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HHS Proposes Sweeping Changes to AKS and Stark Law, Part 5: Proposed Changes to Key Stark Law Requirements and Numerous Stark Law Exceptions

As we previously reported, the Department of Health & Human Services (HHS) recently issued two proposed rules intended to reduce the regulatory burden associated with the Anti-Kickback Statute (AKS) and the Physician Self-Referral Law (commonly known as the Stark Law). Although the rules’ main focus is on value-based arrangements, the proposed rule issued by the Centers for Medicare & Medicaid Services (CMS) also includes a number of provider-friendly changes and clarifications to the Stark Law.  As discussed below, CMS is proposing several changes to key Stark Law requirements as well as modifications to existing Stark Law exceptions. 

For more information on CMS’s proposed changes to the Stark Law, check out: (i) our November 13, 2019 blog post on new and revised definitions on key Stark Law terms and a new exception for limited remuneration to a physician; and (ii) our comparison chart of the current regulations and proposed rule.  You can also access a recording and the presentation slides for our November 5, 2019 webinar, “Unpacking HHS’ Proposed Changes to the Anti-Kickback Statute and Stark Law,” in which we analyze the key provisions in the proposed rules and the significant impact these rules will have on the health care industry if adopted. 

Proposed Changes to Key Stark Law Requirements

CMS has proposed changes to several key requirements that appear in numerous Stark Law exceptions, including the volume or value standard, the referral requirement, the AKS compliance requirement, and the writing and signature requirements.

Taking into account the volume or value of referrals or other business generated.  Numerous exceptions include the requirement that compensation paid to referring physicians must not take into account the volume or value of referrals or other business generated between the parties.  CMS previously adopted special rules on compensation that specifically address the types of payments that do not take into account the volume or value of referrals or other business generated.  CMS now proposes additional special rules on compensation designed to set forth bright-line, objective tests to determine when compensation takes into account the volume or value of referrals or other business generated between the parties.  Note that these new special rules would not apply to the new value-based enterprise exceptions.  (For more information on the new value-based enterprise exceptions, please see our first blog post in this series on value-based arrangements.)

First, compensation from an entity to a physician takes into account the volume or value of referrals only if the physician’s compensation increases in correlation with the number or value of referrals.  Common examples of compensation arrangements implicated by this rule include productivity bonuses and physician pools.  

Second, compensation from a physician to an entity takes into account the volume and value only if the compensation decreases in correlation with the number or value of physician’s referrals to the entity.  For example, if a physician leases medical office space from a health system, and the rental charges are reduced for each diagnostic test ordered by the physician and furnished in the health system’s outpatient departments, then the compensation would take into account the volume or value of referrals.

The proposed additional special rules on compensation also stipulate that compensation that has a predetermined, direct correlation with other business previously generated by the physician for the entity would take into account the volume or value of referrals.  

While these proposed special rules offer helpful clarity for purposes of complying with the Stark Law, health care providers should be aware that the special rules would not apply in the AKS context even though many AKS safe harbors include the same requirement related to taking into account the volume or value of referrals.  This fact is not surprising given that the Stark Law regulations tend to define more terms than the AKS regulations because the Stark Law is a strict liability statute. 

Referral requirement.  Under the current special rules on compensation, health care entities can require physicians to refer to a particular provider, practitioner, or supplier as a condition of the physicians’ compensation without the compensation being considered to be taking into account the volume or value of referrals, but only if the referral requirement does not apply if a patient expresses preference for a different provider or supplier, the patient's insurer determines the provider or supplier, or the referral is not in the patient’s best medical interests in the physician's judgment.  The referral requirement also must be set out in writing and signed by the parties, the compensation must be set in advance and at fair market value, and the compensation arrangement must comply with an applicable Stark exception. 

While the special rule on referral requirements currently operates like a deeming provision, CMS is proposing to make it an affirmative requirement for a number of exceptions, including the exceptions for academic medical centers, employment relationships, personal service arrangements, physician incentive plans, group practice arrangements with a hospital, FMV compensation, and indirect compensation arrangements.  

Generally speaking, the proposed rules are designed to reduce regulatory burdens on providers, but this proposed change would pose additional administrative obligations on providers.  Because the referral requirement must be in writing and signed by the parties, many health care entities may find that they will need to amend their physician agreements.  In particular, the Stark Law currently does not require employment relationships to be set out in writing, or to involve compensation that is set in advance.  Should this change be implemented, health care entities will need to set the compensation methodology in advance and put in place a signed written document setting forth the referral requirement with any employed physicians for whom it requires directed referrals. 

Special rules for profit shares and productivity bonuses for group practices.  The Stark Law provides group practices with greater leeway than other designated health services (DHS) entities in determining how to divide revenues among their physicians, specifically with regards to profit shares and productivity bonuses.  (Note that to qualify as a “group practice,” a practice must meet a number of requirements related to its organizational structure, physician members, services, and revenue distributions.)

The Stark Law regulations include special rules for profit shares and productivity bonuses paid to physicians in a group practice that prohibit calculation methodologies that directly take into account the volume or value of the physicians’ referrals to the group practice.  In response to commentators’ suggestion that this requirement discourages physician participation in value-based care models, CMS is proposing a deeming provision related to the distribution of profits from DHS that are directly attributable to a physician’s participation in a value-based enterprise. 

CMS also proposes some clarifying revisions related to the “overall profits” provision.  Currently, “overall profits” means the profits derived from all the DHS payable by Medicare or Medicaid of any component of the group that consists of at least five physicians, which may include all physicians in the group.  CMS is clarifying that, if there are fewer than five physician in the group, “overall profits” means the profits derived from all DHS of the group.  Additionally, CMS is clarifying that group practices cannot distribute profits on a service-by-service basis. Profits from all DHS of the practice (or a component of at least five physicians) must be aggregated and distributed.  CMS is also proposing to remove the reference to “DHS payable by … Medicaid” from the definition of overall profits, which has caused confusion since the definition of DHS includes only services payable by Medicare.

AKS compliance requirement.  CMS is proposing to eliminate from all Stark Law exceptions the requirement that an arrangement must comply with the AKS.  The AKS compliance requirement is found in several Stark Law exceptions (e.g., physician recruitment, fair market value, and indirect compensation arrangements), which is concerning and confusing for a number of reasons.  Including compliance with the AKS, which is an intent-based statute, as a Stark Law exception requirement is counter-intuitive because it introduces the concept of intent into a strict liability statute, and it is inconsistent with CMS’s stated goal of providing clear, bright-line rules.  Moreover, the AKS compliance requirements are not necessary because parties remain subject to the AKS regardless of whether their financial relationships otherwise comply with the Stark Law.  This proposal thus appears to be a welcome change for the industry.

Note that two exceptions – referral services and obstetrical malpractice subsidies – require AKS compliance as well as compliance with specified AKS safe harbors.  CMS is not proposing any changes related to these requirements.

Writing and signature requirements.  Many Stark Law exceptions require that the compensation arrangement be set forth in a writing signed by the parties.  These procedural requirements are vexing for many health care entities because physicians often begin performing services before the parties have a signed, written agreement in place, whether due to necessity or oversight.  Recognizing that there is a low risk of program or patient abuse as long as the arrangement otherwise meets all of the requirements of an applicable exception, CMS has been chipping away at these requirements for the past several years.  Prior to January 1, 2016, under exceptions requiring a signed writing, the parties could obtain signatures within 90 days if the failure to do so was inadvertent and within 30 days if the failure to obtain signatures was not inadvertent.  However, in a 2015 final rule, CMS: (i) relaxed the signature requirements, allowing parties to an arrangement to obtain signatures within 90 days regardless of whether the noncompliance was inadvertent; and (ii) acknowledged that the Stark Law does not require that an arrangement be documented in a single formal contract and that a collection of contemporaneous documents evidencing the course of conduct between the parties may satisfy the writing requirement.

Now CMS is proposing to make the writing and signature requirements even less restrictive.  Under this proposal, both the writing requirement and the signature requirement would be deemed to be satisfied if the parties obtain the required writing and signatures within 90 days after the date on which the arrangement fell out of compliance, provided the arrangement otherwise satisfies all of the requirements of an applicable exception.  This exception would likely ease some administrative burdens associated with the Stark Law’s writing and signature requirements.

Proposed Modifications to Existing Exceptions

CMS also proposes a number of modifications to existing exceptions.  Generally, these proposed revisions are provider-friendly and provide greater insight and clarity into CMS’ intent.

Rental of office space and rental equipment exceptions.  The statutory exceptions for the rental of office space and equipment include a requirement that the space or equipment must be used exclusively by the lessee and not shared with the lessor or any person related to the lessor. This restriction has been problematic for providers who have interpreted the exception as prohibiting the lessee from sharing the space or equipment with any other party.  Multiple physicians commonly use the same space or equipment at the same time when treating patients.  CMS thus proposes changes to the regulatory text to clarify that the exception does not prohibit multiple lessees from using the space or equipment or prevent a lessee from inviting another party other than the lessor to use the office space or equipment rented by the lessee.  Under the proposed rule, the lessor (or any person or entity related to the lessor) is the only party that must be excluded from using the space or equipment under the exceptions.

Physician recruitment exception.  In connection with the exception for physician recruitment, CMS proposes to modify the signature requirement.   Currently, the exception requires a writing that is signed by all parties, including the recruiting hospital, the recruited physician, and the physician practice that the physician will be joining, if applicable.  CMS is reconsidering its position, and now believes the physician practice does not need to sign the recruitment arrangement if the physician practice is not receiving a financial benefit from it.  Under the proposal, CMS would only require the physician practice to sign the writing documenting the recruitment arrangement if the physician practice does not directly pass through to the physician all of the remuneration from the hospital, and the remuneration is provided indirectly to the physician through payments made to the physician practice.  Note that the recruited physician’s signature is still required, which is often the missing signature that trips up health care entities.

Remuneration unrelated to the provision of DHS exception.  Under this exception, remuneration provided by a hospital to a physician does not violate the Stark Law if the remuneration does not relate to the furnishing of DHS.  This exception has an extremely limited application because remuneration must be “wholly unrelated” to the provision of DHS.  One of the few examples CMS has provided of remuneration that could be protected under this exception is payments from a hospital to a physician for the rental of residential property.  Although CMS initially opined that payments for general utilization review or administrative services would be unrelated to DHS, CMS has since retracted that statement.

CMS now proposes to make certain modifications to the exception in order to broaden its application.  Specifically, remuneration from a hospital to a physician would not be related to the provision of DHS if it is: (1) not determined in any manner that takes into account the volume or value of the physician’s referrals; and (2) for an item or service that is not related to the provision of patient care services.  Items that are related to the provision of patient care services would include any items or space that is used in the diagnosis or treatment of patients and any technology that is used to communicate with patients regarding patient care services.  A service is deemed to be not related to the provision of patient care services if the service could be provided by a person who is not a licensed medical professional. 

Significantly, this exception does not contain a fair market value requirement, meaning that it would be permissible under the Stark Law to make payments above fair market value to referring physicians in arrangements unrelated to the provision of DHS.  Note that CMS previously stated in the Stark II Phase II Final Rule that payments above fair market value would be subject to careful scrutiny.  Moreover, parties to these types of arrangements would still be subject to the AKS.

Payments by a physician exception.  This statutory exception protects payments by a physician to a laboratory in exchange for the provision of laboratory services, or alternatively, to an entity as compensation for other items or services, when the items or services are furnished at fair market value.  Although the statutory exception appears to be a very broad catch-all exception, CMS has narrowed this exception substantially by taking the position that it may only be used if no other exception applies.  This position has posed issues in light of the CMS’s Phase III amendment to the FMV exception to cover payments both to and from a physician.  (Previously it only applied to compensation paid to a physician.)  Thus, the FMV exception must be used in lieu of the Payments by a Physician exception for a host of common transactions, such as even a physician’s purchase of health care services, and this means that these transactions must be structured to fit within the FMV exception (e.g. in writing and compensation in advance). Commentators have long argued that this interpretation of a statutory exception is impractical.

CMS thus proposes to clarify that parties to an arrangement would generally be able to rely on this exception to protect fair market value payments by a physician to an entity for items or services furnished by the entity.  CMS no longer believes that the regulatory exceptions should limit the scope of the payments by a physician exception.  On the other hand, this exception would not be available to protect the types of compensation arrangements that are already addressed by one of the statutory exceptions, which includes the exceptions for the rental of office space and equipment, bona fide employment relationships, personal service arrangements, among others.

Fair market value compensation exception.  The fair market value compensation exception is an “open-ended” exception used to protect arrangements that do not fit within other exceptions, or that can be used by parties that are uncertain about whether their arrangement meets the requirements of another exception.  Historically, CMS has been reluctant to apply the exception to the rental of office space over concerns that potential abuse may arise when rental charges are based on: (i) a percentage of the revenue attributable to the services performed or business generated in the office space (a “percentage-based compensation formula”); or (ii) per-unit of service rental charges, where the charges reflect services provided to patients referred by the lessor to the lessee (a “per-click compensation formula”).  Under the proposed rule, CMS would make this exception available to protect nonabusive arrangements for the rental or lease of office space. This would be useful to parties that are unable to meet the rental of office space exception because of technical requirements (e.g. the term of the arrangement is less than one year).  However, CMS intends to prohibit percentage-based compensation and per-unit of service compensation formulas under the exception.

Assistance to compensate a nonphysician practitioner (NPP) exception.  This exception protects remuneration provided by a hospital to a physician to compensate a NPP to provide “patient care services” if the NPP has not practiced in the geographical area served by the hospital within one year of the start of the compensation arrangement.  Previously, the use of the term “patient care services” caused confusion because it is a defined term that relates to tasks performed by only physicians.  CMS seeks to provide clarity by replacing references to “patient care services” with “NPP patient care services.”  CMS is also defining “NPP patient care services” so that nursing services, for example, are clearly not “NPP patient care services” for the purposes of determining whether the arrangement satisfies the one year restriction.  In a related change, CMS is proposing to replace the term “practiced” with “furnished NPP patient care services” to also clarify that other types of health care services do not impact the one year restriction. Lastly, CMS is also adding a requirement to the exception.  The compensation arrangement between the NPP and the physician or physician organization would be required to commence on or after the commencement of the compensation arrangement between the hospital and physician.

Stay tuned for our final installment of this blog series covering a proposed new AKS safe harbor for patient support tools and modifications to existing safe harbors related to beneficiary inducement.

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Karen S. Lovitch

Chair, Health Law Practice & Co-Chair, Health Care Enforcement Defense Practice

Karen advises industry clients on regulatory, transactional, operational, and enforcement matters. She has deep experience handling FCA investigations and qui tam litigation for laboratories and diagnostics companies.
Rachel Yount is a Mintz attorney who focuses her practice on health care industry transactions. Her clients include hospitals, health systems and plans, physician organizations, and pharmacy benefit managers.