On November 20, 2020, the Centers for Medicare & Medicaid Services (“CMS”) issued its final rule (the “Final Rule”) amending current regulations interpreting the Medicare physician self-referral law (the “Stark Law”). The Final Rule revises and clarifies the definition of “overall profits” of a group practice.

The Stark Law prohibits a physician from making referrals for certain designated health services payable by Medicare (“DHS”) if the physician (or an immediate family member) has a financial relationship with the entity performing the DHS. Under the in-office ancillary services exception, the Stark Law does not apply to services that are ancillary to medical services provided by a physician or a group practice. As such, a physician of a group practice may be paid a share of “overall profits” of the group practice, provided that the share is not determined in any manner that is directly related to the volume or value of referrals by the physician. 

Prior to the Final Rule, “overall profits” could mean either, (i) a group’s entire profits derived from DHS, or (ii) the profits derived from DHS of any component of a group consisting of at least five physicians. It was unclear, and always a source of debate, whether a group, or a subgroup of five or more physicians, that had more than one source of DHS could distribute profits from one type of DHS in a different manner than another. 

In the Final Rule, CMS clarifies the definition of “overall profits.” It means the profits derived from all DHS of a group, or any component of a group consisting of at least five physicians. If there are fewer than five physicians in the group, ‘‘overall profits’’ means the profits derived from all the group’s DHS. Thus, distributing profits derived from one type of DHS one way, and the profits of another type of DHS a different way, will no longer be permissible. To illustrate its point, CMS provided an example where a physician practice provides both clinical laboratory services and diagnostic imaging services to its patients. According to CMS, “[i]f the practice wishes to qualify as a group practice, it may not distribute the profits from clinical laboratory services to one subset of its physicians or using a particular methodology and distribute the profits from diagnostic imaging to a different subset of its physicians (or the same subset of its physicians but using a different methodology).”  This is true even if each methodology, on its own, would be allowed under the Stark Law.

CMS indicates that the distribution methodology of overall profits may be different from a component of five or more physicians of a group to another. By way of example, a group practice comprised of fifteen physicians which furnishes clinical laboratory services, diagnostic imaging services, and radiation oncology services, may divide its physicians into three components of five physicians (component A, component B, and component C) for purposes of distributing the overall profits from the DHS of the group. Under the Final Rule, for each component the group practice must aggregate the profits from all the DHS furnished by the group and referred by any of the five physicians in the component. In the example, the group may distribute the overall profits from all the DHS of component A using one methodology (e.g. per capita), distribute the overall profits from all the DHS of component B using a different methodology (e.g. personal productivity), and distribute the overall profits from all the DHS of component C using a third, Stark acceptable methodology. However, a group must use the same methodology for distributing overall profits for every physician in the component.

While the Final Rule does not govern non-Medicare revenues and profits, group practices must keep in mind that any method of distributing non-Medicare profits would need to comply with state self-referral laws.

Finally, it is important to note that, to enable group practices to make any necessary changes to their compensation programs while complying with the Stark Law’s “set in advance” requirement, CMS has delayed the effective date of its overall profits definition until January 1, 2022.