Proposed Stark Regulations: Small Step In the Right Direction

Concern about physicians’ decisions placing financial rewards above patient interests led Congress in 1988 to pass the Ethics in Patient Referrals Act, also known as Stark I, named after the sponsor of the bill, U.S. Rep. Pete Stark of California.(1)

The Stark Law governs those physicians (or their immediate family members) who have a financial relationship (i.e., an ownership investment interest, or a compensation arrangement) with an entity, and prohibits them from making Medicare referrals to those entities for the provision of designated health services (DHS).(2)

The law includes a large number of exceptions related to ownership interests, compensation arrangements, and forms of remuneration.(2) These exceptions were necessary to prevent legitimate transactions from being open to prosecution under the Stark Law.

Similar to Stark, the federal Anti-Kickback Statute (AKBS) was established to prevent intentional abuse of the healthcare system to realize financial gain. Physicians can take advantage of “safe harbors” and exempt certain arrangements from its prohibitions. This differs from the Stark Law in that, under AKBS, a financial relationship outside a safe harbor is not necessarily illegal, whereas under the Stark Law, a relationship must fit into one of the many regulatory exceptions to avoid prosecution.(1)

During the past three decades, physicians have practiced in fear of violating (even unintentionally) these fraud and abuse laws, as the federal government prosecutes physicians for unintentional violations, including documentation errors, for their financial relationships with other physicians who make referrals for DHS. Furthermore, whistleblowers or qui tam plaintiffs can sue physicians for alleged Stark Law violations under the False Claims Act, thereby resulting in treble damages and other penalties.

In a recent survey of 162 healthcare chief executive officers and executives, 36.2 percent pointed to fraud and abuse laws that don’t support new models of care as standing in the way of improving healthcare.(3)

Proposed Modernization of Stark

On October 9, 2019, the Centers for Medicare & Medicaid Services (CMS) issued a proposed rule to modernize and clarify the Stark Law. The proposed rule changes were published in conjunction with the Office of Inspector General (OIG) of the Department of Health and Human Services (HHS), which published proposed rule changes to the AKBS.(4)

Historically, the application of the Stark Law (and the AKBS) has, at times, been at odds with the goals of healthcare reform. Specifically, the discord between the objectives of fraud and abuse laws, and the objectives of value-based reimbursement models reflected the disjointed approach to healthcare reform by the numerous federal agencies tasked with regulating the healthcare industry.

For example, HHS and CMS have pushed value-based healthcare initiatives, which require provider alignment and collaboration, while the OIG and the Department of Justice (DOJ) have intensely scrutinized these arrangements as they relate to the Stark Law and AKBS, and their potential liability under the False Claims Act. Ultimately, this disjointed approach resulted in a scenario wherein the left hand didn’t know what the right hand was doing.(5)

Under the proposed rule, CMS seeks to establish new exceptions and new definitions, as well as provide additional flexibility to support this necessary evolution of the U.S. healthcare delivery and payment system. This article will summarize the new Stark Law exceptions proposed by CMS and discuss their proposed changes to the definitions of the “Big Three” Stark Law exception requirements: fair market value, commercial reasonableness, and the volume or value standard. The potential implications of these rule changes on physicians, including how the proposed rule may reduce current regulatory burdens on providers and influence hospital/physician arrangements going forward, are also addressed.

Prime Reasons For Change

The majority of the proposed changes to the Stark Law acknowledge the shift of healthcare reimbursement from volume-based to value-based payment models and seek to accelerate it.(6) Hence, the prime reasons behind the change are adopting value-based care, promoting coordinated patient care, and fostering improved quality, better health outcomes, and improved efficiency and clarity in how the Stark Law relates to new forms of reimbursement and bonus sharing, telemedicine, and accountable care organizations.

Under the proposed rule provisions, CMS aims to adopt new Stark Law exceptions and revise or reconsider certain existing Stark Law definitions and exceptions. The stated intent of these changes is to: (1) alleviate the undue impact of the Stark Law on parties that participate in alternative payment models; (2) facilitate care coordination; and (3) balance genuine program integrity concerns against the burden of the Stark Law’s billing and claims submission prohibitions. The initiatives are aimed at reducing regulatory barriers and accelerating the transformation of the healthcare system into one that better pays for value and promotes care coordination.(4,6,7)

Proposed Changes

The changes are part of the larger effort by HHS (of which CMS is part) to modernize and clarify fraud and abuse laws as part of the Regulatory Sprint to Coordinated Care initiative and CMS’s Patients over Paperwork initiative.(4,7) The aim of the Regulatory Sprint program is to remove potential regulatory barriers to care coordination and value-based care under certain federal healthcare laws, including the AKBS and Stark Law.

CMS proposed a few new and revised exceptions to the Stark Law, which are summarized in Table 1. Additionally, the proposed rule seeks to clarify several of the definitions regarding the “Big Three” requirements included in most Stark Law exceptions for compensation agreements: fair market value, commercial reasonableness, and the volume or value of referrals standard.

Fair Market Value (FMV). The proposed revision of the FMV definition seeks to clarify previous definitions and guidance on FMV and separate the term and definition from other intertwined terms: general market value and the volume or value standard.

Historically, the Stark Law has defined FMV generally (with additional modifications of the definition as applies to equipment leases and office space leases), and intertwined the term with the volume or value standard and the term general market value.(9) CMS proposes to provide three separate FMV definitions: (1) generally; (2) for the rental of equipment; and, (3) for the rental of office space.(7) However, the agency emphasizes that “the proposed structure of the definition merely reorganizes for clarity, but does not significantly differ from the [previous] statutory language....”(7)

CMS clarified that the volume or value standard is “separate and distinct” from fair market value requirements.(7) Thus, CMS no longer believes it necessary to include the volume or value language as it appears in connection to the FMV definition.(7)

Further, CMS provided guidance on the difference between the terms fair market value and general market value and recognized plausible scenarios wherein a physician may be paid higher than the industry mean, and require a deviation from industry normative benchmark data to account for the specific facts and circumstances related to a given transaction.

CMS provided a hypothetical wherein a hospital seeks to employ an orthopedic surgeon. Industry salary surveys indicate an appropriate annual salary of $450,000 in that locale, but the physician is one of the top orthopedic surgeons in the United States and is in high demand by professional athletes.(7) Consequently, CMS posits that the hospital would be justified in compensating the physician significantly more than the general market value, i.e., $450,000 per year, based on the physician’s skill set.

Commercial Reasonableness. CMS proposed two alternative definitions for the commercial reasonableness standard as follows:

1. “[T]he particular arrangement furthers a legitimate business purpose of the parties and is on similar terms and conditions as like arrangements”; or,

2. “[T]he arrangement 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.”(7)

Significantly, CMS unequivocally noted that an arrangement may be commercially reasonable “even if it does not result in profit for one or more of the parties”(7) This is a particularly important development for employed physicians whose specialty may result in a financial loss for the hospital.

For example, psychiatric and burn units are hospital service lines that often operate at a loss; further, hospitals have licensure and regulatory obligations, such as the Emergency Medical Treatment and Labor Act, that require them to contract with certain physician specialists, regardless whether the volume of services performed by the specialist will be sufficient to render the physician profitable.(7) This “profitability” caveat may make hospital employment of (or alignment with) certain physician specialists less regulated and benefit patients with service lines and illnesses that are unprofitable for hospitals.

Volume or Value of Referrals Standard. CMS proposed four bright-line objective rules for determining whether a compensation arrangement considers the volume or value of referrals or other business generated between the parties, so as to clarify the requirement.(7)

Many Stark Law exceptions require that the compensation arrangement at issue “not [be] determined in a manner that takes into account the volume or value of referrals by the physician...[or be] determined in a manner that takes into account other business generated between the parties.”(7) In response to commentator concerns, CMS proposed mathematical calculations that will provide objective tests for determining whether a given compensation methodology violates this standard.(7)

Implications For AKBS

Physicians and health systems also want CMS to decouple the Stark Law from the AKBS by eliminating regulatory exceptions to Stark that link and forbid any financial arrangements from violating the AKBS.

Physician groups argue that the two laws should not be tied together as they are different with respect to who can be prosecuted, safe harbors/exceptions, intent standards, penalties, and enforcement mechanisms. HHS has proposed changes to the AKBS and the Beneficiary Inducement Civil Monetary Penalties Law (the Beneficiary Inducement Statute) through the OIG. HHS collaborated with the OIG by issuing a request for information to determine how Stark Laws could be modified to fit with the value-based era but still protect existing federal health programs and patients.

Efforts To Promote Price Transparency

CMS did not make any specific proposals related to price transparency, but instead used the proposed rule to solicit comments as to the pursuit of the Trump Administration’s price transparency objectives and whether to require cost-of-care information at the point of a referral for a healthcare item or service provided to patients.

The idea of requiring cost-of-care information is part of CMS’s larger priority goal of price transparency aimed at lowering the rate of growth in healthcare costs and giving patients a better understanding of healthcare costs before embarking on a referral.

Implications For Employment Models

Proposed changes in the Stark exceptions are predicated upon the idea that these changes will somehow speed up the growth of value-based programs. Some argue that unless clinical processes are accelerated, realistic savings targets issued, and more efficient care models rolled out, these changes may not be enough to ease regulatory burdens on physicians.

In an era of increasing employment of physicians by health systems, although they can be more flexible if within an accountable care organization where they can share quality data, true alignment may not be possible with existing Stark and AKBS laws.

First, the new exceptions related to value-based arrangements likely would reduce burdens for physicians and other providers to align to provide care coordination and other value-based measures without fear of violating the “volume or value of referrals” prohibition. Note that any value-based arrangements must satisfy crucial and specifically defined elements within the new exceptions, including value-based activity, value-based arrangement, and value-based enterprise (see Table 1). These exceptions may pave the way for private advanced payment models that were previously considered risky arrangements by payors, hospitals, and physician medical groups.

Second, a proposed exception seeks to provide flexibility to business practices and arrangements CMS finds to be “non-abusive.” The Stark Law currently allows “non-monetary compensation” of $416 per year if it is not solicited by a physician and does not take into account the value or volume of referrals by the physician.(7,10) Additionally, the law permits $35 per instance to medical staff for non-cash items or services, such as trinkets given out on Doctors Day.(11)

A new exception will allow limited remuneration from the employing institution to a physician, “even in the absence of documentation regarding the arrangement and where the amount of or a formula for calculating the remuneration is not set in advance of the provision of items or services.”(7) This would be allowed if certain conditions are met and only if the remuneration does not exceed $3,500 per year.(7) Some examples to which this exception may apply, according to CMS, include:(7)

1. A hospital and physician agree to an arrangement wherein the physician will provide call coverage services, but the arrangement was not documented (the first $3,500 would be covered under this exception, but any subsequent services/payments would need to fit under another Stark exception);

2. A hospital and physician have a call coverage arrangement that fits within another Stark exception, but the hospital subsequently engages the physician to provide sporadic supervision services, which was not documented (so long as the amount paid for the supervision services is less than $3,500 for the year); and,

3. A hospital and physician have a call coverage arrangement that fits within another Stark exception, but the hospital subsequently engages the physician to both provide sporadic supervision services and perform occasional EKG interpretations, neither of which arrangement was documented (so long as the amount paid for both the supervision services and the EKG interpretations is less than $3,500 for the year).

Third, specific to group physician practices, CMS proposes changes to multiple standards and definitions to lower barriers for physicians seeking to qualify as a “group practice” as set forth in Table 1.

Of note, CMS proposes changing the rules regarding profit shares and productivity bonuses so that going forward, a group practice could directly distribute profits emanating from a physician’s participation in a value-based enterprise (including profits from the physician’s referrals) to that physician, and that distribution would be deemed to not directly take into account the volume or value of the physician’s referrals.(7)

Valuation Impact On Physician Practices

Perhaps the most revealing takeaway from the proposed rule for physicians stems from CMS’s acknowledgment that not all physicians or compensation arrangements are the same, and that compensation arrangements may have qualitative benefits that outweigh quantitative costs, i.e., profitability. The significance of this recognition is critical — it means that hospitals may be more willing to purchase physician practices, even if the purchase results in a “book financial loss” for the hospital.

CMS’s proposals recognize that an arrangement may have inherently subjective, qualitative elements. For example, there are plausible scenarios that may require a valuation professional to deviate from industry normative benchmark data to account for the specific facts and circumstances related to a given transaction. This further demonstrates the need for valuation professionals in the healthcare industry who use an evidence-driven methodology that includes both qualitative and quantitative assessments of the specific facts and circumstances related to the transaction; document their consideration of these facts and circumstances; and, articulate their ultimate applicability to the transaction in support of their opinion.

Downsides To the Proposed Changes

In 2018, three large settlements with DOJ were reached for physician remuneration in exchange for patient referrals ($260 million),(12) free or discounted physician office space in exchange for patient referrals ($84.5 million),(13) and excessive physician compensation above fair market value in exchange for referrals ($24 million).(14) Proposed relaxation of Stark rules have led to concern that changes in these healthcare relationships may lead to more fraud, patient harm, and anticompetitive behavior by large health systems and hospitals.(7)

Finalization

The rules were published in the Federal Register on October 17, 2019, and all comments on the proposed rule were due 75 days from the date of publication, i.e., by December 31, 2019. Upon the end of the comment period, CMS has no official timeline by which it must publish the Final Rule.

Conclusions

CMS’s proposed rule changes clearly aim to remedy the current Catch-22 situation that physicians and providers face, making it easier for them to provide value-based care without running afoul of the Stark Law. CMS has made significant strides in attempting to reduce the burden of compliance while also maintaining strong safeguards against fraud and abuse.

Medical groups are concerned about the proposed changes because they believe the fundamental issue of unfairness to physicians has not been addressed and that any changes will simply add more layers to existing law. Ultimately, if major structural modifications are needed, Congress will need to step in and deliver further alterations to existing law.(15)

References

1. Satiani B. Exceptions to the Stark Law: Practical Considerations for Surgeons. Plastic & Reconstructive Surgery. March 2006;117(3):1012–1022.

2. Limitation on Certain Physician Referrals. 42 U.S.C. § 1395nn.

3. Advis Healthcare Survey. Advis; https://advis.com/advis-in-the-news/advis-healthcare-survey-may2019 . Accessed November 11, 2019.

4. U.S. Department of Health & Human Services. HHS Proposes Stark Law and Anti-Kickback Statute Reforms to Support Value-Based and Coordinated Care. U.S. Department of Health & Human Services; https://www.hhs.gov/about/news/2019/10/09/hhs-proposes-stark-law-anti-kickback-statute-reforms.html . Accessed October 25, 2019.

5. For more information, see: Cimasi RJ, Zigrang, TA, Bailey-Wheaton JL, Chwarzinski JR. Beyond FMV: Commercial Reasonableness of Physician Compensation Post-MACRA. Business Valuation Review. 2018; 37(1): 20–46.

6. Centers for Medicare & Medicaid Services. Modernizing and Clarifying the Physician Self-Referral Regulations Proposed Rule. Centers for Medicare & Medicaid Services; https://www.cms.gov/newsroom/fact-sheets/modernizing-and-clarifying-physician-self-referral-regulations-proposed-rule . Accessed October 22, 2019.

7. Medicare Program; Modernizing and Clarifying the Physician Self-Referral Regulations. Federal Register. October 17, 2019;84(201):55777, 55788-55790, 55791, 55793-55794, 55797, 55799-55804, 55808-55809, 55811-55815, 55828-55829, 55828-55830, 55835, 55840.

8. Office of Inspector General. Notice of Proposed Rulemaking OIG-0936-AA10-P: Fact Sheet. Office of Inspector General; https://oig.hhs.gov/authorities/docs/2019/CoordinatedCare_FactSheet_October2019.pdf . Accessed October 22, 2019.

9. Definitions. 42 C.F.R. § 411.351.

10. Exceptions to the referral prohibition related to compensation arrangements. 42 C.F.R. § 411.357(k).

11. Wynne B, Pahner K, LaRosa J. Proposed Stark Law, Anti-Kickback Reforms Aim to Facilitate Value-Based Care. Health Affairs Blog; https://www.healthaffairs.org/do/10.1377/hblog20191014.13154/full/ . Accessed November 13, 2019.

12. U.S. Department of Justice. Hospital Chain Will Pay Over $260 Million to Resolve False Billing and Kickback Allegations; One Subsidiary Agrees to Plead Guilty. U.S. Department of Justice; https://www.justice.gov/opa/pr/hospital-chain-will-pay-over-260-million-resolve-false-billing-and-kickback-allegations-one . Accessed December 12, 2019.

13. U.S. Department of Justice. Detroit Area Hospital System to Pay $84.5 Million to Settle False Claims Act Allegations Arising from Improper Payments to Referring Physicians. U.S. Department of Justice; https://www.justice.gov/opa/pr/detroit-area-hospital-system-pay-845-million-settle-false-claims-act-allegations-arising . Accessed December 12, 2019.

14. U.S. Department of Justice. Kalispell Regional Healthcare System to Pay $24 Million to Settle False Claims Act Allegations. U.S. Department of Justice; https://www.justice.gov/opa/pr/kalispell-regional-healthcare-system-pay-24-million-settle-false-claims-act-allegations . Accessed December 12, 2019.

15. Committee on Finance, United States Senate. Examining the Stark Law: Current Issues and Opportunities. Committee on Finance, United States Senate. https://www.govinfo.gov/content/pkg/CHRG-114shrg26440/html/CHRG-114shrg26440.htm . Accessed December 12, 2019.