December 18, 2020

CMS Physician Self-Referral Final Rule - A New Era For Stark?

New self-referral guidance from The Centers for Medicare and Medicaid Services (CMS) will require American College of Radiology® (ACR®) members to re-evaluate some of their current clinical and economic arrangements. On November 20, 2020, CMS issued a Final that updates its regulations of the Physician Self-Referral law (“Stark”). The Final Rule is one of two main healthcare pillars of the Trump Administration’s regulatory “Sprint to Coordinated Care.” The other pillar is the U. S. Department of Health and Human Services (HHS) Office of Inspector General (OIG)’s companion final rule that revises considerably the federal Anti-Kickback Statute. CMS’s revisions to the Stark Final Rule generally take effect Jan. 19, 2021. However, to afford more time to ACR members and other physician stakeholders, CMS will implement its updates to the group practice productivity bonuses and profit-sharing requirements on Jan. 1, 2022.

As we reported in the Dec. 12, 2020 edition of Advocacy in Action’s E-News, the Final Rule culminates CMS’s longstanding effort to “modernize” its Stark regulations. Fundamentally, CMS has adopted what they term a more value-centric approach. It devised new exceptions for physician-patient interactions that emphasize high-quality, improved health outcomes and lower costs per patient. The Agency also touts this ‘reform’ as advancing the Government’s mission of reducing regulatory burden that might preclude innovation in patient care. We will focus on CMS’Ss value-based rubric, its revised “Big Three definitions” of essential self-referral concepts, and analyze the notable Electronic Health Record (EHR) and cybersecurity exceptions.

Value-Based Exceptions

Essential terms in CMS’S value toolkit include:

  • Value-based activity;
  • Value-based arrangement (VBA);
  • Value-based enterprise (VBE);
  • Value-based purpose;
  • VBE participant; and
  • Target patient population.

These definitions relate to CMS’s new value-based exceptions that will avoid Stark’s strict referral and billing restrictions. The exceptions vary by type of compensation arrangement and level of financial risk by the parties or value-based enterprise in which they participate. CMS finalized these exceptions for value-based arrangements that:

  • Assume full financial risk by the physician for the entire duration of patient care services for a target patient population;
  • Involve a physician who has meaningful financial risk for failing to achieve value-based purposes of the value-based enterprise for its entire duration; or
  • Otherwise meet specific requirements.

CMS stated that the new exceptions will apply to arrangements involving Medicare beneficiaries, patients outside of Medicare and mixed patient populations. Within the exceptions, value-based arrangements may offer monetary or nonmonetary remuneration to recipients such as ACR members.

The full financial risk exception applies to value-based arrangements between VBE participants where the VBE accepts full financial risk for the cost of all patient care items and services covered in their target patient population for a specified period. CMS does not advise a specific manner for the assumption of full financial risk but does state the financial risk must be prospective. Additionally, CMS requires the VBE be at full financial risk for the entire duration of the value-based arrangement, starting within 12 months of the arrangement’s commencement. This exception will exclude payments for referrals or other arrangements, such as marketing and sales campaigns, that do not relate to a target patient population. In-kind remuneration that is for or results from value-based activities must be necessary for the recipient and avoid duplicating technology or other infrastructure the recipient already possesses.

The meaningful downside risk exception is where physicians are at risk for at least 10% of the total value of the remuneration the physician receives under the value-based arrangement. CMS had originally proposed this to be set at 25% but acceded to stakeholders who pushed for less risk. For instance, physicians who wish to use this exception must put in writing the nature and extent of their financial risk. CMS will require that any value-based party monitor its arrangement to ensure it operates as planned. Like the full financial risk exception, parties must set in advance of providing items or services for which remuneration is offered how they will determine the amount of that remuneration.

The third, or general VBA, exception fits value-based arrangements — whether they accept financial risk. Here, CMS will not require physicians or other entities to accept any financial risk. Yet, it requires physicians and other parties to maintain significant documentation regarding the details of the arrangement. Stakeholders also must monitor annually whether the VBE has furnished the value-based activities required under the arrangement. For the latter two exceptions, ACR members and other stakeholders will have to account to CMS for their progress in attaining their intended outcome measures.

In CMS’s view, assuming more risk generally means less incentive to “game the system” by steering patients to more expensive sites of service and/or ordering medically unnecessary services. Therefore, meaningfully assuming downside financial risk may well transform payment systems and curtail “at least to some degree, fee for service incentives to order medically unnecessary or overly costly items and services, key patient and program harms addressed by the physician self-referral law (and other Federal fraud and abuse laws).”

Under the new exceptions, the only parties to such arrangements are “a value-based enterprise and one or more of its VBE participants or VBE participants in the same [VBE].” These VBEs must achieve a “value-based purpose,” which includes various objectives such as coordinating and managing a targeted patient population’s care: improving that population’s quality of care; lowering costs to or growth in expenditures of payors without reducing quality of care for a target patient population; or moving from a volume-based delivery and financing paradigm to a value-based one.

A value-based enterprise may be a separate legal entity, such as an Accountable Care Organization, that has a formally constituted governing body, operating agreement or bylaws and may receive payment on behalf of its affiliated healthcare providers. Alternatively, two parties may make up a VBE by informal affiliation and function under a written document that memorializes the arrangement. ACR members and other physicians may form a network and qualify as a VBE, or members might qualify if they serve with an entity that provides designated health services (DHS). CMS will allow VBE participants to aggregate the risk that each individual participant assumes to meet full financial risk for the VBE. A value-based enterprise must retain material financial risk and not attempt to shift it back to a payor. The enterprise may negotiate and obtain stop-loss or other protection to reduce risk but cannot completely offset its losses.

CMS agreed to extend to 12 months, rather than six, the “pre-risk” period by which a VBE must attain full financial risk. ACR members and other participants in any value-based activity that becomes ineffective must terminate the activity within 90 consecutive calendar days after they finish monitoring it. While members and other parties may revise their arrangements to address deficiencies they identify, they may amend the arrangements only prospectively.

A recipient of any nonmonetary remuneration under a VBA will not have to contribute at least 15% of the donor’s cost of that remuneration. CMS believes that mandating any contribution might impede HHS’s objective of moving to a value-based system.

Notably, CMS will not mandate that an individual or organization coordinate and manage care. CMS declined to define “coordinating and managing care” because it wishes to avoid excluding stakeholders that otherwise might not meet the criteria of current Stark exceptions. Nor is CMS prescribing a specific path in which an entity must assume full financial risk to qualify as a value-based enterprise. However, ACR members who participate in value-based arrangements must reduce costs or growth in payer expenditures. Otherwise, CMS will not recognize maintaining quality of care as a legitimate value-based purpose.

Value-based arrangements may suit radiology practices that consider providing free data analytics to a practice with which members work closely, e.g., to address the referrers’ aberrant trends or decide whether patients seek the follow-up care that the members recommend.

“Big Three” Definitions

CMS altered three fundamental definitions in its final rule: “commercially reasonable;” “volume and value of referrals” and “fair market value.” The “Big Three” represent “cornerstone” principles of the Stark law. Most of the statutory and regulatory exceptions in Stark encompass one, two or all of these requirements: “the compensation arrangement itself is commercially reasonable; the amount of the compensation is fair market value; and the compensation paid under the arrangement is not determined in a manner that takes into account the volume or value of referrals (or, in some cases, other business generated between the parties).” ACR members and other physicians must satisfy each of their requirements to meet a regulatory exception.

Stakeholders assert that courts have interpreted the False Claims Act inconsistently, which has prevented them from engaging reliably in clinical arrangements that meet these essential requirements. In its Final Rule, CMS addressed those concerns by establishing more objective standards for the Big Three definitions — “to reduce the burden of compliance … [and] provide clarification where possible.” CMS also decided that its value-based exceptions will not compel ACR members and other participants to follow all three traditional criteria. Rather, CMS only will require one: that value-based arrangements be commercially reasonable.

Commercial reasonableness

CMS defines this term to indicate 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.” Significantly, CMS agreed with commenters that an arrangement in which one or more physicians gains no profit should be commercially reasonable. For example, an ACR member may participate in an initiative designed to advance quality improvement (peer learning). While she or he realizes no profit, that still may be commercially reasonable and avoid Stark prohibitions. Conversely, an arrangement that avoids violating criminal law or duplicates an existing relationship (i.e., multiple medical directors of hospital-based departments) fails to qualify as commercially reasonable. CMS’s definition will not apply to regulations that the Office of Inspector General, the Internal Revenue Service or any state agency enforce.

Volume or value of referrals

This standard embodies the concept that a physician may not pay, or receive, compensation that depends upon referring patients. Many stakeholders have complained that its vague definition in Stark inhibits their transactions and presents risk for potential civil and criminal liability. CMS in the final rule will establish an objective test as follows. If the formula to determine a physician’s compensation includes as a variable either the physician’s referral to an entity (e.g., hospital) or other business the physician generates for that entity, and the variable accordingly rises or falls with the compensation amount, then that compensation “takes into account” the volume or value of referrals. Therefore, compensation that increases or decreases proportionately as referrals or generation of other business increases or decreases will fail to meet a Stark Law exception that includes the “volume or value” provision.

Fair market value

Fair market value under the Stark law generally has meant value in arms-length transactions that reflects “general market value.” It also includes criteria that apply to rentals or leases, i.e., the value of rental property for “general commercial purposes (not taking into account its intended use). Finally, this vital concept in Stark applies to office space leases because fair market value (FMV) may not reflect “additional value the prospective lessee or lessor would attribute to the proximity or convenience to the lessor” when that lessor might represent a potential source of patient referrals to the lessee. CMS offered some relief in its Final Rule, defining FMV based on the statutory text as “the value in an arm’s length transaction, consistent with the general market value of the subject transaction.”

EHR and Cybersecurity Exceptions

 Imaging care succeeds if data flows smoothly among physicians, health systems and patients. The ACR focused its Stark proposed rule comments on CMS’s exceptions that would affect the digital superhighway. These address donations of electronic health record and cybersecurity technology. CMS proposed to modify its Stark regulatory definition of an “electronic health record” to better align it with the Public Health Service Act’s EHR definition and its information blocking provisions. The ACR urged CMS, though, to recognize a broad construct of “electronic health information” in the Final Rule. This would ensure medical imaging-related data, such as electronic orders/referrals for radiology services, would be subject to HHS Office of the National Coordinator for Health IT prohibitions on restricting use or compatibility of donated items or services with other EHR systems. The ACR stated that CMS should prioritize minimizing health IT-facilitated fraud and abuse rather than matching self-referral prohibitions with ONC information blocking provisions.

The Final Rule offers a mixed outcome for radiology. CMS appropriately retained the 15% contribution or cost-sharing requirements for physicians who receive donated EHR-related items or services.

However, CMS removed its regulatory condition that donors or their representatives avoid limiting use or interoperability of donated items or services with other EHR systems. It explained that, when fully implemented and enforced, ONC’s information blocking provisions will address such risk. Conceptually, this is true. Members and their practices will have to gauge that risk, though, as they interact with prospective “donors” of EHR technology. The Final Rule’s Jan. 2021 effective date will not mean that law enforcement agencies promptly will pursue information blocking schemes. More importantly, HHS has not yet proposed or identified ways under current regulatory authorities to reduce incentives for violating information blocking limits. The ACR is concerned that the enforcement climate, particularly during a transition of Administrations, may not effectively inhibit unlawful digital behavior.

Additionally, CMS finalized its regulatory exception for (standalone) cybersecurity donations of cyber software and hardware to deter, detect and respond to cyberattacks. Stakeholders only may use this new cyber exception for technology and services they need and use primarily to implement, maintain or re-establish cybersecurity. Physical security falls outside the exception, as do ancillary cyber uses and functionality that fail to meet the exception’s criteria.

The ACR welcomes CMS preventing donors from taking into account the volume or value of referrals or other business they generate when deciding whether a potential cyber recipient may receive donated technology or services. Similarly, recipients may not impose their own quid pro quo of obtaining EHR donations in exchange for doing business with donor individuals or entities. Generally, the cyber exception appears to have a sound theoretical foundation.

Other Issues

More innovative transactions likely will emerge in 2021 and beyond. However, CMS will not abandon its stated intent to safeguard program integrity and prevent patient abuse. Certain risk areas will stay on CMS’s radar. For instance, physicians may not use percentage-based or per-unit-of-service based compensation methods to decide compensation for renting office space under CMS’s general fair market value compensation exception. CMS maintains that such arrangements that incentivizes lessors on a per-referral basis “are susceptible to abuse … [including] the potential for overutilization, patient steering and stifling patient choice …”

Additionally, CMS still opposes “sham lease arrangements” in which a physician lessee pays remuneration to a lessor (hospital or multispecialty practice) nominally as rent of office space or equipment that the physician never intends to use. Consequently, office space or equipment leases must not exceed what is reasonable and necessary to further the lease’s legitimate business purposes.

Hospital or health systems that employ physicians may pay them productivity bonuses more readily under Stark. Bonuses will not run afoul of the “volume- or value-related” requirement solely because hospitals bill services that correspond to the services a physician renders for which she or he may receive a bonus. However, the Final Rule mandates that profits from all designated health services (DHS) of a group practice or any of its components must be aggregated before the practices distribute them. Practices cannot allocate profits on a per-service basis.

Significantly, CMS underscores the complementary nature of its final rule with the OIG’s final rule for value-based arrangements under the anti-kickback law. The new CMS exceptions afford relief from the “strict liability referral and billing prohibitions” of Stark. Meanwhile, OIG’s rule offers “backstop protection” to beneficiaries and programs “against abusive arrangements” in which remuneration is exchanged intended to induce or reward patient referrals under arrangements that could otherwise meet a Stark exception.

What’s Next?

Overall, CMS appears to have balanced innovation with prudence. The Nation moved years ago to more value-centric patient care. Now, there are more regulatory exceptions to support this shift. Whether ACR members and their practices may benefit under the new regulations remains an open question. For instance, how high will regulators set the bar for value-based compensation arrangements that operate at the rules’ margins and might disadvantage radiologists, who still are forging their paths in a Merit-based Incentive Payment System and alternative payment model world?

Members should consult with qualified legal counsel in their jurisdiction(s) the Final Rule’s impact on their arrangements. Please contact Tom Hoffman at, Mike Peters at or Christina Berry at, with questions about the Final Rule.