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HHS Finalizes Highly Anticipated Final Rule Amending Anti-Kickback Statute and Stark Law Regulations, Part VI: Changes to Fundamental Stark Law Terminology

In this final post of our blog series on the substantial changes to the regulations implementing the Anti-Kickback Statute (AKS) and the Physician Self-Referral Law (commonly known as the Stark Law), we cover change to (i) key Stark Law terminology, and (ii) the scope and application of the Stark Law exceptions.  The Centers for Medicare & Medicaid Services (CMS) finalized new definitions for various key terms used in the Stark Law regulations as well as revisions to existing terms that are generally intended to provide more certainty and flexibility.  This post discusses a few of the highlights, but the final regulations contain many others.

Changes to Fundamental Stark Law Terminology                                                                                  

            Commercially Reasonable

The Stark Law regulations now define “commercially reasonable,” which is a term included in a number of commonly used exceptions.  The definition permits the parties to consider their own characteristics, such as size, type, scope, and specialty, and it specifically recognizes that the arrangement does not necessarily need to be profitable, which many previously believed to be true.  While the addition of the defined term is welcome, it does pose some risk because it contains an undefined term (“legitimate business purpose”) and requires the parties to make subjective judgments when determining compliance, which could make it easier for enforcement authorities to second-guess the parties after the fact.  

            Designated Health Services

The definition of “designated health services (DHS)” now makes clear that services furnished by hospitals to inpatients do not constitute DHS if the furnishing of those services does not increase the amount paid to the hospital under the Acute Hospital Inpatient Prospective Payment System (PPS), the Inpatient Rehabilitation PPS, the Inpatient Psychiatric Facility PPS, or the Long-Term Care Hospital PPS.  For example, if a specialist who is not responsible for the patient’s admission orders an x-ray for an inpatient, the x-ray would not qualify as DHS under the new definition, which means that the specialist can have a financial relationship with the hospital that does not satisfy a Stark Law exception, and the hospital can bill Medicare for the inpatient hospital services without violating the Stark Law. 

We expect this change to have limited utility as hospitals typically do not engage physicians to treat and order services exclusively for inpatients, and hospitals would have difficulty anticipating prior to a referral whether it would cause Medicare payment to a hospital to increase.  But the revised definition of DHS could significantly reduce the amount that would need to be refunded under an overpayment analysis because referrals for services that did not result in an increase to the amount paid under the PPS would not constitute DHS and thus would not need to be refunded due to a non-compliant financial relationship.  

            Isolated Financial Transaction

While most of the final rule’s changes are provider-friendly, the new definition of “isolated financial transaction” is intended to prevent parties from using the isolated transactions exception to protect a single payment for services provided without a written, signed agreement, which typically cannot comply with any other exception because compensation is not set in advance.  The regulation now expressly states that an “isolated financial transaction” does not include a single payment for multiple or repeated services (such as payment for services previously provided but not yet compensated).”  CMS also clarified that the exception for isolated financial transactions does protect forgiveness of an amount owed in settlement of a bona fide dispute related to a compensation arrangement but emphasized that a bona fide dispute must in fact exist.

Changes to the Scope and Application of the Stark Law Exceptions

In addition to adding and revising many key terms, CMS also finalized changes to several requirements that appear in multiple Stark Law exceptions with the goal of increasing flexibility, reducing burden, and providing more certainty those seeking to comply.

            Volume or Value Standard

Numerous Stark Law exceptions require 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 addressing certain types of payment arrangements that meet this standard, and it is now finalizing 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. 

First, compensation from an entity to a physician takes into account the volume or value of referrals or other business generated between the parties only if the physician’s compensation positively correlates with the number or value of the physician’s referrals to the entity.  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 of referrals or other business generated between the parties only if the compensation negatively correlates with the number or value of the 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.

While these formulas provide clarity for Stark Law compliance purposes, health care providers should note that no such rules apply in the AKS context.  This fact is not surprising given that the Stark Law is a civil strict liability statute rather than a criminal, intent-based law like the AKS.  In addition, these special rules do not apply to the new value-based enterprise exceptions. 

            AKS Compliance Requirement

CMS eliminated from most – but not all – Stark Law exceptions the requirement that an arrangement must comply with the AKS.  Health care providers have always struggled with this requirement because it introduced the concept of intent into a strict liability statute, and it allowed enforcement authorities to claim violate of the Stark Law based solely on a claim of non-compliance with the AKS.  The exceptions for referral services and obstetrical malpractice subsidies require AKS compliance as well as compliance with specified AKS safe harbors, and those requirements have not changed.  In addition, CMS decided not to eliminate the AKS compliance requirement from the exception for fair market value compensation because it does not contain the same level of compliance safeguards as the other exceptions.  It did, however, remove the requirement that the arrangement must not violate laws and regulations governing billing or claims submission.  Health care providers will undoubtedly welcome the added certainty and increased flexibility resulting from this change.

            Writing and Signature Requirements 

Many Stark Law exceptions require that the compensation arrangement be set forth in a writing signed by the parties, which can present a variety of operational challenges.  For example, physicians often perform services before the parties have a signed, written agreement, whether due to necessity or oversight.  Recognizing that such technical non-compliance presents a low risk of program or patient abuse as long as the arrangement otherwise complies with an applicable exception, CMS has sought to relax the writing and signature requirements for the past several years.  The final rule allows the parties to obtain the required writing or signature within 90 consecutive calendar days after the date on which the arrangement fell out of compliance.  CMS also codified its long-standing policy of allowing electronic or other signatures considered to be valid under state law.


The Stark Law has for many years now posed obstacles and placed great regulatory burdens and enforcement risk on the health care industry.  The impact of these substantial changes remain to be seen, but they offer welcome relief and guidance to the industry as it continues to adopt value-based arrangements.

For additional information on the historic changes to the AKS and the Stark Law, you can access a recording of our webinar in which we reviewed key provisions from the new regulations and provided practical examples of how the industry can take advantage of these significant changes. We have also provided two comparison charts – one on the AKS and the Beneficiary Inducements CMP and another on the Stark Law – that offer an easy-to-read comparison between the current, proposed, and final regulations. 

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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.