United States: The Implications Of CMS' Proposed Stark Law Regulations

On July 8, 2015, the Centers for Medicare & Medicaid Services ("CMS") released proposed regulations "to reduce burden and to facilitate compliance" under the physician self-referral law known as the Stark Law. See 80 Fed. Reg. 41686, 41910 (July 15, 2015). The proposed rule, if finalized, would clarify some regulations, relax certain technical requirements and create new exceptions. In a larger sense, however, the proposed rule provides only small relief for small and minor violations. Absent more, the self-referral law and its implementing regulations will remain "an impenetrably complex set of laws and regulations"1 that can ruin a provider that missteps. Accordingly, providers should maintain a high degree of vigilance in seeking to ensure compliance with the Stark Law.

The proposed self-referral regulations are part of a much larger 279-page proposed rule that includes revisions to payment policies under the Medicare Physician Fee Schedule ("MPFS"), and other revisions to Part B for CY 2016. See 80 Fed Reg. 41686 (July 15, 2015). Taken as a whole, the proposed rule updates payment policies, payment rates, and quality provisions for services furnished under the MPFS on or after January 1, 2016. Reed Smith's summary of the other provisions of the proposed MPFS rule is available here.

This Alert focuses on the proposed changes to the Stark Law regulations. CMS is soliciting comments on the proposed rule until 5 p.m. September 8, 2015. Below, we summarize the changes and consider their implications, and identify possible areas for comment.

Summary of Proposed Regulations

a. Relaxation of Technical Requirements

i. No requirement for a particular kind of "writing" under various exceptions to the prohibition on self-referrals

The Stark Law prohibits a physician from making referrals for certain designated health services ("DHS") payable by Medicare to an entity with which that physician (or an immediate family member) has a financial relationship, unless an exception applies. Many of the exceptions require that the arrangement be in writing. However, current regulations use differing terminology, distinguishing, for example, between the requirement for a written agreement (exceptions for rental of space at 42 C.F.R. § 411.357(a) and the rental of equipment at 42 C.F.R. § 411.357(b)), and the requirement that an arrangement be set out in writing (exception for personal services arrangement at 42 C.F.R. § 411.357(c)). CMS proposes to remove the terms "agreement" and "contract" or "contracted for" from the various exceptions, and replace these words with "arrangement" or "covered by the arrangement."

In the explanatory text that accompanies the proposed regulations, CMS states that there is no substantive difference among the writing requirements for the various compensation exceptions that require a writing; no requirement for a particular kind of writing; and thus no requirement for a formal contract. CMS explains further that, depending on the facts and circumstances, a "collection of documents," including contemporaneous documents evidencing the course of conduct between the parties, may suffice. 80 Fed. Reg. 41915. CMS provides no specific guidance or examples to elucidate when a collection of documents could satisfy the writing requirement. Presumably, however, such contemporaneous documentation could include emails, correspondence and file memoranda.

ii. No requirement for a minimum one-year term provision

Existing exceptions for space rentals, equipment rentals and personal services arrangements all specify that the arrangement must have a term of at least one year. Consistent with its view that there is no requirement for a formal contract, CMS clarifies that the requirement for a one-year term does not mean that the arrangement must include an explicit provision setting forth a term of at least one year. Rather, the requirement can be satisfied as long as there is some contemporaneous documentation establishing that the arrangement in fact lasted for at least one year, or that the parties did not terminate the arrangement during the first year and enter into a new arrangement for the same space, equipment or services during that same first year. 80 Fed. Reg. 41916.

iii. Indefinite holdover period permitted for rental of office space, equipment and personal services arrangement exceptions after one year period has expired

Existing exceptions for space rentals, equipment rentals and personal services arrangements permit a "holdover" arrangement for up to six months if an arrangement of at least one year has expired, if the arrangement continues on the same terms, and if the arrangement otherwise satisfies the requirements of the exception. The proposed rule would permit indefinite holdovers as long as the arrangement continues on the same terms and conditions as the original agreement, and as long as all elements of the applicable exception continue to be satisfied during the holdover period. Alternatively, CMS proposes to extend the holdover period from six months to a longer definite period as long as the same safeguards are met: the arrangement continues on the same terms and continues to satisfy all requirements of the exception during the holdover period. CMS emphasizes that the arrangement must meet the applicable fair market value requirement when the arrangement expires, and on an ongoing basis during the holdover period.

iv. Temporary noncompliance period with signature requirements to be extended to 90 days for all cases

Multiple exceptions require that an arrangement be signed by the parties. Under the current regulations, if the failure to comply with the signature requirement is inadvertent, the parties must obtain the required signatures within 90 days. Where the failure was not inadvertent, the parties must obtain the required signatures within 30 days. The proposed regulation would give the parties 90 days to obtain the missing signature across the board; however, an entity could make use of this exception only once every three years for the same referring physician.

b. Clarifications

i. All physicians in a physician organization are parties to a compensation arrangement between the physician organization and a DHS entity

Currently, under 42 C.F.R. § 422.354(c)(3)(i), physicians who have an ownership or investment interest are required to stand in the shoes of their physician organization, and other physicians with a compensation arrangement with a physician organization (e.g., employees and independent contractors) are permitted to stand in the shoes of their physician organization. CMS proposes to amend this subsection to clarify that all physicians in a physician organization (not just those who stand in the shoes of the physician organization) are considered parties to a compensation arrangement between the physician organization and the DHS entity for all purposes, except satisfying signature requirements. Most notably, this means that referrals from all physicians in the physician organization must be considered when evaluating whether a physician organization's compensation arrangement with a DHS entity takes into account the volume or value of referrals. In the proposed rule, CMS also clarifies that, for purposes of the signature requirements, only those physicians who stand in the shoes of their physician organization are considered parties to an arrangement. The signature requirement for those physicians in multiple exceptions would be satisfied when the authorized signatory of the physician organization has signed the writing.

ii. Definition of "remuneration"

Under the Stark Law, the provision of items, devices, or supplies that are "used solely" to collect, transport, process, or store specimens for the entity providing the items, devices, or supplies, or to order or communicate the results of tests or procedures for such entity, does not create a compensation arrangement triggering the Stark Law's referral prohibition. CMS proposes to revise the definition of "remuneration" at 42 C.F.R. § 411.351 to clarify that, as long as the items, devices, or supplies are furnished for any of the purposes listed in the regulation, and not for any other purpose, the provision of the item does not constitute remuneration.

iii. Distancing CMS from the ruling in Kosenske

In the preamble to the proposed rule, CMS responds to the 3rd Circuit Court of Appeals decision in United States ex rel. Kosenske v. Carlisle HMA, 554 F.3d 88 (3d Cir. 2008). In Kosenske, the 3rd Circuit held that a physician's use of a hospital's resources (exam room, nursing personnel, supplies) when treating hospital patients constituted remuneration under the Stark Law (and therefore created a financial relationship between the physician and the hospital), even though the hospital billed the payor for those services and the physician only sought reimbursement for professional fees. CMS states its view that a physician's use of a DHS entity's exam and procedure rooms, nursing and other non-physician personnel and supplies when treating patients does not constitute remuneration under the self-referral law, where the physician bills the payor only for professional fees, and the DHS entity bills the payor for its services.

CMS emphasizes, however, that where a physician and a DHS entity submit a global bill to a payor, the physician-referral statute is implicated because there is now "remuneration" between the parties. CMS does not explain why a payor's decision to reimburse professional and facility fees separately is not "remuneration between the parties," and if so, why a fair market value reconciliation of the physician and non-physician components of a global payment should also not constitute "remuneration."

c. New Exceptions

i. Timeshare leases

The rental of office space exception requires, among other things, that the office space rented or leased must be used exclusively by the lessee when being used by the lessee (and cannot be shared with or used by the lessor or any other person or entity related to the lessor). Acknowledging that timeshare leases could make it easier for needed specialists to serve rural areas, and recognizing that timeshare agreements may not fit easily within the existing rental of office space exception, CMS proposes to allow timeshare arrangements with physicians, where the physician organization or hospital is the licensor. However, the proposed timeshare leases must meet several requirements, including a written arrangement and compensation set in advance, among others.

ii. Remuneration to physicians to recruit nonphysician practitioners

CMS also proposes to permit hospitals, Federally Qualified Health Centers ("FQHCs"), and Rural Health Centers ("RHCs") to provide remuneration to physicians to recruit nonphysician practitioners. However, CMS imposes several limits. For example, the nonphysician practitioner must be a bona fide employee of the physician, meet certain geographical requirements, and must provide primary care services.

In the course of describing this proposed exception, CMS discusses the requirement, contained in numerous Stark Law exceptions and in the definition of an indirect compensation arrangement, that compensation may not "take into account" the volume or value of referrals. CMS notes that it has developed a uniform interpretation of the volume or value standard, but that the Stark Law regulations continue to use different language formulations ("takes into account," "based on" and "without regard to"). Accordingly, CMS proposes consistently to use the phrase "take into account" in connection with the volume or value standard throughout the Stark Law regulations.

d. Other Changes/Interpretations

i. Publicly traded securities

An existing Stark Law exception allows a physician to refer to an entity, as long as that physician owns securities in the entity that are publicly traded. The publicly traded securities exception currently requires (among other things) that the securities must be (a) listed for trading on the New York Stock Exchange, the American Stock Exchange, or any regional exchange in which quotations are published on a daily basis; or (b) foreign securities listed on a recognized foreign, national, or regional exchange in which quotations are published on a daily basis; or (c) traded under an automated interdealer quotation system operated by the National Association of Securities Dealers ("NASD"). Given that the NASD no longer exists, and that it is no longer possible to purchase a publicly traded security traded under the automated interdealer quotation system NASD formerly operated, CMS proposes to revise the publicly traded securities exception to include securities listed on electronic stock markets or over-the-counter quotation systems, as long as quotations are published on a daily basis and trades are standardized and publicly transparent. CMS is soliciting comment on further restrictions to publicly traded securities.

ii. Physician-owned hospitals

The Affordable Care Act ("ACA") eliminated the Stark "whole hospital" exception, except for certain grandfathered physician-owned hospitals, and limited the percentage of physician investment in any such grandfathered physician-owned hospital to its level on March 23, 2010. Prior CMS guidance required calculation of the maximum percentage of physician investment based on the investment level of referring physicians only. In the proposed rule, CMS proposes to change the definition of ownership or investment interest such that all physician owners or investors, regardless of whether they refer patients, would be included for purposes of this calculation. The ACA also revised the Stark "whole hospital" exception to require that a physician-owned hospital disclose the fact that the hospital is partially owned or invested in by physicians on any public website for the hospital and in any public advertising for the hospital. CMS proposes to clarify the types of websites that would constitute a public website and the types of advertising that would constitute public advertising for purposes of this disclosure, and the types of statements that would provide sufficient disclosure.

e. Solicitation of Comments for Changes Needed for Health Reform

CMS acknowledges that the Stark Law and the aims of the ACA are not always consistent. The ACA provides broad authority to test new Medicare payment models and encourages new health care delivery models, such as accountable care organizations ("ACOs"). CMS seeks comment on how to reform the Stark Law so that it does not interfere with innovative health care delivery and payment models and integrated approaches to health care. Specifically, CMS seeks suggestions on how to revise the law so as to prevent it from impeding the development of relationships with physicians that could facilitate a more integrated approach to care as envisioned by health reform.

Takeaways and Implications

a. The Stark Law Persists as a Booby Trap

While the proposed regulations provide some clarifications of existing rules, the fact remains that the Stark Law is still too complex, too unwieldy, and too susceptible to differing interpretations.2 Nothing demonstrates this more than the recent 4th Circuit decision in United States ex rel. Drakeford v. Tuomey Healthcare System, Inc., No. 13-2219, 2015 WL 4036166 (4th Cir. July 2, 2015).

In Tuomey, the court sustained a $237 million judgment against a hospital system for providing compensation that was determined to vary with the value of referrals. Tuomey entered into part-time employment arrangements with physicians to perform outpatient surgeries only at the hospital. In addition to their base salaries, the physicians received an 80 percent productivity bonus, as well as a 7 percent incentive bonus. The amount that was ultimately paid to the physicians exceeded what was collected for their professional outpatient surgical services, and they continued to maintain private practices. Before finalizing the arrangement, Tuomey had sought advice from multiple, experienced, health care regulatory counsel.

The Tuomey case raises multiple issues: the value of an advice of counsel defense, the problem of cherry-picking legal advice, the need to determine what fair market value is for a specific service, whether physician compensation can ever permissibly exceed collections for a physician's services, and many others. Ultimately, however, the 4th Circuit concluded that the arrangement violated the Stark Law because a reasonable jury could have found that the Tuomey contracts compensated physicians in a manner that varied with the volume or value of referrals. According to the court, "the more procedures the physicians performed at the hospital, the more facility fees Tuomey collected and the more compensation the physicians received in the form of increased base salaries and productivity bonuses."

b. The Proposed Rule Leaves Uncertainty in Key Areas

Although the proposed regulations provide some clarifications, uncertainty remains with regard to several key concepts. For example, while the preamble explains that the writing requirement that exists in several important exceptions may, depending on the facts and circumstances, be satisfied by "a collection of documents, including contemporaneous documents evidencing the course of conduct between the parties," CMS provides no indication of the specific circumstances or examples of the types of documents that would suffice. Given that the exceptions generally also require that the compensation must be set in advance, and that the arrangement must be signed by the parties, it would be helpful if CMS would provide some examples of scenarios for which a collection of documents adequately demonstrates compliance with all of the requirements of an exception.

Further, despite significant discussion in the preamble concerning the volume or value standard, CMS fails to provide any meaningful insight as to when compensation would be regarded as taking into account or varying with the volume or value of referrals. Such guidance is urgently needed in the wake of Tuomey. Because a physician's personally performed services are explicitly carved out of the definition of "referral" in the Stark Law regulations, many would not typically view payments to a physician for personally performed services as varying with or taking into account the physician's referrals. Yet, in Tuomey, such payments for personally performed professional services were determined to vary with the volume or value of referrals. As a result, without more guidance from CMS, providers will not know when payments based on a physician's personally performed services create insurmountable Stark Law problems.

c. Rigorous Contract Management Processes Remain Best Practice

Because the Stark Law is a strict liability statute, the relaxation of technical requirements and the interpretive guidance may, in some cases, help providers avoid violations resulting from the occasional inadvertent error. Certainly, the proposed rule, if finalized, could be helpful in avoiding some violations of the statute, e.g., where providers become timely aware that a signature is missing or that an agreement has expired inadvertently.

Providers should take note that the relaxation of certain requirements is not removal of the requirements. The best course will be for providers to remain on guard and maintain fastidious procedures for physician contracting. As CMS states, "a single written document memorializing the key facts of an arrangement provides the surest and most straightforward means of establishing compliance with the applicable exception." 80 Fed. Reg. 41915. Absent careful attention to satisfying all of the requirements of an exception at all times, it is too easy for a provider to fall out of compliance with the self-referral law.

Fair market value, for example, is a critical requirement for almost all of the exceptions. Providers who permit agreements to expire may still have a sufficient arrangement for Stark purposes if all terms and conditions remain the same. However, if they fail to assess continuously whether compensation paid still meets fair market value requirements, the arrangement may still end up violating the anti-referral law if, over time, the compensation no longer reflects fair market value for the actual services performed.

d. Providing Flexibility to Achieve Health Reform Goals Will Be Key

CMS' solicitation of comments on the impact of the Stark Law on health care delivery and payment reform is encouraging. The Stark Law has proved to be among the legal barriers to achieving the clinical and financial integration that will facilitate effective population health management and success under new and emerging payment models involving governmental and commercial payors. One example is the change to the definition to "remuneration" in this proposal that appears to signal that CMS is conscious that new bundled or global payment arrangements are emerging, that it believes must not overlook Stark rule scrutiny. Given CMS' low bar for identifying when abuse may exist and its historical reluctance to provide meaningful relief from the Stark Law where it perceives any risk of abuse, skepticism about whether these barriers will be lowered – or will remain an obstacle to reform – is understandable. Nevertheless, health industry participants should take advantage of the opportunity the proposed rule affords to educate CMS concerning the practical problems caused by the Stark Law, and why it is an obstacle to achieve the aims of health reform.


1 United States ex rel. Drakeford v. Tuomey, No. 13-2219, 2015 WL 4036166 (4th Cir. July 2, 2015) (Wynn, Circuit Judge, concurring).

2 "It seems as if, even for well-intentioned providers, the Stark Law has become a booby trap rigged with strict liability and potentially ruinous exposure – especially when coupled with the False Claims Act." United States ex rel. Drakeford v. Tuomey, No. 13-2219, 2015 WL 4036166 (4th Cir. July 2, 2015) (Wynn, Circuit Judge, concurring).

Client Alert 2015-213

This article is presented for informational purposes only and is not intended to constitute legal advice.

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