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Product Liability Conference Seminar

August 21, 2021

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Product Liability Conference Seminar

Healthcare Essentials

October 17, 2019

Proposed Coordinated Care Revisions to the Medicare Physician Self-Referral Law

By Hannah L. Cross, Patricia A. Markus

Mark your calendar for an informative webinar on December 5, during which Nelson Mullins healthcare and compliance attorneys will summarize and explain potential consequences of the new CMS proposed rule. Check back here for additional details.

The Centers for Medicare & Medicaid Services (“CMS”) issued a proposed rule (“Proposed Rule”) on October 9, 2019 to amend current regulations interpreting the Medicare physician self-referral law (the “Stark” law).  This Proposed Rule stems from the Department of Health and Human Services’ (“HHS”) “Regulatory Sprint to Coordinated Care” and CMS’s “Patients over Paperwork” initiative, both of which aim to remove potential regulatory barriers to and burdens on value-based payment and patient-focused care coordination efforts.

The Stark law prohibits a physician from making referrals for certain “designated health services” payable by Medicare if the physician has a financial relationship with the entity performing the designated health services. Statutory and regulatory exceptions describe safeguarded arrangements that otherwise would violate the Stark law.  However, the current law, regulations, and exceptions are becoming outdated, as they were created for the fee-for-service payment paradigm that was the predominate model in 1989 when the Stark law was enacted. More recently, the health insurance market, including both private insurers and government programs like Medicare and Medicaid, has begun moving toward a value-based health care model which emphasizes patients’ engagement in their health care and incentivizes providers to coordinate care and improve patient outcomes.  Because the current regulatory scheme often presents obstacles to participation in coordinated health care furnished by different providers—and because any noncompliance with the Stark law or its exceptions renders services provided under the noncompliant arrangement not payable by Medicare—guidance and clarification regarding financial relationships subject to the Stark law have been highly anticipated by the health care industry.

To advance this emerging health care delivery and payment system, the Proposed Rule attempts to carve out coordinated care arrangements that might otherwise violate the Stark law.  At a high level, the Proposed Rule:

  • Introduces new exceptions for value-based care compensation arrangements between physicians, providers, and suppliers;
  • Introduces a new exception covering limited remuneration to a physician for items or services provided by the physician;
  • Introduces a new exception for donated cybersecurity technology and related services;
  • Updates the existing exception for electronic health records items and services; and
  • Provides additional guidance and clarity regarding Stark law terminology and the scope of the law and regulations.

Spotlight on Coordinated Care Arrangements

The Proposed Rule introduces the following three new exceptions to the Stark law targeting coordinated care arrangements.

  1. Full Financial Risk Exception
    • This exception would apply to value-based arrangements between VBE participants in a value-based enterprise that have assumed “full financial risk” for the cost of patient care items and services in a target patient population for a specified period of time.
    • “Full financial risk” is defined as financially responsible or contractually obligated to be so within six months following the commencement date of the value-based arrangement.
    • The “full financial risk” must span the entire term of the arrangement.
  2. Value-Based Arrangements with Meaningful Downside Financial Risk to a Physician Exception
    • This exception would apply to remuneration paid under a value-based arrangement where the physician is at meaningful downside financial risk to achieve the value-based purpose(s) of the value-based enterprise.
    • Remuneration could be paid to or from the physician, but the meaningful downside risk must span the entire term of the arrangement.
  3. Value-Based Arrangements Exception
    • This broader exception would apply to value-based compensation arrangements, regardless of the level of risk involved, that meet the following conditions:
      • “The arrangement is set forth in writing and signed by the parties. The writing includes a description of—
        • The value-based activities to be undertaken under the arrangement;
        • How the value-based activities are expected to further the value-based purpose(s) of the value-based enterprise;
        • The target patient population for the arrangement;
        • The type or nature of the remuneration;
        • The methodology used to determine the remuneration; and
        • The performance or quality standards against which the recipient will be measured, if any.
      • The performance or quality standards against which the recipient will be measured, if any, are objective and measurable, and any changes to the performance or quality standards must be made prospectively and set forth in writing.
      • The methodology used to determine the amount of the remuneration is set in advance of the undertaking of value-based activities for which the remuneration is paid.
      • The remuneration is for or results from value-based activities undertaken by the recipient of the remuneration for patients in the target patient population.
      • The remuneration is not an inducement to reduce or limit medically necessary items or services to any patient.
      • The remuneration is not conditioned on referrals of patients who are not part of the target patient population or business not covered under the value-based arrangement.
      • If the remuneration paid to the physician is conditioned on the physician’s referrals to a particular provider, practitioner, or supplier, the value-based arrangement satisfies the requirements of §411.354(d)(4)(iv).
      • Records of the methodology for determining and the actual amount of remuneration paid under the value-based arrangement must be maintained for a period of at least 6 years and made available to the Secretary upon request.”

CMS also offers several new definitions to apply exclusively to these exceptions:

  • A “value-based activity” would mean any of the following activities, provided that the activity is reasonably designed to achieve at least one value-based purpose of the value-based enterprise: (1) the provision of an item or service; (2) the taking of an action; or (3) the refraining from taking an action. The making of a referral is not a value-based activity.
  • A “value-based arrangement” would mean an arrangement for the provision of at least one value-based activity for a target patient population between or among: (1) the value-based enterprise and one or more of its VBE participants; or (2) VBE participants in the same value-based enterprise.
  • A “value-based enterprise” would mean two or more VBE participants: (1) collaborating to achieve at least one value-based purpose; (2) each of which is a party to a value-based arrangement with the other or at least one other VBE participant in the value-based enterprise; (3) that have an accountable body or person responsible for financial and operational oversight of the value-based enterprise; and (4) that have a governing document that describes the value-based enterprise and how the VBE participants intend to achieve its value-based purpose(s).
  • A “value-based purpose” would mean: (1) coordinating and managing the care of a target patient population; (2) improving the quality of care for a target patient population; (3) appropriately reducing the costs to, or growth in expenditures of, payors without reducing the quality of care for a target patient population; or (4) transitioning from health care delivery and payment mechanisms based on the volume of items and services provided to mechanisms based on the quality of care and control of costs of care for a target patient population.
  • A “VBE participant” would mean an individual or entity that engages in at least one value-based activity as part of a value-based enterprise.
  • “Target patient population” would mean an identified patient population selected by a value-based enterprise or its VBE participants based on legitimate and verifiable criteria that are set out in writing in advance of the commencement of the value-based arrangement and further the value-based enterprise’s value-based purpose(s).

Focus on Existing Definitions

Commercially Reasonable

CMS proposes to clarify the meaning of fundamental terminology and requirements, including the terms “commercially reasonable,” “determined in a manner that takes into account the volume or value of referrals or other business generated between the parties,” and “fair market value.” These terms are crucial to many of the compensation arrangement exceptions to the Stark law that physicians, institutional providers, and suppliers rely on today to assure compliance.

CMS proposes two alternative definitions for the term “commercially reasonable” and seeks comments from stakeholders as to which might provide clearer guidance regarding how to structure arrangements:

  1. Commercially reasonable shall mean “that the particular arrangement furthers a legitimate business purpose of the parties and is on similar terms and conditions as like arrangements;” or
  2. Commercially reasonable shall mean “that the arrangements make commercial sense and is entered into by a reasonable entity of similar type and size and a reasonable physician of similar scope and specialty.”

CMS also would clarify in regulation text that an arrangement still may be considered commercially reasonable even if it does not result in profit for one or more of the parties.  The proposed commercially reasonable definitions are similar to those expressed in previous agency commentary.[i] 

Volume or Value of Referrals and Other Business Generated

CMS proposes the following bright line rule for the “volume or value of referrals” standard and the “other business generated” standard:

Only when the mathematical formula used to calculate the amount of the compensation includes as a variable referrals or other business generated, and the amount of the compensation correlates with the number or value of the physician’s referrals to or the physician’s generation of other business for the entity, is the compensation considered to take into account the volume or value of referrals or take into account the volume or value of other business generated.

This change would be reflected in two separate special rules for the volume or value standard, as well as two separate special rules for the other business generated standard, instead of in a single definition for either standard.

Fair Market Value

As for the definition of “fair market value,” CMS clarifies that fair market value is meant to be separate and distinct from the volume or value standard, so the Proposed Rule disconnects the two concepts. The Proposed Rule sets forth the following three definitions of fair market value to be applied in different circumstances:

  1. Applied generally, fair market value “means the value in an arm’s-length transaction with like parties and under like circumstances, of assets or services, consistent with the general market value of the subject transaction.”
  2. Applied to equipment rental, fair market value “means the value, in an arm's-length transaction with like parties and under like circumstances, of rental property for general commercial purposes (not taking into account its intended use), consistent with the general market value of the subject transaction.”
  3. Applied to the rental of office space, fair market value “means the value in an arm’s length transaction, with like parties and under like circumstances, of rental property for general commercial purposes (not taking into account its intended use), without adjustment to reflect the additional value the prospective lessee or lessor would attribute to the proximity or convenience to the lessor where the lessor is a potential source of patient referrals to the lessee, and consistent with the general market value of the subject transaction.”

CMS also would revise the definition of “general market value,” currently included in the definition of fair market value, to mean:

 “[t]he price that assets or services would bring as the result of bona fide bargaining between the buyer and seller in the subject transaction on the date of acquisition of the assets or at the time the parties enter into the service arrangement; or, in the case of the rental of equipment or office space, the price that rental property would bring as the result of bona fide bargaining between the lessor and the lessee in the subject transaction at the time the parties enter into the rental arrangement.”

Highlights of Certain Additional Proposals

CMS proposes the following additional measures and guidance:

  • Various measures to streamline terminology throughout the regulations.
  • Various modifications and clarifications to rules affecting group practices.
  • An additional buffer to the writing and signature requirements present in many Stark exceptions: if the required writing(s) or signature(s) are obtained within 90 days of the date a compensation arrangement became noncompliant, the arrangement will be deemed to have satisfied the writing and signature requirements of the applicable exception. CMS also clarifies how to meet the “set in advance” requirement, if applicable, relating to these technical requirements.
  • Reacting to industry comments and CMS’s experience in administering the Self-Referral Disclosure Protocol, CMS proposes to “decouple” the Stark Law from the Anti-Kickback Statute and associated billing or claims submissions laws by removing affirmative requirements to certify compliance with those laws.
  • Modifications to the definition of “designated health services” to make it clear that inpatient hospital services paid for under the Acute Care Hospital Inpatient Prospective Payment System are only considered designated health services if the furnishing of the service affects the amount of Medicare’s payment.  This change may greatly reduce the number of claims potentially tainted by prohibited financial relationships between physicians and hospitals.
  • Modifications to the existing definition of “remuneration.”
  • A new definition of “isolated financial transaction” to clarify that the exception is “not available to retroactively cure noncompliance” with the Stark law.  Accordingly, an isolated financial transaction would not include a single, retroactive payment for multiple services provided over an extended period of time for which compensation has not yet been made.
  • Deletion of the rules relating to the “period of disallowance,” with guidance discussing various examples of what a period of disallowance might look like, and how a party might rectify noncompliance in certain circumstances.
  • Extension of the concept of “titular ownership or investment interests” to the current rules governing ownership or investment interests, so that physicians who have no right to the financial benefits of ownership or investment (such as distribution of profits or proceeds of a sale) are not considered to have ownership or investment interests in an entity.
  • Clarifying language affecting a number of compensation arrangement exceptions, including but not limited to the exceptions for space and equipment rental, physician recruitment, remuneration unrelated to the provision of designated health services, payments by a physician, fair market value, and assistance to compensate a nonphysician practitioner.
  • Clarifications to the existing exception for electronic health records items and services, including removal of the sunset provision, and a new exception related to donations of cybersecurity technology and related services.
  • A new exception, “limited remuneration to a physician,” applicable to remuneration to a physician that does not exceed an aggregate of $3,500 per calendar year, adjusted for inflation.

Next Steps 

The Proposed Rule was published in the Federal Register on October 17, 2019. CMS has requested comments no later than 5 p.m. on December 31, 2019. The announcement may be found at https://www.cms.gov/newsroom/fact-sheets/modernizing-and-clarifying-physician-self-referral-regulations-proposed-rule, and the proposed regulation can be found in the Federal Register at https://www.govinfo.gov/content/pkg/FR-2019-10-17/pdf/2019-22028.pdf

At over 330 pages, the Proposed Rule introduces a number of proposed amendments to the Stark law, including further revisions to existing regulatory exceptions. Nelson Mullins attorneys will be exploring the Proposed Rule in depth and providing more analysis and context over the coming weeks and months, including a webinar on Thursday, December 5 featuring a moderated discussion of practical impacts of the Proposed Rule. Please check back at this website and at @NelsonMullins on Twitter for these updates. Nelson Mullins is ready to assist stakeholders in submitting their comments to the Proposed Rule.

[i] See, e.g., 69 Fed. Reg. 16054, 16093 (Mar. 26, 2004) and 63 Fed. Reg. 1659, 1700 (Jan. 9, 1998).

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