CMS Budgets an Extra Year for Updating Stark: Why Life Sciences Companies and Healthcare Providers Should Prepare for Big Changes

Wilson Sonsini Goodrich & Rosati

Wilson Sonsini Goodrich & Rosati

Executive Summary

The Centers for Medicare & Medicaid Services (CMS) has pushed back its plan for issuing a final rule updating the Physician Self-Referral law (the "Stark Law") by one year to August 31, 2021. Ostensibly the rule, when published, will finalize proposals that CMS published in the Federal Register on October 17, 2019. There, CMS proposed new Stark Law exceptions that reflect current shifts in the healthcare landscape, including, exceptions for value-based compensation arrangements and donations of cybersecurity technology and related services. CMS also proposed to redefine basic Stark terminology, including making a meaningful change to the key "value or volume" standard. As we note below, the October 2019 proposals themselves arose out of years of dialogue about problems with the Stark Law involving professional societies and trade associations, U.S. Department of Health and Human Services (HHS) officials and Congressmembers. We read the one-year delay to mean that CMS is seriously engaged with the extensive input that it has received, including issues raised in hundreds of public comments. When the final Stark rule eventually issues, we expect that it will build on CMS's already ambitious 2019 proposals to both modernize, and bring clarity to, the famously cumbersome Stark Law.

The Stark Law, CMS's 2019 Proposed Changes, and Industry Reactions

On August 27, 2020, CMS announced that it was extending its deadline to issue a highly-anticipated Stark Law final rule. The agency pushed back its deadline for issuing the final rule one year, to August 31, 2021. CMS explained that it was still working through "the complexity of issues" it received from commenters on the 82-page proposed rule, which CMS published in the Federal Register on October 17, 2019. ("Modernizing and Clarifying the Physician Self-Referral Law" 84 FR 55766.) The delay has prompted outcry from major health industry stakeholders. The American Hospital Association, for example, derided it as an "extremely disappointing setback." Below we discuss causes for the delay and why stakeholders should take hope that the delay reflects CMS's earnest efforts to fulfil the promise of "modernizing and clarifying" the Stark Law.

The Stark Law prohibits physicians who—individually or through family members—have an ownership interest in, or a compensation arrangement with, healthcare entities from making Medicare referrals to those entities for designated health services (DHS) including, among other things: clinical laboratory services; physical or occupational therapy; or radiology imaging services. Where applicable, the law only permits physicians to make DHS referrals under specified excepted compensation and ownership arrangements or involving specified forms of remuneration. The law authorizes federal prosecutors and qui tam plaintiffs to seek triple damages and civil penalties—regardless of the violators' intent—even when technical violation arises out of documentation errors. The Stark Law prohibition overlaps with the far broader range of activities that implicate the federal Anti-Kickback Statute (the AKS). The AKS is the cornerstone of healthcare fraud and abuse law. Despite their close ties, the AKS functions differently—imposing criminal liability activities on actions taken to buy or sell federal healthcare program business.

When finalized, CMS's changes will be the first major changes to the Stark Law since Phase III of the law was finalized in September 2007. Calls for rule changes bringing the Stark Law and the AKS into line with contemporary priorities and payment methods have arisen from the healthcare industry, law enforcement, and Congress for years. CMS developed the October 2019 proposal, in part, based on what it learned from stakeholders after publishing a Request for Information (RFI) on June 25, 2018 seeking input about how to address regulatory barriers to a value-based healthcare payment and delivery system under the Stark Law. The RFI also sought input on potential changes for the Stark rules that would help ease burdens and make compliance more straightforward. These Trump administration priorities mesh well with HHS's longstanding aim of resolving problems in the existing legal framework, such as ambiguous definitions, as well as gaps and even apparent contradictions.

CMS's original August 2020 publication date was highly ambitious, given the scope and complexity of the issues involved. HHS's rulemaking resources then had to be diverted to address the unexpected and unprecedented COVID-19 health emergency; consequently, substantive reform in the original timeframe became all but impossible. Speaking positively, CMS signals with the one-year delay that it won't "take a punt" by offering interim fixes for basic problems. Interim fixes, such as piecemeal situational waivers, have multiplied in fraud and abuse law. In tightly limited circumstances, they have provided straightforward means of reconciling legal authorities assembled for the era of fee-for-service healthcare with newer arrangements that tend to emphasize value-based payment and coordinated care delivery. These fixes have satisfied few of the increasingly vocal critics who question the fraud and abuse laws from positions in industry or government. CMS must seriously engage in the underlying issues, along with its sister agencies at the HHS.

Last October, CMS proposed several exceptions to the Stark Law for value-based compensation arrangements between or among physicians, providers, and suppliers; arrangements under which a physician receives limited remuneration for items or services that the physician actually provides; and an exception for donations of cybersecurity technology and related services. To support the new exceptions, CMS proposed definitions of key terms in those exceptions. CMS also proposed to amend the existing exception for electronic health records items and services. CMS stated that the purpose of these changes is to 1) alleviate the undue impact of the Stark Law on parties that participate in newer alternative payment models, 2) facilitate care coordination, and 3) balance program integrity concerns against the burden of the Stark Law's billing and claims submission prohibitions.

As stated in its name, the October 2019 proposal aims for two forms of change—modernizing and clarifying an already famously complex law. As CMS moves to encourage value-based healthcare arrangements, the Stark Law must allow for these arrangements to exist without running afoul of the law. CMS has proposed broad exceptions to cover various types of value-based arrangements, including allowing device manufacturers to be counted among value-based entities. In its comments to the proposed rule, AdvaMed applauded CMS's inclusion of device manufacturers in value-based arrangements stating that device manufacturers play a critical role in providing technologies and services that will improve the health of beneficiaries while reducing costs.

Although much of the effort to modernize Stark is being invested into the proposed exception for value-based arrangements, CMS has sought far broader changes. For example, CMS solicited comments about the role of price transparency in the context of the Stark Law and whether to require cost-of-care information at the point of a referral for an item or service. Such policy would represent a departure from past applications of the Stark Law. Not surprisingly, by simply introducing the concept has stirred up pushback from stakeholders representing a broad swath of the industry, including professional groups such as the American Medical Association, the American Academy of Medical Colleges (AAMC) and America's Essential Hospitals.

CMS has also set out to clarify the Stark Law. There is a long list of problems with the current framework that have accumulated over decades of enforcement. For example, Stark Law exceptions require that covered compensation arrangements not be determined in a manner that take into account the volume or value of referrals by the physician or other business generated between the parties. Both healthcare providers and courts have interpreted this basic requirement in varied ways, sometimes frustrating CMS and law enforcement. Last October, CMS proposed redefining these standards so that compensation "takes into account" the volume or value of the physician's referrals or other business generated only when: 1) the physician's compensation formula includes referrals as a variable and there is a "positive correlation" between the resulting compensation and the volume or value of the physician's referrals or other business generated; or 2) when there is a "predetermined, direct correlation" between the physician's prior referrals to the DHS entity and the physician's "prospective rate of compensation" for a specified duration. For example, if the physician receives additional compensation as the number or value of the physician's referrals to the DHS entity increase, the physician's compensation would positively correlate with the number or value of the physician's referrals. Another example of the proposed volume and value standard is where there is a predetermined, direct, and meaningful "if X, then Y" correlation between the volume or value of the physician's prior referrals and the prospective rate of compensation to be paid over the duration of the arrangement—if the physician orders 300 diagnostic tests per year, then she will be paid $30 per wRVU but if the physician orders 350 diagnostic tests per year, then she will be paid $35 per wRVU.

By contrast with the prospect of price transparency, this proposed redefinition of "value or value" was warmly welcomed in comments by professional societies. The Association of American Medical Colleges (AAMC), for example, praised CMS for helpfully clarifying that productivity bonuses paid by hospitals to employed physicians do not take into account "volume or value of referrals" in connection with facility fees that accompany personally performed physician services. CMS proposed many such adjustments, some of which seem overdue.

As noted earlier, the Stark Law is closely tied to the AKS. Responsibility for administration and enforcement of the AKS rests with a different HHS agency, the Office of Inspector General (OIG-HHS). Out of necessity, CMS and OIG-HHS consult closely about interpreting and developing these two laws. Among other reasons, industry often looks to the Stark rules so as inform their understanding of the far broader, seemingly open-ended AKS. Rulemaking relating to the two laws often occurs in tandem and, indeed, OIG-HHS had announced plans for an August 2020 final rule that would follow up revisions to the AKS that the OIG-HHS proposed last October. (With the August final rule passed, OIG-HHS has yet to formally announce a delay in the planned release. Under current circumstances, such an announcement seems likely.) The tight connection between the Stark Law and the AKS—and the resulting back-and-forth between CMS and OIG-HHS—complicates the challenges that CMS faces and draws out the process of revising the Stark rules. For this reason, too, CMS appears to need the additional year that it recently allotted for developing a final rule that would fulfil the purpose of its October 2019 proposal and legitimately modify and clarify the Stark Law.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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