Health Law Monitor
The Winds of Change - Defining Value in Healthcare
December 14, 2020
By: Lindsay D. Petrosky, Neil C. Brown, and
On November 20th, 2020, the Centers for Medicare & Medicaid Services (CMS) made sweeping changes to the Stark Law through the issuance of a new “Final Rule,” which is an essential mile-marker in the government’s Sprint to Coordinated Care. Many industry stakeholders have been eagerly awaiting the Final Rule’s issuance, hoping that it would provide more flexibility and clarity to this complex regulatory landscape.
Notably, the Stark Law sets forth several exceptions for certain types of common arrangements between physicians and hospitals or other healthcare facilities – including bona fide employment arrangements and personal services arrangements – to offer protection and “separate the wheat from the innocuous chaff.”1 Many exceptions generally require that remuneration paid under an arrangement does not account for the volume or value of referrals or other business between parties, is consistent with fair market value, and is commercially reasonable.2 However, a lack of consensus and clear guidance with respect to these three terms have led to uncertainty for many in the healthcare industry.
In its newly-issued Final Rule, CMS attempts to clarify each of these three critically important terms.
Volume and Value of Referrals
One of the most significant changes to the Stark Law created by the Final Rule is the bright-line test to determine whether a provider’s compensation takes into account the volume or value of referrals or other business generated.3 To this end, CMS resolved that a compensation structure does not directly take into account the volume or value of referrals if there is no direct correlation between the total amount of a physician’s compensation and the volume or value of the physician’s referrals of designated health services.4 Stated positively, if a variable in a physician’s compensation equation represents referrals or other business generated for the healthcare entity, and the compensation increases or decreases as the referrals or other business generation increases or decreases, then that compensation arrangement would not be afforded protection.
Prior to the Final Rule’s issuance, there was controversy over whether certain productivity bonuses would comply with the exceptions. The controversy stemmed at least in part from the decisions in United States ex rel. Drakeford v. Tuomey and United States ex rel. Brookwalter v. UPMC, which generally held that a physician could not seek protection because “work relative value unit (wRVU) compensation can vary with or take into account the volume or value of the inpatient or outpatient hospital referrals because of the correlation between the compensation and the referral.”5 But CMS has refuted this proposition by declaring that “with respect to employed physicians, a productivity bonus will not take into account the volume or value of the physician’s referrals solely because corresponding hospital services (that is, designated health services) are billed each time the employed physician personally performs a service.”6 Instead, as detailed above, the inquiry is limited to whether a direct correlation exists between the total amount of a physician’s compensation and the volume or value of the physician’s referrals of designated health services. For example, if a physician received additional compensation as the number or value of the physician’s referrals to an entity increased, then the physician’s compensation “would positively correlate with the number or value of the physician’s referrals.”7
Fair Market Value
Unfortunately, CMS largely refused to create a bright line rule to determine fair market value like it did for volume or value of referrals. CMS justified its decision on the benefits of a more flexible fact-intensive inquiry.
CMS stated that the fair market value “may not always align with published valuation…salary surveys” due to “extenuating circumstances.”8 Yet on the other hand, these salary surveys are to be construed in the words of CMS, as a “starting point.”9 For example, situations where the medical services provided are identical and have little relationship to the experience and expertise of the physician are highly conducive to using salary surveys.10 If the opposite holds true—where the experience, expertise, and/or other unique factors are in play—then the fair market value for compensation may appropriately differ from the averages contained within market surveys.
Commercial Reasonableness
CMS also clarified that an arrangement is “commercially reasonable” if it furthers a legitimate business purpose of the parties and is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty.”11 CMS further confirmed that “an arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.”12 In essence, the definition acknowledges that there may be legitimate reasons to employ physicians even when the hospital does not profit. Such reasons may include accreditation requirements, EMTALA compliance, community need, payor mix, type of practice and mission fulfillment.”13 Ultimately, the key question to ask when determining whether an arrangement is commercially reasonable is “simply whether the arrangement makes sense as a means to accomplish the parties’ goals.”14
With Change May Come Opportunity
Most parts of the Final Rule will be effective on January 19, 2021. With the sweeping changes made by the Final Rule, now is an excellent time for providers to ensure that their current and future arrangements are compliant with the Stark Law. Jackson Kelly’s attorneys and staff are dedicated to helping you do just that. We will be providing additional content detailing the other Stark Law changes made by the Final Rule, as well as the significant modifications recently made to the federal Anti-Kickback Statute.
1 United States ex rel. Bookwalter v. UPMC, 946 F.3d 162, 169 (3d 2019).
2 42 U.S.C. 1395nn(e)(2); see also 42 C.F.R. § 411.357.
3 Medicare Program; Modernizing and Clarifying the Physician Self-Referral Regulations, 85 Fed. Reg. 232, 77537 (Dec. 2, 2020) (to be codified at 42 C.F.R. pt. 411).
4 Medicare Program; Modernizing and Clarifying the Physician Self-Referral Regulations, 85 Fed. Reg. at 232, 77537.
5 Tony Maida & Nicholas Alarif, What A Difference a Year Makes—Key Anti-Kickback Statute and Stark Law Developments, 22 No. 4 J. Health Care Compliance 5, 8 (2020).
6 Medicare Program; Modernizing and Clarifying the Physician Self-Referral Regulations, 85 Fed. Reg. at 232, 77539.
7 Medicare Program; Modernizing and Clarifying the Physician Self-Referral Regulations, 85 Fed. Reg. at 232, 77537.
8 Medicare Program; Modernizing and Clarifying the Physician Self-Referral Regulations, 85 Fed. Reg. at 232, 77554.
9 Medicare Program; Modernizing and Clarifying the Physician Self-Referral Regulations, 85 Fed. Reg. at 232, 77557.
10 Id.
11 Medicare Program; Modernizing and Clarifying the Physician Self-Referral Regulations, 85 Fed. Reg. at 232, 77531.
12 Id.
13 Id.
14 Id.