Three Key Things in Health Care

Last month, the Centers for Medicare & Medicaid Services (CMS) finalized amendments (the “2020 Amendments”) “modernizing and clarifying the physician self-referral (Stark) regulations.”  Among the most important changes were clarifications of the so-called “big three” – three principles relevant to core standards of the most-used Stark exceptions: commercial reasonableness, volume or value, and fair market value (FMV). The amendments were published in the Federal Register on December 2, 2020, with an effective date of January 19, 2021. Notably, the Government Accounting Office (GAO) determined that this effective date failed to comply with the mandatory 60-day delay under the Congressional Review Act (CRA) and the rule could still be nullified pursuant to the joint resolution of disapproval process under the CRA.¹ It also remains to be seen whether the Biden administration will seek to modify or retract the amendments. However, absent any such actions being taken, the “big three” clarifications will remain on the books and therefore deserve careful study by hospitals, health systems, physicians, and other providers of designated health services (DHS).

• Commercial Reasonableness
  • Before the 2020 Amendments, “commercial reasonableness” had no regulatory definition. CMS interpreted this standard only in preamble language, stating it meant “an arrangement [that] appears to be a sensible, prudent business agreement, from the perspective of the particular parties involved, even in the absence of any potential referrals.”
  • In recent years, whistleblowers in False Claims Act (FCA) lawsuits argued an arrangement cannot be commercially reasonable if it generates losses for the DHS entity and/or the physician. 
  • In response to this and other concerns, the 2020 Amendments added a formal regulatory definition: “commercial reasonableness 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.”
    • Although the new definition says an arrangement “may be commercially reasonable” if it generates losses, CMS makes clear that “the profitability of an arrangement is [not] completely irrelevant or always unrelated to a determination of its commercial reasonableness.”  CMS then commented favorably on positive justifications for why arrangements might result in losses to one or more parties while still being commercially reasonable: “community need, timely access to health care services, fulfillment of licensure or regulatory obligations, including those under [EMTALA], the provision of charity care, and the improvement of quality and health outcomes.”
      • A regulation defining commercial reasonableness is an improvement and the practice-losses proviso should help refute the whistleblowers’ strawman argument that such losses prove the absence of commercial reasonableness.
      • A series of FCA cases from 2013 to 2015 involved allegations of practice losses and resulted in substantial settlements.  Had defendants in those cases been able to advance positive justifications for practice losses, the outcomes may well have been different.
      • As it stands, the FCA plaintiffs’ bar likely will continue to raise practice losses as a fact cutting against a finding that an arrangement is sensible and furthers a legitimate business purpose of the parties, absent such justifications.
  • In the preamble, CMS also:
    • stated that commercial reasonableness is not a valuation question, but left the door open to consideration of compensation as part of the analysis (“the compensation terms of an arrangement are an integral part of the arrangement and impact its ability to accomplish the parties’ goals”);
    • made clear that conduct violating criminal law (such as a violation of the anti-kickback statute) is not commercially reasonable because illegal conduct is not a legitimate business purpose; and
    • identified arrangements that “on their face, appear to further a legitimate business purpose of the parties” as potentially problematic “if they merely duplicate other facially legitimate arrangements.” 
• Volume or Value Standard
  • In the preamble to the 2020 Amendments, CMS acknowledged that many commenters identified the lack of clear understanding as to whether compensation will be considered to take into account the volume or value of referrals or other business generated (the volume or value standard) as one of the greatest risks faced when structuring arrangements with physicians. CMS sought to address this issue in the 2020 Amendments by providing new objective tests for the volume or value standard.
  • The 2020 Amendments establish new special rules that more narrowly define when compensation violates the volume or value standard: compensation violates the standard only when
    • the mathematical formula used to calculate the physician’s compensation includes the physician’s referrals or other business generated as a variable, and
    • the amount of compensation correlates with the number of value of referrals or other business generated.
  • The new special rules apply to most of the compensation arrangement exceptions that include the volume or value standard, but specifically do not apply to certain exceptions involving non-monetary remuneration (e.g., medical staff incidental benefits, professional courtesy) or for purposes of the special rules on unit-based compensation. CMS noted that if compensation violated the new volume or value standard, the special rules on unit-based compensation would not then apply to deem such compensation not to take into account volume or value; the special rules on unit-based compensation thus are effectively no longer necessary or applicable for unit-based compensation arrangements on and after the effective date of the 2020 Amendments.
  • The new special rules also do not apply for purposes of determining the existence of an indirect compensation arrangement, as the 2020 Amendments include a revised and much  narrower definition under which an indirect compensation arrangement will only exist if
    • the aggregate compensation received by the physician varies with the volume or value of referrals or other business generated by the physician, and
    • the individual unit of compensation received by the physician either (i) is not fair market value, or (ii) includes the physician’s referrals or other business generated as a variable, resulting in an increase or decrease in the physician’s compensation that positively correlates with the number or value of the physician’s referrals or other business generated.
    • This change could prove to be one of the most helpful for health systems given the significant number of indirect arrangements they may have with physicians employed through system-affiliated medical groups.
  • In connection with the adoption of a more narrow volume or value standard, the 2020 Amendments also included substantial modifications to the special rule on directed referral requirements that providers need to note. Historically, this special rule served to protect directed referral provisions from being deemed to violate the volume or value standard. Given the change to the volume or value standard, CMS modified the special rule on direct referral requirements to be a mandatory requirement that must be met for any employment or personal service arrangement that is conditioned on the physician’s referrals to a particular provider, practitioner or supplier.
  • The new volume or value standard will only apply with respect to compensation arrangements on and after the effective date of the 2020 Amendments.  CMS provided important clarifying guidance on its interpretation of the historical volume or value standard that continues to apply for pre-effective date periods. In particular, CMS reaffirmed (in multiple instances) that correlations between personally-performed physician services and DHS furnished by an entity do not convert compensation tied solely to a physician’s personal productivity into compensation that takes into account the volume or value of referrals.

• Fair Market Value
  • In the 2004 Phase II Stark rulemaking, CMS added explanatory text to the definition of FMV which referenced the volume or value standard – “Usually, the fair market price is the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition, or the compensation that has been included in bona fide service agreements with comparable terms at the time of the agreement, where the price or compensation has not been determined in any manner that takes into account the volume or value of anticipated or actual referrals” (emphasis added).²
  • CMS has now concluded that this explanatory reference linking the two standards was incorrect.  According to CMS, the FMV requirement “is separate and distinct from the volume or value standard and the other business generated standard. . . . the requirement that compensation does not take into account the volume or value of referrals – which is plainly set out as an independent requirement of the relevant exceptions – is not also part of the definition of ‘fair market value.’”  Accordingly, CMS eliminated the erroneous connection.
  • Thus, the revised definition³ of fair market value is “[t]he value in an arm’s length transaction, consistent with the general market value of the subject transaction.”  General market value, in turn, means
    • “With respect to the purchase of an asset, the price that an asset would bring on the date of acquisition of the asset as the result of bona fide bargaining between a well informed buyer and seller that are not otherwise in a position to generate business for each other.”
    • “With respect to compensation for services, the compensation that would be paid at the time the parties enter into the service arrangement as the result of bona fide bargaining between well-informed parties that are not otherwise in a position to generate business for each other.”
  • Turning to the determination of FMV in physician compensation arrangements, CMS states that the value of a physician’s services should be the same regardless of the identity of the purchaser of those services, and that a hospital may not value a physician’s services at a higher rate than a physician practice owned by private equity investors or other physicians.
  • CMS also addressed the use of salary or compensation surveys.
    • CMS makes clear that there is no general policy under which compensation above the 75^th percentile of survey data is automatically suspect or presumed inappropriate, nor is there any general policy that automatically approves of compensation at or below the 75^th percentile.
    • Survey data is best thought of as a starting point, with CMS recognizing that extenuating circumstances might dictate higher or lower compensation under the circumstances (such as the “rock star surgeon” who might command compensation higher than salary surveys or a general practitioner working in a very low cost-of-living area where FMV might be below national survey data amounts).
  • Additionally, CMS reiterates that “there are many valid reasons and legitimate business purposes for entering into an arrangement that will not result in profit for one or more of the parties to the arrangement,” but the “fact that [a] hospital could make up losses for the physician’s compensation through [DHS] reimbursed at facility rates under OPPS rather than PFS, may not be considered.”
• Key Takeaways:
  • The modification to the volume or value standard (and the definition of indirect compensation arrangements) provides much clearer rules for determining Stark compliance, but providers will still have to evaluate pre-effective date arrangements under the prior regulatory provisions.
  • Health systems that have any direct referral requirements (written or unwritten) for affiliated physicians should pay careful attention to complying with the now mandatory requirements under the special rule on directed referral requirements.
  • Be careful not to blindly rely solely on survey data amounts and give thoughtful consideration to what factors may support any deviations from survey amounts.
  • To the extent that compensation arrangements may result in practice losses, document the appropriate justifications for those practice losses.
  • The 2020 Amendments provide some welcome clarity and flexibility, but providers will still need to stay focused on appropriate documentation of physician compensation arrangements and be very intentional about how referral data is tracked and used (and who has access to it).

¹ The GAO made similar findings with respect to the general amendments to the safe harbors under the anti-kickback statute and civil monetary penalties law, as well as the amendments to the discount safe harbor relating to prescription pharmaceuticals. 

² 42 C.F.R. § 411.351.

³ There also are special definitions applicable in the context of the rental of office space and equipment.