On November 20, 2020, the Centers for Medicare & Medicaid Services ("CMS") released a much anticipated final rule ("Final Rule") aimed at modernizing and streamlining key regulations under the federal Stark Law. As anticipated, the Final Rule included some major changes to the Stark regulations that will drive physician contracting, compensation models and compliance strategies for years to come.

As we noted in our firm's initial alert on November 20 and our overview webinar earlier this week, the Final Rule provides a much-needed framework for protecting certain value-based arrangements that incentivize care coordination, quality of care and cost containment. The Final Rule also includes several helpful new exceptions and clarifies the interpretations of current existing Stark regulations, including the "Big 3" requirements of fair market value ("FMV"), commercial reasonableness and the volume or value standard. These changes should ultimately reduce the compliance burden for providers once the Final Rule goes into effect in approximately 45 days. This added flexibility is more important now than it has ever been as the industry continues to navigate the ongoing COVID-19 pandemic.

This article is intended to briefly summarize the Final Rule's key changes and to provide a more detailed discussion of the "Big 3." It is important to note that nearly all of these changes will be effective on January 19, 2021. Certain modifications to the Stark group practice compensation distribution provisions were delayed until January 1, 2022.

New Value-Based Exceptions

In 42 C.F.R. §411.353(aa), CMS finalized three new exceptions intended to encourage physicians and health care providers to enter into innovative arrangements that facilitate a "value-based purpose" for health care delivery and payment.

The Final Rule states that "value-based purpose" means any of the following:

(1) Coordinating and managing the care of a target patient population;
(2) Improving the quality of care for a target patient population;
(3) Appropriately reducing the costs to, or growth in expenditures of, payors without reducing the quality of care for a target patient population; or
(4) Transitioning from health care delivery and payment mechanisms based on the volume of items and services provided to mechanisms based on the quality of care and control of costs of care for a target patient population.

These new exceptions are intended to protect arrangements that satisfy specified requirements based on the characteristics of the arrangement and the level of financial risk undertaken by the parties, including:

  • An exception for value-based arrangements where a value-based enterprise has assumed full financial risk from a payor for patient care services for a target patient population.
  • An exception for value-based arrangements where a physician has meaningful downside financial risk.
  • An exception for other value-based arrangements, provided they satisfy specified requirements.

A "value-based enterprise" is defined as two or more individuals or entities collaborating to achieve a value-based purpose. The value-based enterprise must have an accountable body or person responsible for financial and operational oversight, as well as governing documentation describing the enterprise and the value-based purpose. "Target patient population" means an identified patient population selected by a value-based enterprise based on legitimate and verifiable criteria that are set out in advance and further the enterprise's value-based purpose.

The value-based exceptions set forth at 42 C.F.R. §411.353(aa) do not have a fair market value requirement or a prohibition on "taking into account" the volume or value of a physician's designated health service ("DHS") referrals. According to CMS, value-based arrangements already have sufficient safeguards against harms such as overutilization, care stinting and patient steering. Instead of including traditional requirements, CMS is finalizing what it describes as a "carefully woven fabric of safeguards, including requirements incorporated through the applicable value-based definitions."

Other Significant Changes

The Final Rule also included other notable additions, which will be addressed in more detail in future alerts and content from Hall Render.

  • New Limited Remuneration Exception – The Final Rule includes a new exception for arrangements where an entity pays a physician less than $5,000 over the course of a calendar year in exchange for items or services. This proposed exception would not have writing, signature or set-in-advance requirements, but would require that compensation paid is consistent with fair market value and that the terms of the arrangement are commercially reasonable.
  • 90-Day Grace Period for Writing/Signatures – CMS finalized a 90-day grace period for obtaining the requisite signatures on written arrangements to also include a 90-day grace period for the written document itself. Note that the parties would still be required to comply with all other elements of the applicable exception, including any set in advance requirements. The exception does not apply to compensation modifications made during the term of an arrangement (i.e., modifications must meet the writing and set-in advance requirements prior to the furnishing of items or services to which the modification applies).
  • Isolated Financial Transactions – CMS finalized its proposed changes to the "isolated transactions" exception by confirming that the exception is intended to apply to a "single payment . . . for a single exchange of value," and is not intended to protect a single payment for multiple services provided over an extended period. It also clarified that the exception will protect a single instance of forgiveness of an amount owed in settlement of a bona fide dispute (but the exception will not otherwise correct any failures of the underlying arrangement to meet a Stark exception).
  • Compensation Reconciliations – CMS finalized a special rule that permits parties to resolve payment discrepancies within 90 days following the end of an arrangement.
  • Office/Equipment Leases – CMS clarified the exclusive use requirement in leases to allow multiple lessees to use the space or equipment but to the exclusion of the lessor or persons/entities related to the lessor.
  • Modification of Exceptions and Definitions – CMS updated aspects of the risk-sharing and physician recruitment exceptions and modified key definitions, including DHS and remuneration. CMS also updated rules impacting group practice distributions (which will not go into effect until January 1, 2022).

New Guidance and Clarifications on the "Big 3"

The Proposed Rule provides the following guidance on the "Big 3" Stark Law requirements, fair market value, commercial reasonableness and the prohibition on "taking into account" the volume or value of a physician's referrals:

  • Revised Fair Market Value Definition – CMS revised the fair market value definition to remove cross-references to the volume or value standard, confirming that the standards are separate and distinct. CMS reorganized the definition of fair market value into three different components (i.e., general application, equipment rentals, office or space rentals) and developed a separate definition for "general market value" made up of three components as well (i.e., assets, compensation and equipment or office space). CMS noted that this reorganization provides parties with ready access to the definition of "fair market value," with the attendant modifiers that are applicable to their specific type of compensation arrangement at issue. CMS restated some of the guidance on fair market value in prior rulemaking, including examples of extenuating circumstances that may dictate that parties to an arm's length transaction veer from values identified in health care salary surveys.
  • New Commercial Reasonableness Definition – In a significant development, CMS took on what it described as a widespread misconception about commercial reasonableness and profitability. CMS finalized the following definition confirming that commercial reasonableness will not turn on whether an arrangement is profitable:

    Commercially reasonable means that the particular arrangement furthers a legitimate business purpose of the parties to the arrangement and is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty. An arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.

This proposed change corresponds to the more longstanding view under anti-kickback analysis that the concept of commercially reasonable should be analogous to a purpose-driven arrangement serving a legitimate need. Along this line, in finalizing the new definition, CMS acknowledged that, even if parties know in advance that an arrangement may result in losses to one or more parties, it may be commercially reasonable, if not necessary, to nevertheless enter into the arrangement. CMS stated examples of reasons why parties would enter into such transactions include community need, timely access to health care services, fulfillment of licensure or regulatory obligations, including those under the Emergency Medical Treatment and Labor Act ("EMTALA"), the provision of charity care, and the improvement of quality and health outcomes.

  • Objective Volume or Value Test and Directed Referrals – CMS finalized an objective test that defines exactly when compensation will be considered to take into account the volume or value of a physician's DHS referrals or other business generated. Under the new test, compensation will only be considered to take into account the volume or value of referrals or to take into account the volume or value of other business generated if the mathematical formula used to calculate the amount of the compensation includes referrals or other business generated as a variable and if the amount of the compensation correlates with the number or value of the physician's referrals to or the physician's generation of other business for the entity. CMS noted its belief that there is great value in having an objective test, and that the Final Rules establish such a test. CMS also gave examples of compensation formulas that may fail the new objective test.

In a new development, CMS also finalized changes to Stark's special rules related to directed referrals. Going forward, neither the existence of a compensation arrangement nor the amount of the compensation may be contingent on the number or value of a physician's referrals to a particular provider, practitioner or supplier. It is important to note, however, that providers may require that a physician refer an established percentage or ratio of the physician's referrals to a particular provider, practitioner or supplier.

Practical Takeaways

The Final Rule shows that HHS and CMS have delivered on their promise to work on modernizing and streamlining the Stark Law. It is important to note again that most of the changes in the Final Rule go into effect soon on January 19, 2021. Health care organizations will need to move quickly to react and adapt to the interpretations and positions taken by CMS.

As a next step, please register here for a Hall Render physician compensation webinar roundtable that will touch on the Final Rule scheduled for December 8, 2020, at 1:00 PM EST and watch for our future content on fraud and abuse reform.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.