
The Sprint Regulations eliminate from most Stark exceptions the requirement that the arrangement not violate the federal Anti-Kickback Statute (AKS) (42 U.S.C. § 1320a-7b(b)), and the requirement that the claim or bill otherwise comply with applicable law. This change affects numerous exceptions, including the exceptions for temporary noncompliance, academic medical centers, indirect compensation, risk-sharing arrangements, nonmonetary compensation, medical staff incidental benefits, physician recruitment, timeshare arrangements, and electronic health records. By eliminating the AKS element CMS has removed an intent-based requirement from these Stark exceptions.
CMS retained the AKS element, however, for the fair market value arrangement exception (42 CFR 411.357(l)), based in large part on its decision to expand the scope of that exception, as discussed in more detail below.
Period of Disallowance
The Sprint Regulations eliminate the existing Stark rules addressing the period of disallowance. While confirming the general principle that the period of disallowance under Stark "should begin on the date when a financial relationship fails to satisfy all requirements of any applicable exception and end on the date when the financial relationship ends or satisfies all requirements of an applicable exception," CMS emphasizes the need for a case-by-case analysis.
In other words, by eliminating the period of disallowance rules, CMS is expressly acknowledging that there are no bright line rules for determining when a non-excepted financial relationship has ended.
The Sprint Regulations address several Stark group practice requirements:
- CMS revised the definition of "overall profits" to mean the profits derived from all DHS of any component of the group that consists of at least five physicians.
- CMS now requires that the distribution of overall profits of all DHS for either the whole group or any component of five physicians or more be aggregated before distribution. In short, "split pooling" of DHS profits on a service-by-service basis is no longer permitted.
- For example, if a group provides both clinical laboratory and diagnostic imaging services, the group cannot distribute profits from the clinical laboratory to one subset of physicians and diagnostic imaging to a different subset.
- Group practices can continue to organize physicians into subsets, or "practices within a group practice," of at least five physicians for purposes of distributing profits related to DHE. Profits can be distributed differently within each subset of physicians, provided that overall profits from all DHS in the subgroup are aggregated.
- Recognizing that group practices may need to modify their compensation formulae, these provisions of the final rule do not go into effect until January 1, 2022.
- CMS finalized a deeming provision relating to the distribution of profits from DHS that are directly attributable to a physician's participation in a value-based enterprise. Such distribution is deemed not to directly take into account the volume or value of the physician's referrals thereby enabling physicians in a group who are participating in value-based arrangements to be rewarded for their efforts.
- CMS confirms that profit allocations and productivity bonuses may indirectly take into account the volume or value of referrals.
- The Sprint Regulations remove the reference to Medicaid from the provision deeming certain methods for distributing profit shares to be permissible. Revenues derived from DHS could be distributed based on the distribution methodology used for revenue attributed to services that are not Medicare DHS, and that would not be considered DHS if they were payable by Medicare.
- CMS harmonized the requirements for paying productivity bonuses with the provisions addressing the distribution of overall profits.
One of the Stark special rules on compensation allows an entity to include a requirement in physician employment agreements, personal services agreements, or managed care contracts that the physician refer within a designated network or system (42 CFR 411.354(d)(4)). The referral requirement must be in writing and include exceptions for patient choice, payor preference and the physician's clinical judgment.
Emphasizing the importance of protecting patient choice, the Sprint Regulations make this provision an explicit element in the exceptions for academic medical centers, employment, personal services arrangements, physician incentive plans, group practice arrangements with a hospital, fair market value compensation, and indirect compensation arrangements.
Another condition that was added to the rule on directed referrals is that neither the existence of a compensation arrangement nor the amount of the compensation may be contingent on the volume or value of referrals to a particular provider. However, an arrangement may require the physician to refer an established percentage or ratio of the physician's referrals to a particular provider.
The open issue not addressed by the Sprint Regulations or CMS commentary is whether a physician could be terminated if he or she fails to comply with a contractual requirement to refer a specified percentage of patients "within network," or whether taking such action would result in compensation that is contingent on the volume or value of referrals.
Writing and Signature Requirements
The Sprint Regulations provide greater flexibility to meet the common requirements in many Stark exceptions that the arrangement be set forth in writing and signed by the parties. A new special rule on compensation provides that the writing requirement as well as the signature requirement are deemed to be satisfied if the arrangement satisfies all other elements of an applicable exception, and the parties obtain the required writing and/or signature within 90 consecutive calendar days. The agency also confirms that the writing requirement can be satisfied through a collection of documents.
The writing grace period does not eliminate the requirement for compensation to be set in advance (if an element of the applicable exception). However, the agency indicates that the compensation terms do not have to be documented in writing before the items or services are furnished to meet the "set in advance" requirement. For example, compensation would be considered set in advance if the parties agree on a rate before items or services are furnished and assemble adequate documentation before the end of the 90-day grace period to satisfy the writing requirement and demonstrate a consistent rate of compensation over the course of the arrangement.
Set in Advance
The Sprint Regulations amend the special rule on compensation related to the requirement that compensation be "set in advance" (42 CFR 411.354(d) (1)) by expressly permitting compensation to be modified at any time during the course of the arrangement, provided:
- (1) All requirements of an applicable exception are met on the effective date of the modified compensation;
- (2) The modified compensation is determined before the furnishing of items, service, space or equipment for which the modified compensation is to be paid; and
- (3) Before the furnishing of the items, service, space or equipment for which the modified compensation is to be paid the compensation is set forth in writing such that it can be objectively verified.
This change makes it much easier for parties to amend an agreement as long as any changes to the compensation terms are applied prospectively.
New Special Rule on Reconciling Compensation Within 90 Days
In the proposed Sprint Regulations, CMS offered guidance about how to remedy "administrative and operational failures" that may arise in the course of an arrangement:
Through submissions to the SRDP and other interactions with stakeholders, we are aware of questions regarding whether administrative errors, such as invoicing for the wrong amount of rental charges (that is, an amount other than the amount specified in the written lease arrangement) or the payment of compensation above what is called for under a personal service arrangement due to a typographical error entered into an accounting system, create the type of "excess compensation" or "insufficient compensation" described in our preamble guidance and the period of disallowance rules. This was never our intent. However, the failure to remedy such operational inconsistencies could result in a distinct basis for noncompliance with the physician self-referral law.
CMS' acknowledgement that mistakes could be corrected was welcome but many criticized the fact that once the agreement terminated the ability to cure the defect disappeared. In the final Sprint Regulations, CMS responded by introducing a new special rule for reconciling compensation (42 CFR 411.353(h)).
Under this new rule an entity may avoid a Stark violation if no later than 90 days following the termination of a compensation arrangement the parties reconcile all discrepancies in payments under the arrangement such that, following the reconciliation, the entire amount of remuneration for items and services has been paid as required under the terms of the arrangement. If, however, the error is not discovered and remedied within 90 days of termination, the parties cannot "unring the bell" by correcting the error at a later date.
Modifications to the Compensation Exceptions
New Exception "Z"- Limited Remuneration to a Physician
The Sprint Regulations introduce a new exception (Exception Z) that covers remuneration paid to a physician for items or services that does not exceed $5,000 per calendar year, provided the compensation does not exceed fair market value, is not determined in a manner that takes into account the volume or value of referrals or other business generated by the physician, and the overall arrangement is commercially reasonable.
The $5,000 limit (up from $3,500 in the proposed rule) is per physician per calendar year and subject to an annual CPI adjustment. Note, however, that if a physician stands in the shoes of his/her group, any Exception Z payment to one owner of the group will be attributed to all of the other owners for purposes of calculating the annual limit. In addition, if an entity has multiple undocumented arrangements with a physician, they are considered one arrangement for purposes of compliance with the Exception Z, including the annual monetary cap.
Exception Z has great potential to help entities avoid inadvertent Stark violations because it does not require a writing or signature and compensation does not have to be set in advance. In addition, Exception Z can be used in conjunction with other Stark exceptions, creating the possibility that a personal services arrangement that fails to comply with an exception for the first few months could rely on Exception Z if the amount paid during that period did not exceed $5,000. After the parties have the documentation in place, the arrangement could then qualify for the personal services arrangement exception or the fair market value arrangement exception.
Exception Z does not apply to payments to an immediate family member of a physician. In addition, if the arrangement involves the lease or use of office space, equipment, personnel, items or services, the compensation must not be determined using a formula based on a percentage of revenue or collections attributable to services performed using the space, equipment, personnel, items, supplies or services, or using per-unit of service fees reflecting services provided to patients referred by the lessor to the lessee, or patients referred by the owner of the premises, equipment, personnel, items, supplies or services.
Office Space and Equipment Leases
The Sprint Regulations amend the "exclusive use" requirement in the exceptions for office space and equipment leases to permit multiple lessees to use the space (42 CFR 411.357(b)(2)). In short, the exclusive use requirement limits only the lessor's use of the lessee's space. However, neither the lessor nor any person related to the lessor may use the space even as an invitee of the lessee.
Fair Market Value Compensation
The Sprint Regulations modify the fair market value exception to cover arrangements for the rental of office space or equipment for a term of less than one year (42 CFR 411.357(l)(2)). The parties may enter into only one such arrangement over the course of a year.
However, the duration of the short-term arrangement could be extended on the same terms. Because the use of the fair market value arrangement exception enables parties to avoid the more technical requirements of the lease exceptions, the Sprint Regulations retain the requirement that the arrangement must comply with the Anti-Kickback Statute.
One commenter requested that CMS add a holdover provision to the fair market value exception. CMS considered the addition of a holdover clause unnecessary because the exception does not have a term requirement and can be extended as often and for as long as the parties wish, with or without a writing. Given that the parties can extend the term of the agreement by their course of dealing, a hold over provision is not necessary.
Compensation Unrelated to DHS
Historically, CMS has attempted to eviscerate the statutory exception for remuneration unrelated to DHS. In the Proposed Sprint Regulations, the agency suggested a more liberal reading of the exception—that remuneration would not relate to the provision of DHS if it is not determined in any manner that takes into account the volume or value of the physician's referrals and is "not related to the provision of patient care services."
In the final rule, CMS unfortunately abandons this concept and the Sprint Regulations make no changes to the exception for compensation unrelated to DHS.
Payments by a Physician
In contrast, the Sprint Regulations rescue another exception that CMS has long disfavored: payments by a physician for items or services at fair market value. Historically CMS took the position that this exception was not available for arrangements where any other Stark exception could apply.
Under the Sprint Regulations, this exception applies to compensation arrangements other than those addressed in one of the statutory compensation exceptions. This means that the exception for payments by a physician would still be unavailable for arrangements involving leases of office space or equipment, for example, but could potentially protect an arrangement such as a physician's purchase of administrative services from a hospital, because there are no statutory exceptions that might otherwise apply.
An entity cannot, however, provide cash to the physician as the item or service for which the physician is paying.
CMS acknowledges that the agency has reviewed several arrangements where the recruitment exception was unavailable because the physician practice did not sign the recruitment agreement, even though the practice did not receive any payments under the agreement. The Sprint Regulations modify the recruitment exception to require the practice to sign the recruitment agreement only if payment is made to the practice and the practice does not pass directly through to the recruited physician all of the remuneration received from the hospital.
Assistance to Compensate a Non-Physician Practitioner (NPP)
The Sprint Regulations include clarifications concerning the exception that protects remuneration provided by a hospital, Federally Qualified Health Center (FQHC) or Rural Health Clinic (RHC) to a physician to compensate an NPP to provide "patient care services." To avoid confusion with the already defined term "patient care services" (which refers to physician services), CMS offers a new term, "NPP patient care services," defined as direct patient care services furnished by an NPP and any task performed by an NPP that promotes the care of patients.
To address questions about the timing of the arrangements that are permissible under this exception, the Sprint Regulations require the compensation arrangement between the hospital/FQHC/RHC and the physician begin before the physician or physician organization enters into the compensation arrangement with the NPP.