Changes to the Stark Law’s Special Rules on Compensation Create Flexibility and Reduce Confusion for Physicians and Other Health Care Providers

*This is the sixth article in a series analyzing recent updates to the Stark Law and Anti-Kickback Statute and their effects on health care providers. To request a copy of the entire series, click here.

These include clarifying the phrase “set in advance,” modifying the requirements for directed referrals, and providing an objective test for determining whether compensation takes into account the volume or value of referrals. Importantly, these changes reduce unnecessary regulatory burden on health care providers and suppliers, create flexibility for physicians and other health care providers to structure certain compensation arrangements, and reduce confusion, consistent with many other changes in the Final Rule. The changes, which were published in the Federal Register on December 2, 2020, go into effect on January 19, 2021.

Things to Know

• The set in advance provision for compensation for an initial arrangement is optional and the compensation does not have to be reduced to writing before the furnishing of the items or services.
• Parties may modify the terms of the compensation during the course of the arrangement provided that all terms of the applicable exception are met and the modified compensation is determined and reduced to writing before the items or services for which the modified compensation will be paid are furnished.
• For directed referrals, the physician’s compensation may take into account the volume or value of referrals, but the existence of the compensation arrangement and the amount of the compensation may not be contingent on the number or value of the physician’s referrals.
• Compensation to a physician takes into account the volume or value of referrals only if the formula used to calculate the compensation includes the physician’s referrals to the entity as a variable, resulting in an increase or decrease in the compensation that positively correlates with the number or value of the physician’s referrals to the entity.

Compensation Set in Advance

Several exceptions under §§ 411.355 through 411.357 of the Stark Law require compensation to be set in advance to meet the terms of the exception. These exceptions include, without limitation, rental of office space or equipment, personal service arrangements, and fair market value compensation.

The Final Rule clarifies that the “set in advance” provision for compensation in an initial arrangement is a deeming provision and is optional. It is unnecessary for the parties to reduce the compensation to writing before the furnishing of the items or services. Further, the terms of § 411.354(e)(i) apply to the initial arrangement, allowing parties up to 90 days to satisfy the writing and signature requirements of the applicable exception. This creates flexibility for physicians and providers to commence an arrangement and then memorialize the details later. Although CMS declined to provide specific terms for how parties can demonstrate compensation was set in advance, it stated that, for example, records of a consistent rate of payment over the course of an arrangement typically support such inference.

A significant change in the Final Rule is the deletion of the prohibition on modifying the formula during the term of the arrangement. When the Final Rule takes effect, parties will be able to modify compensation (or a formula for determining the compensation) at any time during the course of the arrangement provided the following conditions are met:

1. All requirements of an applicable exception in §§ 411.355 through 411.357 are met on the date the modification takes effect;
2. The modified compensation (or the formula for determining the modified compensation) is determined before the furnishing of the items or services for which the modified compensation is to be paid; and
3. Before furnishing the items or services for which the modified compensation is to be paid, the formula for the modified compensation is set forth in writing in sufficient detail so that it can be objectively verified.

Importantly, the Final Rule specifically provides that, unlike the initial arrangement, the parties do not have 90 days under § 411.354(e)(4) to reduce the modified compensation terms to writing, but notes that the documentation of the modified compensation need not be signed by the parties.

The amended arrangement must satisfy all of the requirements of the applicable exception. The Final Rule also reminds parties that even if modifications do not directly alter the compensation, they may still trigger the requirements described above if the changes are material to the compensation terms. For example, modifications that decrease a physician’s schedule, but keep the same rate in place, may increase a physician’s compensation above fair market value, which would not meet the requirements of the applicable exception. In contrast, modifications that do not alter compensation, such as a change in schedule from one day to another, do not trigger the requirements described above.

The Final Rule does not codify how parties may establish that a modified compensation arrangement was documented before the furnishing of the items or services, but states that there are many ways an arrangement may be documented. These include a collection of documents, informal communications via email or text, internal notes to file, similar payments between the parties from prior arrangements, generally applicable fee schedules or, where no formal generally applicable fee schedule exists, other documents showing a pattern of payments to or from other similarly situated physicians for the same or similar items or services. The Final Rule also provides that modifications do not have to remain in place for at least one year from the date of the amendment and there is no prohibition on the number of times the parties may modify the compensation.

Directed Referrals

If a physician’s compensation under an employment relationship, personal service arrangement, or managed care contract is conditioned on the physician’s referrals of designated health services (DHS) to a particular provider, practitioner, or supplier (known as directed referrals), the arrangement must meet certain requirements set forth in § 411.354(d)(4). The Final Rule makes three significant changes to directed referral requirements:

1. Any changes to the compensation (or formula for determining the compensation) must be made prospectively;
2. Deletion of the requirement that the payment does not take into account the volume or value of anticipated or required referrals; and
3. Regardless of whether the physician’s compensation takes into account the volume or value of referrals by the physician, neither the existence of the compensation arrangement nor the amount of the compensation is contingent on the number or value of the physician’s referrals to the particular provider.

Regarding item (2) above, CMS states that it no longer believes that compensation predicated on the physician making referrals of DHS to a particular provider should be evaluated for compliance with the volume or value standard. Therefore, the Final Rule removes this language from § 411.354(d)(4). The Final Rule also clarifies that a directed referral requirement will not trigger analysis for compliance with the volume or value standard at § 411.354(d)(5) (described below).

Regarding item (3) above, neither the compensation arrangement nor the amount of the compensation may be contingent on the number or value of the physician’s referrals to the particular provider. However, the Final Rule includes specific language that the physician may be required to refer an established percentage or ratio of the physician’s referrals to a particular provider. The Final Rule does not state if any percentage or ratio is too high and, in an example, stated that an arrangement that required 90% of patients to be referred to a particular provider was permissible.

CMS explains that when a physician will receive no future compensation if s/he fails to refer as required, or if the amount of the compensation is tied to the physician’s referral to a particular provider, there is a risk of program or patient abuse. CMS provides the following examples of arrangements that would be impermissible because they are contingent on the number or value of referrals: (i) if a hospital increases the physician’s compensation in the renewal term only if the physician made a targeted number of referrals for DHS to the hospital in the current term; (ii) if the hospital refuses to renew (or terminates in the current term) unless the value of the physician’s referrals generate sufficient profit to the hospital; or (iii) if the compensation arrangement would be terminated if the physician failed to refer a sufficient number of patients for DHS or the value of the physician’s referrals failed to achieve the established target (however, if the established target was a percentage of referrals, it would not be prohibited).

Additionally, the Final Rule makes compliance with § 411.354(d)(4) a requirement to meet the following exceptions if directed referrals are part of the arrangement: § 411.355(e) (academic medical centers), and §§ 411.357(c) (bona fide employment relationships), (d)(1) (personal service arrangements), (d)(2) (physician incentive plan), (h) (group practice arrangements with a hospital), (l) (fair market value compensation), (p) (indirect compensation arrangements), and (z) (limited remuneration to a physician).

Compensation that Takes into Account the Volume or Value of Referrals or Other Business Generated

Many exceptions under the Stark Law require that compensation not take into account the volume or value of referrals or other business generated between the parties (known as the “volume or value standard” and the “other business generated standard,” respectively). The Final Rule adds a new clause at § 411.354(d)(5) to provide an objective test for determining whether arrangements will violate these standards, which CMS hopes will reduce confusion among providers. The new clause provides, in sum, that compensation from an entity furnishing DHS to a physician (or immediate family member of the physician) takes into account the volume or value of referrals, or other business generated, only if the formula used to calculate the compensation includes the physician’s referrals to the entity, or other business generated by the physician for the entity, as a variable, resulting in an increase or decrease in the compensation that positively correlates with the number or value of the physician’s referrals to, or the generation of other business for, the entity. The clause also provides that a positive correlation between two variables exists when one variable decreases as the other variable decreases, or one variable increases as the other variable increases. For example, a positive correlation exists if a physician’s compensation increases as the number of the physician’s referrals to the entity increases, or if the physician’s compensation decreases as the number of his or her referrals decreases.

The Final Rule clarifies that outside of the circumstances described in § 411.354(d)(5), compensation will not be considered to take into account the volume or value of referrals or other business generated between the parties. If the mathematical calculation does determine that the compensation takes into account the volume or value of referrals, that determination is final—parties may not then apply the special rules at § 411.354(d)(2) (unit-based compensation and the volume or value standard) and (d)(3) (unit-based compensation and the other business generated standard) to obtain a different conclusion.

Additionally, the Final Rule explains that these special rules on compensation act like definitions and, other than several exceptions described below, the analysis of whether compensation takes into account the volume or value of referrals must be determined in accordance with § 411.354(d)(5). The exceptions for which § 411.354(d)(5) does not apply are: § 411.357(m) (medical staff incidental benefits), (s) (professional courtesy), (u) (community-wide health information systems), (v) (electronic prescribing items and services), (w) (electronic health records items and services), and (bb) (cybersecurity technology and related services).

The Final Rule’s changes to the special rules on compensation set forth in § 411.354(d)(4) and (d)(5) will be helpful to physicians and other health care providers and suppliers in structuring compensation arrangements, without fear that failure to set compensation in advance of an initial arrangement, needing to modify compensation during an arrangement, or an incorrect application of the volume of value standard will violate the Stark Law. These changes take effect on January 19, 2021.