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Providers Take Note: What the New Stark Regulations Mean to You

In an important development, the Centers for Medicare and Medicaid Services (CMS) has issued additional final regulations implementing the Stark Law as part of the Physician Fee Schedule for calendar year 2016 (see 80 Fed. Reg. 70,886 (Nov. 16, 2015)).

Executive Summary

In an important development, the Centers for Medicare and Medicaid Services (CMS) has issued additional final regulations implementing the Stark Law as part of the Physician Fee Schedule for calendar year 2016 (see 80 Fed. Reg. 70,886 (Nov. 16, 2015)). The final rule adopts the majority of the changes proposed in July 2015 by CMS and previously analyzed here. Note, however, that some of the key provisions appear in revised regulatory text, while others are only contained in the regulatory preamble. Many of the changes, including the creation of a new timeshare arrangement exception, are intended to make it easier for providers to comply with the Stark Law’s complex requirements. Various “clarifications” described in the preamble also should generally make it easier to comply, particularly with those Stark exceptions that require a signed, written arrangement with a minimum term of one year. The final rule also includes a new exception for the employment of nonphysician practitioners and finalizes certain changes related to physician-owned hospitals.

The vast majority of provisions in the final rule are effective January 1, 2016. However, in light of the fact that certain arrangements involving physician-owned hospitals may need to be unwound due to the change to the definition of “bona fide investment level,” the applicable provision in the final rule will not be effective until January 1, 2017. Moreover, some of the “clarifications” in the preamble reportedly reflect how CMS has always interpreted certain regulatory provisions. As a result, some of these clarifications may have retroactive impact.

Since the Stark Law is a strict liability statute, and since there have been a substantial number of multi-million dollar settlements in False Claims Act cases related to the Stark Law recently, providers should carefully determine whether the revised regulations impact their current arrangements and take any action necessary to ensure compliance now and in the future. Some of the most significant provisions in the final rule are briefly summarized below.

Overview of Key Regulatory Revisions and Clarifications

Facilitating Compliance with the Stark Law

According to CMS, many of the regulatory revisions were designed to make it easier for providers to comply with certain exceptions to the Stark Law (and reduce the number of unnecessary self-disclosures being submitted to the CMS Self-Referral Disclosure Protocol). The vast majority of these revisions were adopted without modification from the proposed rule, including:

  • Clarification that the “writing” or “written agreement” required by numerous Stark Law exceptions does not have to be a single formal contract; it can be a collection of documents as long as “the available, contemporaneous documents… would permit a reasonable person to verify compliance with the applicable exception.” Moreover, the documents “must clearly relate to one another and evidence one and the same arrangement between the parties.” Because this guidance is being characterized as a “clarification” of the existing requirements, CMS notes that parties may rely on this guidance in determining whether there is any need to use the Self-Referral Disclosure Protocol for conduct pre-dating the final rule’s effective date.
  • Clarification that a lease of space or equipment or a personal services arrangement does not need to include a specific written “term” provision as long as the arrangement lasts for at least one year[1];
  • Allowing 90 consecutive calendar days from the date an arrangement became noncompliant from failure to satisfy the signature requirement (regardless of whether compensation is paid or referrals occur during this period) to obtain the missing signatures, regardless of whether the failure to obtain the signature was deliberate or inadvertent. However, the limitation that this signature exception can be used only once every three years per physician remains, and CMS points out that the impact of this limitation can vary, depending on whether the contracting party is a physician or a physician organization; and
  • Permitting arrangements of any length covered by the fair market value exception, not just those lasting less than one year, to be renewed any number of times under certain circumstances.

Another provision in the final rule designed to facilitate compliance with the Stark Law that was modified from the proposed regulations is related to holdovers. Specifically, space and equipment leases and personal services arrangements can now be held over indefinitely (not just for six months), as long as the terms and conditions do not vary, the holdover arrangement is in compliance with the applicable exception at the time it expires, and the arrangement remains in compliance during the holdover period. While CMS cautions that ongoing compliance with the fair market value requirement is necessary during the holdover period (and that long term arrangements may be at risk of falling out of compliance with the fair market value requirement even before the original agreement expires), it did not offer guidance on how often compensation should be checked to ensure that it is still fair market value. Interestingly, CMS also warned providers that failure to pay any holdover premium required under the original lease could prevent use of the holdover exception and could create a separate financial relationship between the parties that would have to meet an applicable exception. Further, CMS stated that parties that are in a valid six-month holdover on January 1, 2016, (the final rule’s generally applicable effective date) may continue the holdover indefinitely, but if the holdover has lasted for more than six months as of January 1, 2016, then the indefinite holdover provision cannot be used for the arrangement.

Timeshare Arrangements

The final rule also contains a new exception for timeshare arrangements, with certain modifications from the proposed rule. This is a narrow exception that would permit certain timeshare arrangements between a physician or physician organization in which the physician is an owner, on the one hand, and a hospital or physician organization in which the physician is not an owner, employee, or contractor, on the other, for the use of space, equipment, personnel, items, supplies, or services.

Among numerous other requirements, the compensation over the term of the arrangement must be set in advance, consistent with fair market value, and not determined in a manner that takes into account the volume or value of referrals or other business generated between the parties. Compensation also cannot be determined using a formula related to a percentage of the revenue raised or otherwise attributable to the services provided while using any of the items and/or services, etc. covered by the arrangement. Using a compensation formula based on per-unit of service fees that are not time-based also is not permissible under specified circumstances. The exception further requires that the premises, equipment, personnel, items, supplies, and services covered by the arrangement be used predominantly to furnish evaluation and management services to patients and on the same schedule. It also requires that the equipment covered by the arrangement is located in the same building where the evaluation and management services are provided. CMS noted that this exception was not intended to affect existing arrangements, but rather establishes an additional exception that may be used by parties to a timeshare arrangement under certain circumstances.

Recruitment and Retention

New Exception for Arrangements with NPPs

CMS also finalized, with some modification, a detailed new exception permitting hospitals, federally qualified health centers (FQHCs), and rural health clinics (RHCs) to provide financial assistance to physicians in order for the physicians to directly employ or otherwise contract with nonphysician practitioners (NPPs). Notably, although the proposed rule limited the exception’s availability to the employment of NPPs for the purpose of providing primary care (general family practice, internal medicine, pediatrics, geriatrics, and OB-GYN services), CMS responded to comments on the proposed rule by expanding the scope of permissible employment to include the provision of mental health services. As a result, under the final rule, an NPP is defined to include physician assistants, nurse practitioners, clinical nurse specialists, certified nurse midwives, clinical social workers, and clinical psychologists. Among numerous other requirements, the compensation paid by the hospital may not exceed 50% of the actual compensation, benefits, and signing bonus (“total compensation”) paid by the physician to the NPP, and the total compensation must not exceed fair market value for patient care services furnished to patients in the physician’s practice. The exception can be used only for the first two consecutive years of the arrangement between the NPP and the physician/physician organization and can be used only once every three years with respect to the same referring physicians (with certain exceptions). Numerous other requirements also must be satisfied, including certain criteria designed to prevent “cycling” NPPs through a physician practice.

Modification to Existing Exception Related to FQHCs and RHCs

The regulations also finalized a new definition of the geographic area that FQHCs and RHCs may serve for the purposes of the existing recruitment and retention exceptions, defining this geographic area as the lowest number of contiguous or noncontiguous zip codes from which the FQHC or RHC draws at least 90 percent of its patients, as determined on an encounter basis. The geographic area also can include zip codes from which the FQHC or RHC draw no patients, as long as these zip codes are entirely surrounded by the zip codes from which the 90 percent of patients are drawn. CMS also finalized its proposed technical revisions to the retention exception.

Physician-Owned Hospital Requirements

Public Website and Public Advertising

In addition, CMS finalized, without modification, revisions to the physician-owned hospital standards regarding public website and public advertising disclosure requirements. Under the new rules, public advertising for a hospital includes only communications paid for by the hospital that are “primarily intended to persuade individuals to seek care at the hospital,” thus excluding communications such as those primarily intended for recruitment, public services announcements, or community outreach. In addition, the advertising disclosure requirement now can be met by “any language that would put a reasonable person on notice that the hospital may be physician-owned.”

Bona Fide Investment Level Calculation

The proposal to change the methodology for calculating the baseline bona fide investment level and the (subsequent) bona fide investment level for physician owners/investors in physician-owned hospitals was finalized to include direct and indirect ownership interests held by a physician, even if the physician does not refer patients to the hospital (e.g., physicians who may have retired or moved away). The effective date for the new methodology has been postponed until January 1, 2017, to give hospitals that meet the current bona fide investment level requirements (which do not require counting ownership interests held by non-referring physicians), but will not meet the new requirements, an opportunity to come into compliance.

Per-Click Compensation

Providers also will be interested to note that CMS used the preamble discussion of the new timeshare exception to briefly address the D.C. Circuit’s recent decision in Council for Urological Interests v. Burwell, 790 F.3d 212 (D.C. Cir. 2015). The D.C. Circuit has instructed the Department of Health and Human Services to reconsider whether a ban on per-click compensation arrangements is consistent with the relevant legislative history. According to CMS, the court did not hold that the Stark Law’s legislative history “requires [CMS] to allow per-click arrangements,” but rather “upheld [CMS’s] authority to prohibit per-click arrangements where [CMS] determines that such a prohibition is necessary to protect against program or patient abuse.” CMS further noted that the decision to prohibit per-unit of service compensation in the new timeshare arrangement exception is not affected by the court’s decision. Finally, CMS indicated it is considering options as to how to comply with the court’s ruling, so further guidance and potential changes may be forthcoming.

Additional Significant Provisions

The final rule also confirmed provisions and guidance from the proposed rule on various topics, including the following:

  • Stand in the Shoes: The unique Stark Law definition of “stand in the shoes” has been revised to clarify that only a physician standing in the shoes of a physician organization, usually an owner, is considered a party to the arrangement for purposes of the signature requirement of an applicable exception. Such a physician satisfies the signature requirement of the applicable Stark Law exception when the authorized signatory of his/her physician organization has signed the required writing. However, for other purposes, all physicians in a physician organization are considered parties to the arrangement. Accordingly, compensation to a physician organization from an entity furnishing designated health services cannot take into account referrals or other business generated by any of the physicians, whether they are owners, employees, or independent contractors of a physician organization.
  • Split Billing Arrangements: In order to clarify confusion related to the discussion in U.S. ex rel. Kosenske v. Carlisle HMA, 554 F.3d 88 (3d Cir. 2009), on so-called split bill arrangements, CMS specifically states that a physician’s use of certain hospital resources (such as an exam room, supplies, and personnel) when treating hospital patients does not constitute remuneration from the hospital to the physician as long as the physician only bills for his or her professional fees. (However, CMS pointedly notes that it is not addressing the exclusive use of space.)
  • Compensation that does not reflect referrals: CMS confirms in the final rule that there is only one standard in the various compensation exceptions related to the requirement that compensation paid to a physician should not be determined in a manner that takes into account the volume or value of a physician’s referrals. (The standard is the same regardless of whether the phrase “takes into account,” “based on,” or “without regard to” are used.)
  • Revised definitions: The final rule revises the definitions of “remuneration” and “locum tenens physician” to remove potential confusion arising from the current wording.
  • Ownership Exception for Publicly-Traded Securities/Mutual Funds: The language in the Stark exception for ownership in certain publicly traded securities and mutual funds is updated to remove the reference to NASD and to cover securities listed for trading on an electronic stock market or over-the-counter quotation system meeting specified standards.


Providers likely can benefit from many of the changes in the final rule, particularly when assessing whether they potentially have a “technical violation” of the Stark Law. However, even with the new exceptions, CMS’s additional guidance, and the “clarification” of some requirements in certain exceptions, the regulations remain complex and the stakes for violating the strict liability Stark Law remain high. The final rule also raises several potential issues that providers may not have focused on in the past, e.g., what to do if the compensation paid is no longer fair market value at some point after the arrangement begins. Providers entering into new arrangements with physicians should confirm with counsel that the arrangement complies with the Stark Law, as revised, and evaluate whether any of the new exceptions, revised regulations, or guidance may be helpful in structuring the arrangement. It also is important to consider whether and how the new guidance affects existing arrangements. Providers who believe they may have identified potential violations should consult with counsel to determine whether any of the additional guidance provided by CMS could mitigate the reporting obligation.

This article was previously published in Compliance Today.

[1] An arrangement that would otherwise meet this requirement can be terminated during the first year as long as the parties do not enter into the same or substantially the same arrangement during the first year of the original arrangement.


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