The Writing Requirement
An often relied upon exception is the “personal services arrangement” which states, in part, that, “[r]emuneration from an entity under an arrangement or multiple arrangements to a physician or his or her immediate family member, or to a group practice, including remuneration for specific physician services furnished to a nonprofit blood center, if [certain conditions are met including that] [e]ach arrangement is set out in writing, is signed by the parties, and specifies the services covered by the arrangement.”
Importantly, in 2015, CMS “declined to adopt the commenters’ recommendation that state contract law principles should determine what constitutes an arrangement that is ”set out in writing for the purposes of the physician self-referral law.” Subsequently on August 25, 2017, a United States district court issued an opinion in a False Claims Act case that addressed the Stark Law’s writing requirement as being material. Specifically, “the writing requirement contained in the relevant statutory exceptions is not ‘minor or insubstantial’ but goes to the very essence of the bargain between the government and health care providers with respect to Stark Act compliance.” The court noted that several Stark Law statutory exceptions and AKS safe harbors require that relevant financial arrangements be “in writing” and “signed by the parties.”
Section 50404 of the Bipartisan Budget Act of 2018 codified CMS’s longstanding policy that “the writing requirement in various compensation arrangement exceptions in § 411.357 may be satisfied by a collection of documents, including contemporaneous documents evidencing the course of conduct between the parties.”
Although it is preferable in any business arrangement to obtain the signatures of the parties prior to the commencement of the arrangement/deal, there is a special rule under the Stark Law which allows for a 90-day period to obtain missing signatures. In December 2020, CMS declined to extend this special rule beyond the 90-day period:
We decline to extend the special rule to allow parties up to 120 or 180 days to comply with the writing and signature requirements. With respect to the signature requirement, section 1877(h)(1)(E) of the Act currently provides for a period of 90 consecutive calendar days for parties to obtain missing signatures, and we are not persuaded that we could extend the period to 120 or 180 days under section 1877(b)(4) of the Act without posing a risk of program or patient abuse. Regarding the writing requirement, we believe that the requirement is important for ensuring transparency in potentially lucrative compensation arrangements, and we believe that extending the grace period to 120 or 180 days could pose a risk of program or patient abuse.
Any agreement between a DHS and a physician or a group’s internal compensation model is required to be in writing. This means that the Stark Law exception and the special rule for writing and signature requirements under § 411.354(e)(4) remain intact with no modifications. This underscores the need to ensure that the writing requirement is met and signatures are obtained within 90 days for physician compensation models, including those involving overall profits.
The Death of Split Pooling and Refinement of “Overall Profits”
It is common that “[p]hysician group practices commonly rely on the in-office ancillary services exception (IOAS) to protect referrals for DHS among physicians within the practice or for ancillary services provided by the practice.” Practically speaking, so long as the practice satisfies the strict and nuanced requirements to be considered a “group practice,” both the physicians’ ownership and compensation arrangements may be compliant with the Stark Law. In 2001, HHS stated in the Federal Register:
Accordingly, the Congress permitted group practice members (and independent contractors who qualify as ‘‘physicians in the group practice’’) to receive shares of the overall profits of the group, so long as those shares do not directly correlate to the volume or value of referrals generated by the member or ‘‘physician in the group practice’’ for DHS performed by someone else.
“Overall profits” is defined to mean:
The group’s entire profits derived from DHS payable by Medicare or Medicaid or the profits derived from DHS payable by Medicare or Medicaid of any component of the group practice that consists of at least five physicians. The share of overall profits will be deemed not to relate directly to the volume or value of referrals if one of the following conditions is met:
- The group’s profits are divided per capita (for example, per member of the group or per physician in the group).
- Revenues derived from DHS are distributed based on the distribution of the group practice’s revenues attributed to services that are not DHS payable by any Federal health care program or private payer.
- Revenues derived from DHS constitute less than 5 percent of the group practice’s total revenues, and the allocated portion of those revenues to each physician in the group practice constitutes 5 percent or less of his or her total compensation from the group.
- Overall profits are divided in a reasonable and verifiable manner that is not directly related to the volume or value of the physician’s referrals of DHS.
While the new Stark rule published December 2020 narrows the definition of “overall profits,” the one item that is consistent between both the 2001 and the 2020 Final Rules is that shares cannot “directly correlate to the volume or value of referrals generated by the member or ‘physician in the group practice’ for DHS performed by someone else.” The table below provides a language comparison of the term “overall profits.”
January 4, 2001 Final Rule
December 2, 2020 Final Rule (effective January 1, 2022 for overall profits)
A group’s entire profits derived from DHS payable by Medicare or Medicaid or the profits derived from DHS payable by Medicare or Medicaid of any component of the group practice that consists of at least five physicians.
The profits derived from all DHS of any component of the group that consists of at least five physicians.
The “overall profits” changes, which became effective January 1, 2022, are critical to a group’s ongoing compliance with the Stark Law’s permissible compensation models, as well as potentially avoiding a False Claims Act allegation. The U.S. Department of Justice has a long history of settling with defendants who violate “the False Claims Act by engaging in improper financial relationships with referring physicians.”
“Split pooling” – the distribution of profits from DHS on a service-by-service basis – is expressly prohibited. The concern voiced by CMS in its Dec. 2, 2020 Final Rule related to comments received on split pooling was that “service-by-services profit shares would allow physicians to receive profit shares more closely related to the services they referred, their specialty, the services they provide, or the expenses they have personally incurred.” Segregation or allocation of DHS profits generated by subgroups of at least five physicians is permitted, as well as using different profit allocation methodologies among the subgroups. Within each subgroup, however, the same compliant methodology must be used. Examples of permissible methodologies include allocating DHS profits on a per capita basis or on personal professional productivity (excluding DHS revenues).
The Role of Commercial Reasonableness and Continuing to Avoid Referrals Premised on Volume or Value
CMS’ December 2020 Final Rule also for the first time codifies the definition for commercially reasonable, which is now codified under the definitions as “Commercially reasonable means that the particular arrangement furthers a legitimate business purpose of the parties to the arrangement and is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty. An arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.” Prior to this Final Rule, CMS mentioned commercially reasonable in commentary in its previous final rules on the Stark Law but had not codified the definition.
In addition to codifying the definition of commercially reasonable, in the new Final Rule CMS provided additional insights and commentary, including the following:
- "In addition, the determination that an arrangement is commercially reasonable does not turn on whether the arrangement is profitable; compensation arrangements that do not result in profit for one or more of the parties may nonetheless be commercially reasonable." However, after offering this comment regarding the issue of profitability, CMS also offered the following important caveat below:
- "Although we believe that compensation arrangements that do not result in profit for one or more of the parties may nonetheless be commercially reasonable, we are not convinced that the profitability of an arrangement is completely irrelevant or always unrelated to a determination of its commercial reasonableness, for instance, in a case where the parties enter into an arrangement aware of its certain unprofitability and there exists no identifiable need or justification other than to capture the physician's referrals-for the arrangement." CMS provided the following examples of why parties might enter into unprofitable transactions below:
- "Examples of reasons why parties would enter into such [unprofitable] transactions include community need, timely access to health care services, fulfillment of licensure or regulatory obligations, including those under the Emergency Medical Treatment and Labor Act (EMTALA), the provision of charity care, and the improvement of quality and health outcomes." While this list should not be considered exhaustive, it does provide important insights into the characteristics CMS considers for justifying unprofitable arrangements. However, CMS also offers the following additional commentary:
- “We decline to provide examples in regulation text of arrangements that may be commercially reasonable, because the determination of whether a compensation arrangement is commercially reasonable is dependent on the facts and circumstances of the parties….An arrangement that is commercially reasonable for one set of parties may not be commercially reasonable for another.”
- "[T]he 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."
- "The determination of commercial reasonableness is not one of valuation." CMS acknowledged that commercial reasonableness is not strictly an issue of whether the arrangement is fair market value, but the arrangement should be looked at in its totality.
- "We continue to believe that this determination [of commercial reasonableness] should be made from the perspective of the particular parties involved in the arrangement." Therefore, CMS views the specific parties, and the implied specific terms to the arrangement, to be important factors when considering commercial reasonableness.
For the volume and value requirement, the Final Rule still requires that compensation may not be determined in any manner that takes into account the volume or value of the physician’s referrals to the entity or the other business generated by the referring physician.
However, instead of this volume and value requirement being included in the definition of fair market value (FMV)/general market value (GMV), it is now considered to be separate from FMV/GMV. Also, two new special rules have been created, including one for compensation paid to a physician and another for compensation paid from a physician. For compensation paid to a physician, the compensation would improperly take into account the volume or value of referrals if the compensation formula used results in an increase in compensation if the physician’s referrals increase, which would be a positive correlation. For compensation paid from a physician, the compensation would improperly take into account the volume or value of referrals if the compensation formula used results in a decrease in compensation if the physician’s referrals increase, which would be a negative correlation.
Providers and their counsel need to review their internal distribution and compensation arrangements to see if any changes need to be made to comply with the new Stark Law provision. Beginning January 1, 2022, the “split pool” method of allocating DHS profits will no longer meet an exception. The requisite writing and signature requirements have not been modified and should be adhered to in order to fit squarely into the parameters of the Stark Law exception. According to the Stark Law’s Final Rule, all revenue and expenses from all DHS service lines need to be aggregated and then distributed using the same methodology. Commercial reasonableness now has a codified definition and CMS has provided important commentary that should be considered by parties entering into arrangements involving DHS services. Also, the volume and value requirements have been separated from the previous definitions of FMV/GMV and new rules regarding positive or negative correlations between the volume and value of referrals and the impact on physician compensation have been established. These changes should be studied and given full consideration.