CMS made impactful changes to the Federal physician self-referral law's (i.e., Stark Law's) regulations in its Final Rule that were effective January 19, 2021 (with the exception of the changes to 42 C.F.R. § 411.352(i) that are effective January 1, 2022). Although lengthy (190 pages/3-column format), the Final Rule is worth the read with multiple clarifications and revisions to the dense regulations.
In this first part of our two-part blog, each reader will find gems in the Final Rule that are impactful, but we note particularly the following key changes, clarification, and discussion:
1. New Value-Based Exceptions (§ 411.357(aa))
The new value-based (VB) exceptions offer three (3) options to arrangements involving remuneration paid under a VB arrangement:
- full financial risk for which the VB
enterprise (VBE) is at "full financial
risk"—meaning that the VBE is financially responsible on
a prospective basis for the cost of all patient care items and
services covered by the applicable payer for each patient in the
target patient population for a specified period of time. 42 C.F.R.
§ 411.357(aa)(1)(vii)—(or is contractually obligated to
be at full financial risk within the 12 months following the
commencement of the VB arrangement) during the entire duration of
the VB arrangement;
- meaningful downside risk for which
the physician is at "meaningful downside
risk"—meaning that the physician is responsible to repay
or forgo no less than 10% of the total value of the remuneration
the physician received under the value-based arrangement. 42 C.F.R.
§ 411.357(aa)(2)(ix)—for failure to achieve the VB
purpose(s) of the VBE during the entire duration of the VB
arrangement and the nature and extent of that risk is set forth in
- value-based arrangements for which the arrangement is set forth in writing and signed by the parties and includes a description of (A) the VB activities to be undertaken under the arrangement, (B) how those activities are expected to further the VB purposes of the VBE; (C) the target patient population for the arrangement; (D) the type/nature of the (monetary or nonmonetary) remuneration; (E) the methodology used to determine the remuneration; and (F) the outcome measures against which the recipient of the remuneration is assessed (if any). (NOTE: The title of this 3rd exception is confusing because it is called "value-based arrangements" despite all three exceptions applying to VB arrangements.)
With regard to all three (3) VB exception options:
- The exceptions have additional requirements, and there are
multiple definitions that need attention.
- VB exceptions do not include fair market value, set in advance, volume or value of referrals or other business-generated requirements. However, the VB arrangement exception does expressly require that the compensation arrangement is commercially reasonable (the full financial risk and meaningful downside risk exceptions do not).
2. New Exception for Limited Remuneration to a Physician (§ 411.357(z))
CMS finalized a new exception to protect compensation not exceeding an aggregate amount of $5,000 per calendar year, as adjusted for inflation, to a physician for the provision of items and services (including the lease of office space or equipment) without the need for a signed writing.
- CMS noted that if an entity has multiple arrangements with a
physician that are undocumented and unsigned, it will consider the
parties to have a single compensation arrangement for the various
items and services, and the aggregate compensation for all those
items and services may not exceed the $5,000 annual limit
(See 85 Fed. Reg. at 77,624).
- That annual aggregate remuneration limit resets each calendar
- The exception permits the physician to provide services
directly or through employees hired for the purpose of performing
the services, a wholly-owned entity or through locum
tenens physicians (but not through independent
- The writing and set in advance requirements are only triggered
if there is a directed referral arrangement.
- The limited remuneration to a physician exception is intended to apply to a physician, not to a physician organization. (Id. at 77,626) Be careful how these arrangements are structured, because if "stand in the shoes" compensation is received by a physician organization, then that compensation counts to all physician who "stand in the shoes" of the organization.
3. New Cybersecurity Technology and Related Services Exception (§ 411.357(bb))
CMS adopted a new cybersecurity technology and related services exception that incorporates many of the same requirements of the EHR exception.
- The exception covers cybersecurity software (e.g.,
malware prevention, data protection and encryption);
cybersecurity-related hardware; and
cybersecurity-related services (e.g., cybersecurity
training services, services associated with performing a
cybersecurity risk assessment). Examples are fleshed out in the
Final Rule, and are illustrative, not exhaustive. (Id. at
- The exception only applies to technology and services that are
necessary and used
predominantly to implement, maintain, and reestablish
- The exception is limited to nonmonetary compensation (i.e., no
subsidies are permitted under this exception and no ransom
- CMS did not exclude any particular type of technology or
services—including patches and updates—from the
application of the final cybersecurity exception. There is no
financial contribution requirement so the initial writing and
meeting the exception's other requirements can cover
- The exception does not apply to donations of installation,
improvement, or repair of infrastructure related to physical
safeguards even if they could improve cybersecurity (e.g., upgraded
wiring or high security doors) because such donations have benefits
- Physicians cannot make the receipt of cybersecurity technology
and services a condition of doing business.
- The exception does not require the parties to sign the writing that documents the arrangement, nor do they need to draft the writing as a formal contract. The writing requirement is satisfied if contemporaneous documents would permit a reasonable person to verify compliance with the exception at a time the referral is made. (Id. at 77,642)
4. New Commercially Reasonable Definition (§ 411.351)
CMS added a definition of "commercially reasonable." Commercially reasonable means that the particular arrangement furthers a legitimate business purpose of the parties to the arrangement and is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty.
- Commercial reasonableness is not a valuation
- Compensation arrangements that do not result in profit for one or more of the parties may nonetheless be commercially reasonable. Examples of why parties would enter into such arrangements include community need, timely access to healthcare services, fulfillment of licensure or regulatory obligations (e.g., EMTALA obligations), the provision of charity care, and the improvement of quality and health outcomes.
This definition and discussion of commercially reasonable was incredibly helpful given the prior opinions of government experts regarding commercial reasonableness involving health systems that were not making a profit on certain physician practices. We have argued the examples noted above for commercial reasonableness, and now have confirmation from CMS.
5. New Tests Related to Volume or Value Standard and Other Business Generated Standard (§ 411.354(d)(5), (6))
CMS created objective tests for determining whether the compensation is determined in any manner that takes into account the volume or value of referrals or takes into account other business generated between the parties at 42 C.F.R. § 411.354(d)(5) and (6).
- Only when the mathematical formula used to calculate
the amount of the compensation includes referrals or other business
generated as a variable, and the amount of compensation correlates
with the number or value of the physician's referrals to or the
physician's generation of other business for the entity, is the
compensation considered to take into account the volume or value of
referrals or take into account the volume or value of other
business generated. (Id. at 77,537)
- "Directly or indirectly" is implicit in the
requirements that compensation is not determined in
any manner that takes into account the
volume or value of referrals or the volume or value of other
- CMS also clarified uncertainty around the Tuomey correlation theory noting: We reaffirmed the position we took in the Phase II regulation. ...[W]ith respect to employed physicians, a productivity bonus will not take into account the volume or value of the physician's referrals solely because corresponding hospital services (that is, designated health services) are billed each time the employed physician personally performs a service. We also clarified that our guidance extends to compensation arrangements that do not rely on the exception for bona fide employment relationship at § 411.357(c), and under which a physician is paid using a unit-based compensation formula for his or her personally performed services, provided that the compensation meets the conditions in the special rule at § 411.354(d)(2). That is, under a personal services arrangement, an entity may compensate a physician for his or her personally performed services using a unit-based compensation formula – even when the entity bills for designed health services that correspond to such personally performed services – and the compensation will not take into account the volume or value of the physician's referrals if the compensation meet the conditions in the special rule at 411.354(d)(2) (see 69 FR 16067). This is true whether the compensation arrangement is analyzed under an exception applicable to compensation arrangements directly between an entity and a physician or is an indirect compensation arrangement analyzed under the exception at 411.357(p). ... An association between personally performed physician services and designated health services furnished by an entity does not convert compensation tied solely to the physician's personal productivity into compensation that takes into account the volume or value of a physician's referrals to the entity or the volume or value of other business generated by the physician for the entity. (Id. at 77,540-541)
6. Revisions to the Indirect Compensation Definition (§ 411.354(c)(2))
CMS revised the definition for "indirect compensation arrangements" adding that any one of the following are true:
- The individual unit of compensation received by the physician
(or immediate family member) is not fair market value for items or
services actually provided;
- the individual unit of compensation received by the physician
(or immediate family member) is calculated using a formula that
includes the physician's referral to the entity furnishing
designated health services as a variable, resulting in an increase
or decrease in the physician's (or immediate family
member's) compensation that positively correlates with the
number or value of the physician's referrals to the entity;
- the individual unit of compensation received by the physician (or immediate family member) is calculated using a formula that includes other business generated by the physician for the entity furnishing designated health services as a variable, resulting in an increase or decrease in the physician's (or immediate family member's) compensation that positively correlates with the physician's generation of other business for the entity.
With this revised analysis, fewer indirect arrangements will meet the definition, and therefore, CMS acknowledges that less indirect arrangements will be in writing.
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In evaluating your financial arrangements, we recommend that you also consider the changes to the Federal anti-kickback statute safe harbors that were also effective on January 19, 2021. See 85 Fed. Reg. 77,684 (OIG Final Rule Dec. 2, 2020). Stay tuned for part 2 of this blog series, which will drop tomorrow!
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.