October 2019

IS CHANGE ON THE HORIZON? Congress Proposes Reforms to the Stark Law

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Podiatrists are among the providers targeted by efforts to revise regulation of referral for Medicare services. The goal? Modernize governance of a changing healthcare industry.

By Daniel F. Shay, Esq.

The federal Physician Self-Referral Law (known commonly as the “Stark Law” or, simply, “Stark”) and its regulations generally prohibit physician referrals of Medicare patients for certain designated healthcare services when the physician has a financial relationship with the entity to which the patient is being referred. Under Stark—unlike under the federal Anti-Kickback Statute and its safe harbor regulations—if a physician (defined to include podiatrists) fails to meet one of the regulatory exceptions, the referral violates the law. The regulations remain a morass of confusing terminology and complex requirements, often requiring careful legal analysis to determine whether an arrangement complies.

To modernize Stark regulations, the Centers for Medicare and Medicaid Services (CMS) recently published proposed rules that would:

  • create several new exceptions to Stark for certain value-based arrangements
  • create a new exception for the donation of certain cybersecurity technology
  • clarify language already in the regulations.

Although these are not the only changes in the proposed rule, they represent some of the most significant.

Value-based exceptions

In recent years, CMS began to transition Medicare toward value-based payment, as opposed to traditional fee-for-service payment. However, CMS has recognized that Stark regulations do not adequately protect these value-based arrangements, leading CMS to propose new exceptions to Stark.

The proposed exceptions will apply only to compensation arrangements that are considered value-based arrangements between a “value-based enterprise” (VBE) and “VBE participants,” or 2 VBE participants. In addition to definitions for these terms, the exceptions include definitions for “value-based activity” and “target patient population,” as well as for “value-based purpose,” which constitutes:

  • coordinating and managing care
  • improving quality of care
  • reducing costs to, or growth in expenditures of, payors without reducing the quality of care
  • transitioning from volume-based healthcare delivery and payment mechanisms to mechanisms based on quality of care and control of the cost of care.

Each of these efforts must be directed toward a target patient population. This definition is central to the exceptions because VBEs must be formed for at least 1 value-based purpose.

There are 3 exceptions for compensation arrangements related to value-based arrangements: “full financial risk,” “value-based arrangements with meaningful downside financial risk to physicians,” and “value-based arrangements.”

“Technology” is defined broadly by CMS to include any software or other types of information technology, although explicitly excluding the donation of hardware.

Full financial risk. Under the first exception, the VBE is financially responsible, on a prospective basis, for the cost of all patient care items and services covered by an applicable payor, for each patient in a target patient population, for a specific period of time. Capitation and global budget payments are also permitted.

Meaningful downside financial risk. Remuneration paid to a physician is protected when the physician is at “meaningful” downside risk for failure to achieve value-based purpose(s) of the VBE. As CMS explains, “meaningful” risk means that the physician is responsible to pay the VBE at least 25% of the value of remuneration paid to the physician under the value-based arrangement.

Alternatively, the “meaningful downside financial risk” exception could be met by the physician accepting full financial risk (eg, capitation payments, global budget payments), although CMS expressed concern about attempts to game the system by too narrowly defining the set of care services for the target patient population for which the physician is at risk.

Value-based arrangements. CMS will protect compensation arrangements that qualify as “value-based arrangements” without regard to the degree of risk involved, although this proposal includes additional requirements, such as a writing signed by the parties—which is not a requirement of the other 2 proposed models.

Physicians might be able to take advantage of these value-based exceptions by becoming VBE participants or joining VBE participants. For example: If a VBE is formed for the purpose of improving the quality of care available to a target population of people with diabetes, physicians could become participants in such an effort and thereby receive remuneration that might otherwise be prohibited under Stark. The value-based arrangements exception might prove especially attractive for physicians who do not want to take on financial risk.

Cybersecurity technology exceptions

The proposal to reform Stark includes an exception for donations of cybersecurity technology, provided that 1) the donation does not take into account the volume or value of referrals that the physician generates for the donor, 2) receipt of the technology is not a condition for doing business with the donor, and 3) the donation itself is documented in writing. “Technology” is defined broadly by CMS to include any software or other types of information technology, although explicitly excluding the donation of hardware.

However, CMS has indicated that it is considering an alternate proposal that would allow for donation of certain hardware, provided that it is “stand-alone” (ie, not integrated with other equipment that can perform other functions). As an example, CMS references a 2-factor authentication dongle (hardware add-on). In practical terms, this would mean that the donor could not donate a cell phone—which could be used for both 2-factor authentication as well as a range of other functions—but could donate software and hardware that included a physical token with randomly generated digital numbers that must be entered when logging into a computer system.

The definition of “cybersecurity” is similarly broad, defined within the proposed regulations to mean “the process of protecting information by preventing, detecting, and responding to cyberattacks.” CMS has explained that its goal is to define the term broadly to avoid unintentionally limiting donations that might otherwise be prohibited by a definition written too narrowly.

The definition of “cybersecurity” is similarly broad, defined within the proposed regulations to mean “the process of protecting information by preventing, detecting, and responding to cyberattacks.”

Cybersecurity compliance—especially within the realm of security under the Health Insurance Portability and Accountability Act of 1996 (HIPAA)—remains challenging, especially for small practices. The expense of implementing technological steps toward compliance with HIPAA in the realm of cybersecurity can be prohibitive. For smaller practices, investment in software and hardware, as well as services necessary to keep them in operation, can represent too great a cost to implement effective cybersecurity measures. With this proposed donation exception, donors could provide small practices with such technology (possibly, including cybersecurity hardware) that could significantly improve their security and protect against security breaches.

Language clarifications

Several terms of art within Stark regulations have also been defined (or, in some cases, redefined) in the proposed rule. These terms appear throughout the regulations, including  “commercially reasonable” and “fair market value.”

Commercially reasonable. Under the proposed rule, “commercially reasonable” (which has never been defined) would mean an arrangement that furthers a legitimate business purpose of the parties and is similar to other arrangements. That definition would also explicitly state that an arrangement might be commercially reasonable even if it does not result in greater profit for 1 or more parties.

Fair market value. Similarly, the proposed rule redefines “fair market value” in 3 circumstances: general use, rental of equipment, and rental of office space. Generally, “fair market value” would mean value in an arm’s length transaction with like parties and under like circumstances, of like assets or services, and consistent with general market value. For rental of equipment, a similar definition would apply, but the intended use of the equipment could not be considered part of the value. For rental of office space, the intended use again could not be considered—nor could proximity to the landlord, as part of the value to the landlord or tenant when the landlord is a referral source for the tenant. CMS further redefines “general market value” to comport with the concept of “market value” as that term is understood in the valuation industry.

CMS further explains: “Fair market value” refers to the value of an asset or service to hypothetical parties in a hypothetical transaction. “General market value,” on the other hand, refers to specific parties to the specific transaction. In some circumstances, a higher “general market value” might actually be “fair market value.” Why? Because the concept of “fair market value” must take into account the “general market value” of the specific circumstances of an arrangement. For example: A practice hiring a specific physician might consult salary surveys to determine that a particular salary is “fair market value,” given the geographic region. But if the physician in question is highly sought after and able to command a much higher salary generally, the higher salary, which would fit under “general market value,” might in fact be “fair market value” in this circumstance.

Other proposed changes to language. “Volume or value” and “other business generated” by the referring physician have been codified in the proposed regulations. Previously, CMS provided clear guidance only for what would be deemed not to take into account the volume or value or other business generated between parties; under proposed rules, CMS provides bright-line tests. In broad strokes, these tests look at whether the compensation amount increases or decreases in a manner that positively correlates with the number or value of referrals or other business generated. This includes application to group practices that offer profit shares and productivity bonuses to physicians.

The proposed rule peers further into the internal workings of group practices and, if implemented, likely will require many groups to restructure their compensation mechanisms. For example: Multispecialty groups might have to change how they compensate their physicians who are grouped into so-called “pods” of 5 or more. Under current rules, “pods” can be separated by the types of services provided (eg, the physical therapy pod, the podiatry pod, the imaging pod). Under the proposed rule, such arrangements might no longer work.

This is not (yet) a final rule!

Remember that these are proposed, not final, Stark regulations. Comments on the proposed rule are due 75 days after October 17, 2019, the date that the proposed rule was published in the Federal Register. Expect at least some of these changes to be modified from their proposed versions in response to commentary; some might be withdrawn or replaced altogether. It seems clear, however, that CMS intends to make the Stark Law better reflect modern realities of health care. Experienced healthcare legal counsel can help make sense of the changes when they are finalized.

Mr. Shay is in practice with Alice G. Gosfield & Associates, PC, Philadelphia, PA. He is Vice Chair of Educational Programs for the American Health Lawyers Association’s Physicians and Physician Organization Practice Group. He can be reached at dshay@gosfield.com, or by cell, 215.735.2384.

  1. HHS proposes Stark Law and Anti-Kickback Statute reforms to support value-based and coordinated care. US Department of Health and Human Services. October 9, 2019. Press release. www.hhs.gov/about/news/2019/10/09/hhs-proposes-stark-law-anti-kickback-statute-reforms.html. Accessed November 7, 2019.

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