CMS Rule Proposes to Further Modify Stark Regulations' Definition of  Indirect Compensation Arrangement

On July 23, 2021, the Centers for Medicare & Medicaid Services (CMS) released proposed changes to the Physician Self-Referral Law, commonly known as the “Stark Law,” regulations defining an “indirect compensation arrangement” (ICA) (the Proposed Rule). The proposed regulations tighten up changes made to the ICA definition finalized in the Stark rules published on December 12, 2020, under the Trump Administration’s “Regulatory Sprint to Coordinated Care” (the 2020 Final Rule).

In simple terms, the Stark Law prohibits referrals for certain health services (designated health services or DHS) from a physician to a health care entity with which the physician or an immediate family member has a financial relationship and further prohibits that entity from billing Medicare for the services provided pursuant to a prohibited referral. A financial relationship can constitute an ownership interest or compensation arrangement, either of which can be direct or indirect. Where an ICA exists, the arrangement must satisfy the requirements of an applicable Stark exception to avoid a violation of the Stark Law’s referral prohibition.

The current Stark Law regulations define “indirect compensation arrangement” using three “conditions” that must exist:

1. Between the referring physician (or immediate family member) and an entity furnishing designated health services (the DHS entity) there is an unbroken chain of more than one person or entity that has financial relationships between them;
2. The referring physician (or immediate family member) receives aggregate compensation from the person or entity with which the physician has a direct financial relationship varying with the volume or value of referrals or other business generated by the physician for the DHS entity and the individual unit of compensation that is received: (a) is not fair market value for items or services actually provided; (b) includes the physician’s referrals to the DHS entity as a variable (increasing or decreasing in a way that positively correlates with the number or value of the physician’s referrals to the DHS entity); or (c) includes as a variable other business generated by the physician for the DHS entity (increasing or decreasing in a way that positively correlates with the business generated); and
3. The DHS entity has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the referring physician or immediate family member receives compensation varying with the volume or value or referrals of business generated for the DHS entity.

The qualifying text above in bold (“the individual unit of compensation condition”) was added by the 2020 Final Rule. The addition of the individual units of compensation received by physicians or immediate family members standard in the 2020 Final Rule makes it less likely that an arrangement fits within the ICA definition, as explicitly acknowledged by CMS in comments to the Final Rule (“our final policies will reduce the number of unbroken chains of financial relationships that fall within the ambit of the physician self-referral law as indirect compensation arrangements…”).

In the newly Proposed Rule, CMS proposes to update the list of items (at 42 CFR § 411.354(c)(2)(A)(ii)) that may be used to satisfy the individual unit of compensation condition to include a fourth item, “payment for anything other than services personally performed by the physician (or immediate family member).” Further, CMS states its intention to codify its policy that services performed by any person other than the physician (or immediate family member), including the referring physician’s (or family member’s) employees, independent contractors, group practice members, or supervisees are not personally performed by the physician. CMS contextualizes these changes by noting that there is a “reduced risk of program or patient abuse where compensation to a physician (or immediate family member of a physician) is solely for services that he or she personally performs.”

CMS also notes that it “inadvertently excluded” from the modified ICA definition in the 2020 Final Rule arrangements involving unit of service-based payment that it has “long identified” as presenting program integrity concerns—arrangements for office space or equipment rentals.

The bottom line is that as physicians and other stakeholders in the health care industry continue to assess the 2020 Final Rule’s changes to the Stark regulations and their impact on their businesses and arrangements, the Proposed Rule’s additional changes to the ICA definition will need to be taken into account as part of that assessment, most critically whether any arrangements previously thought to be outside of the ICA definition in the 2020 Final Rule may be covered by the revised definition, as currently proposed.

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