CMS Finalizes Major Stark Law Rule

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The Centers for Medicare & Medicaid Services (“CMS”) delivered welcome news in advance of the Thanksgiving holiday by issuing its final rule (the “Final Rule”) on November 20, 2020 to amend current regulations interpreting the Medicare physician self-referral law (the “Stark law”). Stakeholders have eagerly anticipated this rule since CMS published its proposed rule (the “Proposed Rule”) on October 17, 2019 as part of the Department of Health and Human Services’ (“HHS”) “Regulatory Sprint to Coordinated Care” and CMS’ “Patients over Paperwork” initiatives. These initiatives aim to remove potential regulatory barriers to and burdens on value-based payment and patient-focused care coordination efforts, as well as tackle technical obstacles that present significant liability.

The Stark law prohibits a physician from making referrals for certain designated health services payable by Medicare (“DHS”) if the physician (or an immediate family member) has a financial relationship with the entity performing the DHS. It also prohibits that entity from billing Medicare for those prohibited referrals. Statutory and regulatory exceptions describe safeguarded arrangements that otherwise would violate the Stark law. Since its enactment in 1989, the Stark law has undergone several amendments and various large regulatory rulemakings. This most recent final rule is the most ambitious and significant rulemaking that CMS has issued since 2007.

The Final Rule modernizes and clarifies the Stark law regulations by eliminating certain requirements in current regulatory exceptions, revising components of existing regulatory exceptions and finalizing new exceptions for nonabusive arrangements. The Final Rule is effective January 19, 2021, with the exception of revisions to the group practice special rules for profit shares and productivity bonuses found at 42 C.F.R. §411.352(i), which are effective January 1, 2022. A high level summary of some, but not all, of the most significant and highly-anticipated provisions of the Final Rule follows.

Value-Based Arrangements

CMS finalized the following new definitions at §411.351, which will apply only to compensation arrangements that qualify as value-based arrangements.

  • Value-based Activity means any of the following activities, provided that the activity is reasonably designed to achieve at least one value-based purpose of the value-based enterprise: (1) the provision of an item or service; (2) the taking of an action; or (3) the refraining from taking an action. This definition was finalized with modification.
  • Value-based Arrangement means an arrangement for the provision of at least one value-based activity for a target patient population to which the only parties are— (1) the value-based enterprise and one or more of its VBE participants; or (2) VBE participants in the same value-based enterprise. This definition was finalized with modification.
  • Value-based Enterprise (“VBE”) means two or more VBE participants— (1) collaborating to achieve at least one value-based purpose; (2) each of which is a party to a value-based arrangement with the other or at least one other VBE participant in the value-based enterprise; (3) that have an accountable body or person responsible for the financial and operational oversight of the value-based enterprise; and (4) that have a governing document that describes the value-based enterprise and how the VBE participants intend to achieve its value-based purpose(s). This definition was finalized as proposed.
  • 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. This definition was finalized as proposed.
  • VBE Participant means a person or entity that engages in at least one value-based activity as part of a value-based enterprise. This definition was finalized with modification.
  • Target Patient Population means an identified patient population selected by a value-based enterprise or its VBE participants based on legitimate and verifiable criteria that— (1) are set out in writing in advance of the commencement of the value-based arrangement; and (2) further the value-based enterprise’s value-based purpose(s). This definition was finalized as proposed.

CMS has created three new exceptions at §411.357(aa) to address value-based care arrangements. The new exceptions do not include select traditional safeguards that are common in many exceptions to compensation arrangements, including the requirements that compensation be consistent with fair market value and not determined in any manner that takes into account the volume or value of a physician’s referrals or other business generated by the physician for the entity. Of note, commercial reasonableness is included and also has a new definition at §411.351. Additional safeguards are present in these exceptions, some of which can be found in the definitions above. These new exceptions will be available to direct compensation arrangements and certain indirect compensation arrangements that include a direct value-based compensation arrangement with a physician in the unbroken chain of financial relationships.

  • Full Financial Risk
    New §411.357(aa)(1) will protect value-based arrangements where a VBE has assumed full financial risk from a payor for patient care services for a Target Patient Population during the entire duration of the value-based arrangement. This new exception was finalized with only one modification, which extended the deadline for the VBE’s contractual obligation to be financially responsible from 6 months to 12 months.
  • Value-Based Arrangements with Meaningful Downside Financial Risk to a Physician
    New §411.357(aa)(2) will protect value-based arrangements where a physician has taken on meaningful downside financial risk for failure to achieve the value-based purposes of the VBE. In the Proposed Rule, CMS proposed “meaningful downside financial risk” as a requirement that the physician be responsible to pay no less than 25 percent of the value of the remuneration received under the value-based arrangement to the entity. In the Final Rule, CMS reduced that threshold to 10 percent, and clarified that the risk of repayment or the amount the physician must be at risk to forgo applies to the value of the remuneration that may be provided in-kind. CMS finalized requirements in this exception that the meaningful downside risk for the entire duration of the value-based arrangement and the nature and extent of the physician’s financial risk must be set forth in writing. Further, the methodology used to determine the amount of remuneration must be set in advance of the furnishing of the items or services for which remuneration is to be paid. Meeting the set in advance deeming provision at §411.354(d)(1) would be sufficient to show compliance, however, it is not the only avenue to do so.
  • Value-Based Arrangements
    New §411.357(aa)(3) will protect, generally, value-based arrangements regardless of the level of risk undertaken by the VBE or any of its VBE Participants as long as specific requirements are met. Remuneration protected by this exception may be both monetary and nonmonetary. This exception includes those safeguards also found in the meaningful downside risk exception, plus traditional requirements such as writing and signature requirements. CMS also incorporated an explicit monitoring requirement, which may result in a requirement that the parties terminate the ineffective value-based activity. CMS did not include a contribution requirement, which was considered in the Proposed Rule.

Clarification of Fundamental Terminology and Requirements

  • Commercially Reasonable
    In the Proposed Rule, CMS introduced, for the first time, a definition of the term Commercially Reasonable. Clarifying that a determination of commercial reasonableness is not one of valuation, CMS states in the Final Rule that arrangements need not be profitable to be commercially reasonable. CMS proposed two alternative definitions of Commercially Reasonable in 2019, and in the Final Rule it finalized §411.351 a definition that marries those two alternatives. 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.
  • Volume or Value of Referrals and Other Business Generated
    CMS finalized special rules to address both the volume or value standard and the other business generated standard at §411.354(d)(5) and (6). These policies apply to certain exceptions, and include, in regulatory text, specific special applications, such as application to the special rules for unit-based compensations. The final volume or value and other business generated standards define exactly when compensation will be considered to take into account the volume or value of referrals or other business generated between parties. Outside of the specific circumstances in the finalized special rules, CMS confirms that compensation will not be considered to not run afoul of either standard. The standards generally read:
    • Compensation from a physician to an entity furnishing DHS takes into account the volume or value of referrals only if the formula used to calculate the entity’s compensation includes the physician’s referrals to the entity, or other business generated by the physician for the entity, as a variable, resulting in an increase or decrease in the entity’s compensation that negatively correlates with the number or value of the physician’s referrals to the entity. A negative correlation between two variables exists when one variable increases as the other variable decreases, or when one variable decreases as the other variable increases.
    • Compensation from an entity furnishing DHS to a physician takes into account the volume or value of referrals only if the formula used to calculate the physician’s compensation includes the physician’s referrals, or other business generated by the physician, to the entity as a variable, resulting in an increase or decrease in the physician’s compensation that positively correlates with the number or value of the physician’s referrals to the entity. A positive correlation between two variables exists when one variable decreases as the other variable decreases, or one variable increases as the other variable increases.

While both standards are being finalized as special rules on compensation, CMS interprets them in the same manner as definitions. Relatedly, CMS finalized amendments to the volume or value standard in the indirect compensation relationship found at §411.354(c)(2), incorporating and applying the conditions of the special rules on unit-based compensation at the definitional level, intended to simplify the indirect compensation analysis.

Following statements made in the Proposed Rule, in the Final Rule CMS reaffirmed its position relating to the correlation theory advanced in cases such as Tuomey. Specifically, “An association between personally performed physician services and DHS 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.” CMS declined commenters’ requests to codify this policy in regulation text.

  • Fair Market Value
    CMS finalized its proposal to restructure the definition of fair market value with attendant modifiers to provide further meaning to the statutory definition of fair market value. It declined to finalize its proposal from 2019 to include references to “like parties and under like circumstances.” Ultimately, the final fair market value definition does not significantly differ from the statutory definition.

    Fair market value means—
  • Rental of office space. With respect to the rental of office space, the value in an arm’s-length transaction of rental property for general commercial purposes (not taking into account its intended use), without adjustment to reflect the additional value the prospective lessee or lessor would attribute to the proximity or convenience to the lessor where the lessor is a potential source of patient referrals to the lessee, and consistent with the general market value of the subject transaction.
  • Rental of equipment. With respect to the rental of equipment, the value in an arm’s length transaction of rental property for general commercial purposes (not taking into account its intended use), consistent with the general market value of the subject transaction.
  • General. The value in an arm's-length transaction, consistent with the general market value of the subject transaction.

CMS finalized its definition of General Market Value, emphasizing the consideration of the economics of the subject transaction in contrast to the previous definition that was tied to principles of reasonable cost reimbursement for end stage renal disease services.

General market value means—

  • Assets. With respect to the purchase of an asset, the price that an asset would bring on the date of acquisition of the asset as the result of bona fide bargaining between a well-informed buyer and seller that are not otherwise in a position to generate business for each other.
  • Compensation. With respect to compensation for services, the compensation that would be paid at the time the parties enter into the service arrangement as the result of bona fide bargaining between well-informed parties that are not otherwise in a position to generate business for each other.

Highlighting Additional Notable Amendments and Provisions

  • CMS finalized two new exceptions aimed to protect non-abusive arrangements, many of which it found parties disclosing through the Self-Referral Disclosure Protocol (“SRDP”):
    • Limited Remuneration to a Physician. New §411.357(z) will protect remuneration from an entity to a physician for the provision of items or services provided by the physician to the entity that does not exceed $5,000 in the aggregate per calendar year. CMS finalized this new exception with several modifications from the Proposed Rule, including increasing the financial cap by $1,500 from the proposed limit of $3,500.
    • Cybersecurity Technology and Related Services. New §411.357(bb) protects nonmonetary remuneration in the form of technology and services necessary and used predominantly to implement, maintain, or reestablish cybersecurity. This new exception was finalized with modifications regarding the type of nonmonetary remuneration permitted under the exception.
  • Consideration was given by CMS regarding the inclusion of price transparency provisions, specifically in the care coordination exceptions. Nevertheless, given the strict liability nature of the Stark law, CMS declined to finalize any price transparency provisions in the rulemaking.
  • New revisions to the group practice rules in the Final Rule include the new volume or value standard, references to new definitions and special rules related to commercially reasonable compensation arrangements and fair market value compensation, and revise the rules on distribution of overall profits in order to further value-based care models. We highlight that the revisions to the special rules for profit shares and productivity bonuses found at §411.352(i) are effective January 1, 2022 as opposed to January 19, 2021, when the balance of the Final Rule is effective.
  • CMS finalized most, but not all, proposed amendments decoupling the Stark law from the Anti-Kickback Statute in line with the Proposed Rule. Notably, compliance with the Anti-Kickback Statute remains in the exception for fair market value compensation found at §411.357(l).
  • In the Final Rule, CMS finalized its proposed amendment of the definition of Designated Health Services found at §411.351. Specifically, if the services furnished to inpatients by a hospital do not increase the amount of Medicare’s payment to the hospital under the Inpatient Prospective Payment System, it will not be considered a Designated Health Service. CMS extended that exception to additional prospective payment systems, including those for Inpatient Rehabilitation Facility, Inpatient Psychiatric Facility and Long-Term Care Hospital. It did not extend the policy change to apply to hospital services furnished to outpatients.
  • CMS finalized its proposal to delete the provisions setting forth the period of disallowance. In doing so, it relied heavily on its experience with the SRDP and cited concerns regarding the “overly prescriptive and impractical” nature of the rules.
  • A new special rule on compensation arrangements was finalized at §411.354(e), including new special rules for noncompliance with writing and signature requirements, as well as a new rule on electronic signatures. Further, CMS amended the “set in advance” language at §411.354(d) to clarify in regulation text that the special rule is only a deeming provision, and that reducing compensation to writing before the furnishing or items or services is not the only avenue to comply with the “set in advance” requirement.
  • Revisions to the exception for rental of office space and rental of equipment found at §411.357(a) and (b) were finalized to clarify that the requirement for exclusive use applies only to the lessor or any person or entity related to the lessor, and not parties related to the lessee.
  • CMS finalized revisions to the existing exception for electronic health records items and services, including removal of the sunset provision.

The Final Rule will be published in the Federal Register on December 2, 2020. A link to the Federal Register website that includes the unpublished PDF version may be found here. The Final Rule is almost 630 pages and provides noteworthy additions and clarifications to the complex law and regulations.

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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