HHS to Ease Fraud and Abuse Rules Part 4: Proposed Revisions to the Stark Law

McGuireWoods LLP

As discussed in a previous McGuireWoods alert, on Oct. 9, the Department of Health and Human Services announced two proposed rules to significantly amend the Physician Self-Referral Law (Stark Law), the federal Anti-Kickback Statute (AKS) and the Civil Monetary Penalties (CMP) Law. This client alert, the fourth in McGuireWoods’ summary series on these proposed rules, focuses on the Centers for Medicare & Medicaid Services’ (CMS’) proposed revisions to ease certain requirements under the Stark Law by adding: (1) a new exception for limited monetary compensation; (2) changes to the group practice definition, particularly on physician profit-sharing; (3) definitional clarification for interpreting the regulations; and (4) other clarifications to ease compliance.

The proposed rules stem from HHS’ Regulatory Sprint to Coordinated Care (discussed in a Sept. 26, 2018, client alert), intended to incentivize value-based arrangements and patient care coordination by expressly permitting certain activities that could be deemed problematic under current law. The proposed rules, respectively released by CMS and the HHS Office of Inspector General (OIG), would add new value-based exceptions to the Stark Law and additional safe harbors under the AKS.

Although the proposed changes are likely to provide greater flexibility under the Stark Law, CMS does not intend to increase program risk. Accordingly, CMS provided additional clarification and bright-line rules in the proposed rule, based in part on knowledge gained from overseeing more than a thousand Self-Referral Disclosure Protocol filings. The industry will likely welcome changes to a strict liability statute that otherwise prohibits a physician referring designated health services (DHS) when a financial relationship does not meet an exception. This alert outlines CMS’ proposed changes to modernize its Stark Law regulations and provides seven key takeaways to assist healthcare providers in navigating these potential revisions.

  1. CMS proposed a new exception for limited monetary physician compensation, under $3,500 per year. CMS seeks to add a new non-monetary compensation exception, which would allow physicians to be paid $3,500 or under per calendar year (adjusted for inflation), in the aggregate, without a signed writing or compensation set in advance. CMS, however, would still require that the compensation (a) not take into account the volume or value of referrals or other business generated, (b) not exceed fair market value, and (c) be commercially reasonable.
    CMS noted that, through the Self-Referral Disclosure Protocol, it regularly encountered arrangements it deemed non-abusive but which failed to meet the requirements for a Stark Law exception (e.g., where a hospital paid a physician fair market value and had a legitimate need for physician services, yet failed to satisfy an exception because the arrangement was not in writing). CMS requested comment on whether a $3,500 limit would be workable and appropriate.

    Note, importantly, the $3,500 limit, as proposed, would not apply to compensation for items or services outside of these arrangements if that compensation is itself protected under a different exception. CMS also suggested this exception might allow compliance at the outset of an arrangement before being replaced by another exception.

  1. Changes to the group practice definition may necessitate certain revisions to a group’s compensation plan. The nuanced, technical definition of “group practice” is a critical concept under the Stark Law, as Congress created certain exceptions for referrals within group practices, including the in-office ancillary services exception, understanding that internal DHS referrals are commonplace and foster continuity of care and patient convenience. Therefore, even minor changes to the group practice definition can have significant impacts necessitating changes to physician compensation. Here, most significantly, CMS proposed to change limits placed on acceptable profit-sharing and productivity bonuses that do not directly vary based on the volume or value of DHS referrals and still meet the group practice definition.
    First, CMS proposed a new, deemed-compliant profit-sharing methodology for group practices participating in a value-based enterprise (discussed below). Current law provides three deemed-compliant methodologies that the agency considers to be not directly based on the volume or value of DHS referrals. This new proposal would add another deemed-approved methodology for remuneration paid to a physician based on his or her DHS referrals in the context of value-based arrangements.

    Second, CMS proposed several clarifying revisions to the profit-sharing rules. Perhaps the most important clarification is CMS’ continuing intention that “overall profits” means the profits derived from all the DHS in aggregate and not categories of DHS (i.e., the group cannot assign physicians into separate or overlapping imaging, physical therapy and outpatient prescription drug pods). CMS also appeared to prohibit a common approach — to split different DHS categories within a single pod in different compliant manners (i.e., within the same pod, using pro rata for imaging, and basing physical therapy on personal production). Commenters are likely to provide what they consider non-abusive examples of such approaches. We will be watching to see if CMS states explicitly that this clarification will be prospective only for enforcement purposes, despite its statement that the move is consistent with its intention all along.

  1. CMS clarified key terms to simplify compliance. CMS, recognizing that common elements of numerous Stark Law exceptions are not always understood, sought to clarify a number of terms.
    1. “Commercially Reasonable” Element. CMS proposed to finally define this term utilizing the key determining question of “whether the arrangement makes sense as a means to accomplish the parties’ goals.” From this basic question, CMS proposed two alternative definitions, where the particular arrangement: (i) “furthers a legitimate business purpose of the parties and is on similar terms and conditions as like arrangements” or (ii) “makes commercial sense and is entered into by a reasonable entity of similar type and size and a reasonable physician of similar scope and specialty.” CMS requested comments on these alternatives and specifically asked whether parties could make these proposed comparisons. Commenters may request additional clarification, but we expect many will welcome clarification that this definition is not a valuation question and an arrangement does not need to be profitable.
    2. “Volume or Value” and “Other Business Generated” Bright-Line Standards. CMS proposed special rules for each of the “volume or value” and the “other business generated” standards to create more bright-line, objective tests.
      • Compensation from an entity to a physician would be considered to take into account the volume or value of referrals or business generated only if the physician “receives additional compensation as the number or value” of the physician’s referrals or business generated to the entity increases.
      • Compensation from a physician to an entity would be considered to take into account the volume or value of referrals or business generated only if the physician “pays less compensation as the number or value of the physician’s” referrals or business generated to the entity increases.
      • Fixed-rate compensation would also be considered to take into account the volume or value of referrals or business generated if “there is a predetermined, direct correlation between the physician’s prior” referrals or business generated (e.g., a hospital bases its fixed amount for medical director services on exceeding a past patient admissions threshold).

We expect commentators will appreciate the proposed objective, bright-line tests. To provide these tests, CMS believes it needs to revise certain exceptions by expressly referencing that any referral requirements will not contradict patient choice or a patient’s best interest. CMS specifically asked if the academic medical center exception needs this change too.

  1. “Fair Market Value” and “General Market Value” Definitions. CMS proposed to provide three separate definitions for “fair market value” that will apply separately to equipment rentals, to office space rentals, and to all other arrangements generally. The definitions do not appear to substantively alter the statutory definition; however, the proposed definitions specifically include that “fair market value” means the “value in an arm’s-length transaction, with like parties and under like circumstances, of like assets.” CMS further proposed to amend the definition of “general market value” to be more in line with the valuation industry’s usage relating “to the value of an asset or service to the actual parties to a transaction that is set to occur within a specified timeframe.” This latter change would allow a particular, in-demand orthopedic surgeon sought by professional athletes to, for example, be paid more than a salary survey would suggest, although it may mean less pay for locations with a lower cost of living.
  1. Additional Clarifications to Ease Compliance. CMS also made numerous other changes and proposals to ease certain Stark Law burdens.
    1. Definitional Changes. CMS proposed to revise the following definitions, among others.
      1. Designated Health Services. For inpatient hospital services, CMS proposed to carve out from “DHS” any furnished service that does not affect Medicare’s payment to the hospital under the inpatient prospective payment system (IPPS), such as an X-ray that is ordered after the IPPS rate has been established by the relevant payment rules. CMS requested comment on similar changes for hospitals not paid under the IPPS.
      2. Remuneration. The current definition of “remuneration” carves out certain items, devices or supplies used solely to collect, transport, process or store specimens for the entity providing it. Under current law, CMS does not protect surgical items in this carve-out; however, CMS proposed to allow surgical items if used solely for one of the six statutory purposes. Notwithstanding this change, CMS continues to believe things like sterile gloves, essential to the specimen collection process, are fungible and therefore cannot qualify for this remuneration carve-out.
      3. Transaction. The term “transaction” is used in the isolated financial transaction exception for one-time sales of property or a practice. CMS noted that some have used this exception beyond its intended scope to cure noncompliance retroactively. Therefore, CMS proposed to establish an independent definition of “isolated financial transaction” and clarify that it “does not include payment for multiple services provided over an extended period, even if there is only one payment for such services.”
    2. Writing and Signature Requirements. CMS proposed to codify electronic signature approval for exceptions requiring a signed writing and to allow the 90-day grace period for unsigned writings to be used to satisfy the writing requirement.
    3. Non-exclusive Rental Arrangements. Under current law, CMS requires a lessee to have exclusive use of an office or equipment being rented. CMS proposed to clarify that the exclusive use is only against the lessor, such that healthcare providers will have greater freedom to enter into non-exclusive leases, including multiple lessees at the same time.
    4. Expanding Relevance of Three Existing Exceptions. CMS proposed to liberalize three exceptions that past rulemaking significantly limited. First, at §411.357(g), CMS proposed a significant rewrite for remuneration unrelated to DHS from hospitals to protect more arrangements. Second, at §411.357(i), CMS proposed to expand the reach of the payments by a physician exception by allowing its use even if another regulatory exception could apply (statutory exceptions still cannot). Finally, CMS proposed to allow the fair market value exception at §411.357(l) for short-term equipment and office space rentals under one year in length.
    5. Physician Recruitment. CMS proposed to modify the signature requirement for physician recruitment arrangements so a physician practice has to sign the writing only if it is receiving a financial benefit from the arrangement, but not if the practice merely serves as a pass-through to the recruited physician.
    6. Remuneration for Non-physician Practitioner (NPP) Patient Care Services. CMS proposed to revise an exception allowing a hospital, federally qualified health center or a rural health clinic to assist a physician in hiring an NPP, previously discussed in a Sept. 1, 2015, client alert. CMS clarified numerous service area questions, including that the NPP could remain in his or her community and receive this support after first becoming a nurse practitioner. CMS also proposed to require that the NPP and physician arrangement begin on or after the commencement of the assistance arrangement.
    7. Ownership or Investment Interests. CMS raised two topics with respect to its definition of ownership or investment interests. First, CMS proposed that a titular ownership or investment would not be considered ownership. This may be beneficial for some corporate practice of medicine arrangements, although in many cases, the in-office ancillary services exception already protects the relationship. In addition, CMS asked for comments on whether it should also remove employee stock ownership plans, or ESOPs, from its meaning of ownership.
    8. Decoupling the AKS from the Stark Law. CMS proposed to remove certain requirements for exceptions that entail AKS or other related law compliance. Although the practical effect may be small, providers will appreciate that this would remove ambiguity from complying with a strict liability statute by meeting an intent-based criminal statute with more limited safe harbors. CMS noted the AKS separately remains a “backstop” for problematic arrangements that would no longer be restricted under the Stark Law.
  2. CMS proposed to replace its “period of disallowance” rule with a general standard. For purposes of the DHS referral prohibition, CMS has called the period when a referral cannot be made a “period of disallowance.” CMS has now proposed to replace its current complex rule to determine a period of disallowance, with a general principle that the period of disallowance “should begin on the date when a financial relationship fails to satisfy all requirements of any applicable exception and end on the date that the financial relationship ends or satisfies all requirements of an applicable exception.” Providers would determine the ending date on a case-by-case basis. While commenters will likely appreciate the deletion of the overly prescriptive period of disallowance rules, and certain guidance that may allow providers to cure noncompliance without triggering this period, the general guidance provided in the proposed rule will likely lead to further legal development and consideration in the industry, particularly since the guidance may provide additional opportunities to cure past conduct.
  3. CMS proposed a new exception and modifications to the EHR exception to extend protections for cybersecurity technology. CMS has amended the EHR exception several times, avoiding sunsetting the exception as initially codified. In the proposed rule, CMS introduced various potential changes to the Stark Law exception, consistent with OIG’s AKS proposals. Specifically, CMS’ proposed revisions would: (i) allow cybersecurity technology donations, (ii) update interoperability provisions and (iii) remove the existing sunset date. CMS separately proposed a new cybersecurity technology exception. More information regarding CMS’ proposed modifications were presented in a recent McGuireWoods alert.
  4. CMS proposed a new, value-based exception. As will be discussed in greater depth in a forthcoming McGuireWoods alert, CMS, in an effort to foster a greater emphasis on value-based care, also proposed creating a new Stark Law exception, in conjunction with OIG’s proposed safe harbors to the AKS. Specifically, CMS proposed an exception focused on remuneration exchanged between or among participants in certain value-based arrangements (e.g., care coordination arrangements designed to improve quality, health outcomes and efficiency). CMS would structure the requirements for this exception around whether the value-based arrangement (a) has full financial risk, (b) has meaningful downside financial risk or (c) has other criteria, which would come with the most significant regulatory burden. In adding this exception, CMS also proposed a new value-based enterprise definition that would allow multiple entities to come together to collaborate to achieve value-based purposes.

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Through these proposed changes, CMS sought to be balance a need for innovation with the potential for improper inducements prohibited by the Stark Law, by removing certain burdens while clarifying others and adding new exceptions. Consistent with its changes to the Stark Law advisory opinion process (discussed in an Aug. 26, 2019, client alert), CMS seems to be loosening its rules. Overall, many providers will support these proposed changes, notwithstanding that existing arrangements may need to be adjusted, reformed or terminated to comply with the proposed rule.

The proposed changes are subject to a public comment period, open until Dec. 31, 2019. Please do not hesitate to contact a McGuireWoods attorney or one of the authors of this alert for more information regarding these proposed rules or for assistance in preparing a comment to these rules. After the open comment period, the government will review and may finalize the rule with any desired changes to reduce Stark Law burdens on providers as soon as early 2020.

Given the significance of these proposed changes, McGuireWoods plans to provide additional analysis and summaries on these proposals in the coming weeks. To review additional guidance on the proposed rules, click on the links at the bottom of McGuireWoods’ Oct. 10, 2019, alert.

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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