December 11, 2020

CMS Overhauls Stark Law Regulations as Part of Regulatory Sprint to Coordinated Care

On November 20, 2020, in addition to new Stark Law regulations intended to accommodate value-based financial arrangements with physicians, the Centers for Medicare and Medicaid Services (CMS) issued final regulations that significantly overhaul existing Stark Law exceptions, special rules and definitions. Published in the Federal Register on December 2, these regulatory changes will make it easier for health care entities to comply with the Stark Law.

This client alert is part of a series of summaries prepared by Faegre Drinker explaining the voluminous revisions to CMS’s Stark Law regulations and the Anti-Kickback Statute safe harbors promulgated in connection with what the Trump administration has called the “regulatory sprint” to coordinated care. Links to our prior client alerts are at the end of this piece.

Changes to the “Big Three” Requirements

CMS has adopted a number of clarifications to what it calls the “big three” requirements that appear in many of the Stark Law regulatory exceptions — namely, that compensation arrangements with physicians: (1) be commercially reasonable; (2) not be determined in a manner that takes into account the volume or value of referrals (the “volume or value” requirement); and (3) be consistent with fair market value.

Most importantly, CMS clarified that these three requirements are “separate and distinct” requirements that address different questions:

  • Commercial reasonableness concerns whether the arrangement makes sense as a means of accomplishing the parties’ business objectives.
  • The “volume or value” requirement concerns how the parties calculated the compensation.
  • The fair market value requirement concerns whether the calculation results in compensation that is fair market value for the asset, item or service.

Commercially Reasonable

For the first time, CMS adopted a definition of “commercially reasonable.” The definition states that “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.”

With other revisions made by CMS, the term “commercially reasonable” in the Stark exceptions for compensation arrangements is now always followed by the phrase “even if no referrals were made” between the parties, with the exception of the new exception for value-based arrangements. Thus, in practice, the “even if no referrals were made” caveat is baked into the commercial reasonableness requirement.

Both the new definition and CMS’s commentary reinforce that an arrangement can be commercially reasonable even if it does not result in a profit for one or more parties to the arrangement. CMS explained that an unprofitable arrangement may be commercially reasonable for any number of reasons, including community need, timely access to health care services, fulfillment of licensure or regulatory obligations, the provision of charity care, and the improvement of quality and health outcomes. On the other hand, CMS also commented that the lack of profitability could be relevant to a commercial reasonableness determination, such as if parties entered into an arrangement “aware of its certain unprofitability” and “there exists no identifiable need or justification — other than to capture the physician’s referrals — for the arrangement.”

CMS also noted that an arrangement that, on its face, appears to further a legitimate business purpose of the parties may not be commercially reasonable if it merely duplicates another legitimate arrangement. CMS cited as an example a medical directorship agreement that duplicates another existing directorship agreement and is therefore unnecessary.

Volume or Value

Numerous compensation exceptions require that the compensation may not be determined in a manner that “takes into account the volume or value of referrals,” with certain exceptions adding “or other business generated between the parties.”

The new rules include a provision stating that compensation takes into account the volume or value of referrals (or other business generated between the parties) only if the formula used to calculate the compensation includes the physician’s referrals to the entity (or other business generated) as a variable that results in compensation positively correlated to the number or value of referrals (or other business). In other words, the “volume or value” requirement is now a strict mathematical test. In the past, some had interpreted prior CMS commentary to mean that even fixed compensation could take into account the volume or value of referrals if the compensation was set at a level that subjectively took into account the physician’s referrals. The new rule displaces any such notion.

CMS’s commentary also clarifies that compensating physicians based on units of service for personally performed services (e.g., compensation based on relative value units [RVUs] or number of procedures) does not take into account the volume or value of referrals even if the physician services are associated with a corresponding service that the hospital or other entity can bill for. In the past, relators and the Department of Justice had argued, and some courts had agreed, that RVU-based compensation for surgical procedures that were performed in a hospital or provider-based setting ran afoul of the “volume or value” requirement because each such procedure is associated with a referral to a hospital for designated health services that the hospital could bill for separately (i.e., inpatient or outpatient services). CMS has now put this concern to bed.

As noted above, some exceptions state that compensation may not take into account the volume or value of “referrals,” while other exceptions further state that compensation may not also take into account the volume or value of “other business generated between the parties.” CMS reiterated that the term “referral” is used in the sense in which it is defined in 42 C.F.R. § 411.351 and means the referral of a Medicare patient for a designated health service. By contrast, “other business generated between the parties” means any other form of patient referral or other business.

CMS realized that by clarifying that the “volume or value” standard refers to a mathematical formula, the provision does not prevent employment and other service contracts from requiring physicians to make referrals to the other contracting entity or one of its affiliates. Previously, the Stark regulations contained a special rule permitting such “directed referral” provisions, but only if there were exceptions allowing for patient preference, physician medical judgment and insurance coverage reasons. Due to the clarification of the “volume or value” standard, CMS found it necessary to incorporate a directed-referrals provision directly into a number of compensation exceptions. The new directed-referrals provisions make clear that a contract cannot require a physician to make a specified number or value of referrals to a particular provider, practitioner or supplier, but the contract can require a percentage of the physician’s referrals be made to the specified provider, practitioner or supplier.

Fair Market Value

CMS included a new and clearer definition of “fair market value,” which contains separate subparts for different types of transactions (rental of office space or equipment, personal services, purchase of assets). Despite the urging of some commenters, CMS retained a provision that states that fair market value is determined with reference to the value that would result from bona fide bargaining between well-informed parties “not otherwise in a position to generate business for each other.”

In commentary, CMS stated that physician compensation surveys may not always align with fair market value, which requires a case-by-case determination. At the same time, CMS stated that physician compensation surveys are “an appropriate starting point” and in some instances “may be all that is required” to provide assurance that compensation does not exceed fair market value. To illustrate, CMS stated that a salary survey may not properly capture the fair market value of an orthopedic surgeon who is one of the “top” surgeons in the country and is highly sought after by professional athletes due to the surgeon’s “specialized techniques” and good success rate. On the other end, CMS stated that it may not be appropriate to rely solely on a physician compensation survey to determine fair market value for a family physician in a geographic area with a low cost of living, good schools and recreational activities, and a hospital with tenuous finances. In addition, CMS expressly disowned the notion occasionally espoused by some valuation consultants that compensation above the 75th percentile is “suspect” or that compensation below the 75th percentile is always appropriate.

New Tools for Dealing with Situations Posing Low Risk of Abuse

CMS also issued a new compensation exception for limited remuneration to a physician, which, along with other new rules, will help to reduce the risk that oversights that pose a low risk of fraud and abuse will trigger Stark Law violations.

New Limited Remuneration to a Physician Exception

A new regulatory exception for limited remuneration to a physician allows for payments up to an annual aggregate $5,000 to a physician per calendar year to compensate for the furnishing of items or services if the following elements are met:

  • The compensation does not take into account the volume or value of referrals or other business generated between the parties;
  • The compensation does not exceed fair market value;
  • The arrangement is commercially reasonable even if no referrals were made between the parties;
  • For lease of office space or equipment, the rental rate is not determined on a per-click basis or based on a percentage of revenues generated from the use of the space or equipment; and
  • If the remuneration is conditioned upon the physician’s referrals to a particular provider, practitioner or supplier, the arrangement satisfies the rules on directed referrals described above.

Significantly, no writing is required and the compensation need not be set or otherwise agreed to in advance. In addition, the items or services paid for need not be personally furnished by the physician, but can be provided by an employee or contractor of the physician or the physician’s practice.

The $5,000 calendar year limit will be adjusted for inflation. For arrangements that straddle a calendar year, the $5,000 limit applies to each calendar year, and the $5,000 limit resets on January 1. Thus, conceivably, this exception could protect up to $10,000 for a single arrangement.

If this exception is used for an arrangement with a physician group, the stand-in-the-shoes provision of the Stark Law applies. This means that the payment to the group practice counts towards the $5,000 annual aggregate limit for each physician who stands in the shoes of the physician practice.

Importantly, the exception for limited remuneration to a physician can be used in conjunction with other exceptions. For example, the exception could be invoked to cover the first $5,000 of remuneration under an arrangement while an arrangement lacks a required written agreement; then another exception could be invoked once a written, signed agreement is secured. By coordinating exceptions in this manner, it may be possible either to reduce the period of noncompliance or eliminate noncompliance altogether.

Late Writings and Signatures

CMS has adopted a new rule giving parties 90 days to obtain or collect the required writing or writings where an exception requires a writing—an extension of its prior 90-day leniency with respect to signatures. This 90-day grace period applies only if the arrangement complies with all other elements of an applicable exception. In addition, the rule provides that an electronic signature is permissible if “valid under Federal or state law,” and CMS’s commentary elaborates that the allowance for electronic signatures also applies to a typed signature or even a name on the signature block of an email if “valid” under federal or state law. The concept of “validity” under federal or state law is not explained. Under general contract law, a signature is not required for most types of contracts to be enforceable; indeed, oral agreements are generally enforceable under state law, and only certain types of contracts require a written agreement.

The 90-day grace period and the exception for limited remuneration to a physician can serve as alternative means for a new arrangement that is not immediately memorialized with a writing to comply until the parties compile the required writing and signatures.

Clarification Regarding Documentation Needed to Satisfy “Set in Advance”

CMS explained in its commentary that that initial compensation terms need not be spelled out in writing in order to be deemed as “set in advance,” so long as they in fact have been agreed to prior to the furnishing of items or services for which the compensation will be paid. The Stark Law regulations contain a provision stating that compensation is “deemed” to be set in advance if it is reduced to a writing prior to the furnishing of services and is spelled out with sufficient detail, but CMS explained in the commentary that satisfying the “deeming” provision is not required for initial compensation terms to qualify as “set in advance.”

However, CMS expanded on the “set in advance” rule to require that revised compensation terms — as opposed to initial compensation terms — must indeed be reduced to writing before the furnishing of items and services to which the revised compensation terms apply, in order for the new compensation to be deemed as set in advance. CMS gave the example of an on-call arrangement that was not initially reduced to writing but for which the parties reach an actual agreement that compensation would be $500 per shift. The $500 per shift compensation would be deemed set in advance and, as noted above, the parties would have 90 days to compile a writing and signatures (so long as all other elements of an exception are satisfied). If on Day 70, however, the parties agreed to increase the compensation to $600 per shift, the revised compensation terms would need to be set forth in a writing prior to the furnishing of the services in order for the revised compensation to qualify as “set in advance.” This is so even though the revision to the compensation occurred within the 90-day period within which to compile writings and signatures.

CMS also clarified that compensation may be modified prospectively without the need to extend the agreement by one year (which prior CMS commentary had led some to believe) and that there is no limit to the number of times that parties can revise compensation so long as they satisfy the “set in advance” requirements each time (assuming that “set in advance” is an element of the relevant exception).

New Special Rule for Reconciling Payments within 90 Days

Payment discrepancies — such as contract overpayments or underpayments resulting from administrative errors — have frequently posed Stark Law challenges for health care entities. In response, CMS adopted a new provision that allows parties 90 days after the conclusion of a compensation arrangement to reconcile any discrepancies in payments made under the arrangement. (Entities may potentially look to the isolated transactions exception for potential cover following this 90 day period — more on this below.)

In its commentary, CMS also stated that a Stark Law violation does not arise due to payment discrepancies that are identified and corrected during the course of an arrangement, but that the knowing failure to correct a deficiency could in and of itself create a new compensation arrangement (without an applicable exception) in the form of forgiveness of a liability.

No Stark Law Violation if Ordered Items or Services for a Hospital Inpatient Do Not Increase Reimbursement

Revised Definition of “Designated Health Services”

CMS has revised the definition of “designated health services” (DHS) such that services that are ordered by a physician for a hospital inpatient but that do not increase a hospital’s inpatient Prospective Payment System (PPS) reimbursement are not considered DHS. CMS offers the example of a specialist who is consulted on an inpatient and who orders an imaging study. If the imaging study does not increase the hospital’s inpatient PPS reimbursement, then the radiology test is not considered DHS even though it would otherwise fit into the “inpatient hospital services” category of DHS. This revised definition applies to the Acute Care Hospital Inpatient PPS, Inpatient Rehabilitation PPS, Inpatient Psychiatric Facility PPS and Long-Term Care Hospital PPS, but does not apply to referrals for a hospital outpatient reimbursed under the Outpatient PPS.

The ordering of an item or service for an already-admitted inpatient would increase reimbursement under inpatient PPS reimbursement systems if the care provided to the patient qualifies for outlier payments. Therefore, services referred for such patients may still qualify as “designated health services,” even if they do not affect the diagnosis-related group assigned to the inpatient admission.

Other Provisions

CMS also made a number of additional changes or clarifications, including:

Lease Exceptions

CMS clarified that the provision found in the exceptions for both the rental of office space and for rental of equipment requiring “exclusive use” of the space or equipment by the lessee does in fact allow for other lessees to use the space or equipment, but only that the lessor cannot do so. In addition, the lessor may not use the space or equipment even as an invitee of the lessee. The point of the “exclusive use” provision is to avoid sham leases.

CMS also reversed its prior position and stated that it will now allow the exception for Fair Market Value Compensation to be used to cover rentals of space and equipment. This is significant in that, unlike the rental of office space and rental of equipment exceptions, the fair market value compensation exception does not require a term of at least one year.

Payment by a Physician Exception

The existing Payment by a Physician exception is narrow because it does not apply where another statutory exception itself could apply. For instance, this exception could be used for the rental of a residential property but not for the rental of office space which is the subject of a statutory exception. Although the potential reach of this exception is limited, CMS breathed some new life into it by removing all requirements other than that the physician’s payment for items or services be consistent with fair market value. This is consistent with the elements of the comparable statutory exception and conforms to legal arguments made by many over the years that CMS lacked the statutory authority to narrow this particular exception due to the wording of the Stark Law.

Isolated Transaction Exception

In commentary, CMS confirmed practitioners’ longstanding belief that this exception covers an agreement to settle a good-faith dispute. However, CMS cautions that if the underlying arrangement that gave rise to the dispute does not fit an exception, the settlement agreement will not cleanse the underlying agreement. In addition, CMS clarified (contrary to the belief of some) that the exception cannot be used for the circumstance in which a party makes a single payment for services that are provided on multiple occasions.


CMS’s updates to the Stark Law regulations introduce welcome new clarity and flexibility to a regulatory regime that historically lacked both, sometimes producing draconian results. One certain outcome of the new rules will be to reduce disclosures — and thereby CMS’s current backlog — under the agency’s Self-Referral Disclosure Protocol (SRDP). CMS’s commentary repeatedly references the agency’s learnings from the SRDP, implicitly acknowledging that the breadth of the previous Stark regulations have ensnared many arrangements that posed little or no meaningful risk of abuse. While the new rules hardly amount to a repeal of this regime, at least health care entities and their counsel will find it easier to navigate their way to compliance.

In addition, the revised commercial reasonableness and “volume or value” standards will assist defendants in False Claims Act cases, such as by clearing up that an unprofitable arrangement can nonetheless be commercially reasonable and by establishing that the “volume or value” standard poses a strictly mathematical test.

For more Faegre Drinker insights on this and related topics, view our suggested reading and events.

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