Let’s hear it for clarity! Thanks to the Department of Health and Human Services’ (HHS) revision of the Physician Referral Law (aka the Stark law) in November 2020, we now have more explicit guidance for the key definitions. And for physician compensation experts, it’s about time…

Over the past twenty years, healthcare systems have been challenged to comply with the Stark law’s requirements, sometimes resulting in financial disaster. In 2013, South Carolina’s Toumey Health Care System was ordered to pay $237 million in fines for $39 million in fraudulent Medicare claims. The Toumey case is just one of many where the Court’s interpretation of the Stark definitions differed significantly from CMS’s intended meaning, leading to significant confusion and uncertainty among parties, and ultimately hampering the ability of parties to enter into Stark compliant arrangements.

At the epicenter of the confusion has been the law’s three most important requirements: commercial reasonableness, fair market value, and the volume and value of physician referrals.
Commonly referred to as the ‘Big Three,’ the definitions are the core elements of the Stark exceptions applicable to most arrangements between healthcare systems and referral source
physicians. Ideally, Stark’s Big Three definitions enable healthcare leaders to make compensation decisions with greater confidence that they will comply with an applicable Stark exception.

So, where did the Big Three initially fall short, and how does the new CMS regulation shed light? To better understand, first note that each requirement stands independently. For example, the commercial reasonableness standard does not depend on fair market value pay or vice versa.

Stark Law Revision: Commercial Reasonableness

Until the revision, healthcare organizations often linked a physician hire’s profitability to its commercial reasonableness. However, in a recent episode of HORNE Healthcare’s Buy-in podcast, Julie Kass, a Stark law expert and attorney with Baker Donelson in Maryland, stated that, as a result of the Stark revisions, a hospital can reasonably hire a doctor at a financial loss if there is a legitimate business reason to do so, using the example of a hospital bringing on multiple medical directors.

In the example, even though the combined arrangement may create a loss, the hospital may have a strong business case for why it makes sense and serves a legitimate business purpose. For example, the hiring of three medical directors may be necessary even though, for a given hospital, the arrangement is not profitable. Kass further explained that the business case for any hire requires documentation. The critical insight is that is possible for a compliant arrangement to be commercially reasonable without necessarily being profitable. This is certainly welcome guidance from CMS.

Stark Law Revision: Fair Market Value

Prior to the new regulations, interpreters of the Stark Law have often conflated the Big Three when evaluating fair market value of a doctor’s salary. It is now clear that they are separate elements, and that is especially helpful when considering fair market value. CMS removed references to the Volume or Value of referrals from the fair market value definition but did make some illuminating statements in the commentary about fair market value.

First, use of data between parties in a position to refer to one another generally should be avoided when determining fair market value.

Second, consideration of the referrals between the parties when determining fair market value, while not strictly prohibited by the new fair market value definition itself, may still be inappropriate, as it may be prohibited by the volume or value standard, or give rise to a violation of the Anti-kickback statute, or both.

Finally, consideration of benchmarks in physician salary survey data, while still regarded by CMS as a prudent practice, should not be the singular determinant of fair market value. CMS mentioned several times that survey benchmarks should neither be considered as a cap, nor a floor for fair market value, which is an absolutely crucial insight, given the nature of arguments that often have been made in Stark qui tam cases.

Ms. Kass used the example of a rural or urban hospital that doesn’t have the patient population to generate the Work Relative Value Units (wRVUs) to justify a physician getting paid at the median. Still, it might make sense to pay them higher to incentivize qualified candidates and serve the public. Again, similarly to the commercial reasonableness requirement, the justification for a physician’s compensation should be documented at the time of the transaction.

Stark Law Revision: Volume and Value of Referrals

While the need for justifications can allow for some subjectivity, the third of the Big Three requirements in the Stark Law regarding the volume and value of referrals is more straightforward. Thanks to the CMS revision, the regulations now contains a reference to the mathematical formula used to determine compensation, to evaluate whether an arrangement meets the volume or value standard or not. This requirement tests to see if a positive correlation exists between physician compensation and the volume or value of their referrals.

Similarly, if the physician is compensating the health system (or similar entity), as might be the case in a lease of medical office space, then the test looks for a negative correlation between the formula for the lease rate and the volume or value of referrals.

A Step Toward Clarity for the Big Three

CMS’s clarification is welcome effort to provide relief to physicians, hospital leaders and their legal counsel. Still, is the revision perfect? By way of example, many commentators had hoped for but did not get a rebuttable presumption for fair market value. However, on the whole, while Stark is still a highly complex law, CMS’s revision of the Big Three in the Stark law is a significant step forward. It provides greater context and meaning to the core definitions and better enables doctors and hospitals to work together with far less concern that important care initiatives may be unnecessarily impeded by the nuances of the Stark law.

HORNE LLP stands ready to guide your organization through today’s ever-changing healthcare valuation landscape. For information on how HORNE can help, contact us. (https://hornellp.com/about/contact-us/)