Legal Alert

More Value, Less Volume – CMS Makes Significant Changes to Clarify the Stark Law Regulations and Incentivize Provider Participation in Value-Based Arrangements

by the Health Care Group
November 30, 2020


Publication of the Centers for Medicare and Medicaid Services recent final rule on the Physician Self-Referral Law—known as the Stark Law—may mark the end of the Trump administration’s Regulatory Sprint to Coordinated Care initiative, but the marathon of transitioning the Medicare program to value-based payment has only just begun.

The Upshot

  • New exceptions to the Stark Law related to value-based health care delivery and payment will reduce potential barriers to health care providers participating in value-based payment models.
  • Changes to longstanding definitions provide additional objectivity and clarity that will assist physicians in maintaining compliance with the Stark Law regulations.
  • Health care industry stakeholders no longer have to be torn between playing it safe on Stark Law compliance and participating in innovative value-based payment arrangements.

The Bottom Line

The final rule goes a long way toward clarifying on key elements of Stark Law regulatory compliance by codifying clarifications to existing components of the regulations and adding new exceptions for value-based arrangements. While the changes in the final rule are unlikely to be the magic bullet for getting health care providers to migrate toward value-based payments, the final rule certainly is a step in the right direction.


On November 20, 2020, the Centers for Medicare and Medicaid Services (CMS) published a final rule on modernizing and clarifying the Physician Self-Referral Law (Stark Law) regulations. A driving force behind the rule was to accommodate the transition from volume-based fee-for-service payment to value-based payment under Medicare. Since the initial enactment of the Stark Law in 1989, the Medicare program has seen significant changes to its various payment systems and the adoption of innovative payment and delivery models. This particular rule to update the Stark regulations has been in the works for more than two years, with a request for information (RFI) first being published by CMS in the summer of 2018 followed by a proposed rule in October of 2019.

Since CMS first rolled out various alternative payment models (APMs) that focus on promoting value-based payment within the Medicare program, the agency has made a number of material regulatory changes to incentivize health care providers enrolled in Medicare to participate in APMs. Industry stakeholders have long pointed to the Stark Law and its regulations as potential barriers to entering into value-based arrangements given the significant consequences that non-compliance with the Stark Law can have for physicians and entities that receive payment from CMS for the furnishing of designated health services (DHS).

This final rule is the latest iteration of the efforts made by CMS in its Sprint to Coordinated Care to further reduce potential barriers to participation in value-based payment arrangements as well as accelerate the migration of the Medicare program from its historical emphasis on volume to enhancing the value and quality of services provided to beneficiaries.

In addition to the substantial changes to add permanent new exceptions to the regulations for value-based arrangements, the final rule also made noteworthy updates to existing definitions and guidance regarding interpretations of the existing regulations.New Definitions Related to Value-Based Activity, Arrangements, Enterprises, Purposes, Participants in Value-Based Enterprises, as Well as Target Patient Populations

  • Target patient population” means an identified patient population selected by a value-based enterprise or its VBE participants based on legitimate and verifiable criteria that (1) are set out in writing in advance of the commencement of the value-based arrangement, and (2) further the value-based enterprise’s value-based purpose(s).
  • Value-based activity” means 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.
  • Value-based arrangements” means an arrangement for the provision of at least one value-based activity for a target patient population to which the only parties are (1) the value-based enterprise and one or more of its VBE participants, or (2) VBE participants in the same value-based enterprise
  • Value-based enterprise (VBE)” means 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 the 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 purposes(s).
  • Value-based purpose” means any of the following: (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.
  • VBE participant” means a person or entity that engages in at least one value-based activity as part of a value-based enterprise.
  • One key distinction outlined in the rule is that these new definitions apply only to compensation arrangements and would not be applicable to ownership or investment interests.

New Exception for Arrangements That Facilitate Value-Based Health Care Delivery and Payment

This new exception has three distinct components premised on the degree of financial risk assumed by the value-based enterprise.

  • Full Financial Risk. This component of the exception applies to value-based enterprises that have assumed full financial risk from a payor for patient care services for a target patient population. Guidance within the rule also indicates that full financial risk would not include a defined set of patient care items or services such as episode-based bundled payments.
  • Meaningful Downside Financial Risk to the Physician. This component of the exception applies to those value-based arrangements for which a physician has “meaningful downside financial risk.” Meaningful downside financial risk is defined as the physician being responsible to repay or forgo no less than 10 percent of the total value of the remuneration the physician receives under the value-based arrangement. Note that the final rule threshold of 10 percent is a significant change from the 25 percent threshold outlined in the proposed rule.
  • Value-Based Arrangements. This component of the exception would apply broadly to any value-based arrangement irrespective of any downside financial risk in that arrangement. As one might expect, this catchall component of the exception includes additional requirements that must be satisfied versus those for full financial risk or meaningful downside financial risk to the physician.

Clarifications to the Exception for Compensation Arrangements That Involve Risk-Sharing Arrangements Between a Managed Care Organization (MCO) or Independent Physician Association (IPA) and a Physician

The final rule also includes discussion distinguishing the new exception for arrangements that facilitate value-based health care delivery and payment from the existing exception at 42 C.F.R. § 411.357(n) for compensation arrangements between a managed care organization (MCO) or independent physician association (IPA) for services provided to enrollees of a health plan. The final rule discussion states that the exception applicable to risk-sharing arrangements between entities and physicians that provide services to enrollees of the same health plan does not apply to indirect compensation arrangements between hospitals and physicians, even if both are contractors or subcontractors of the same MCO or IPA. As a result of the perceived lack of clarity by commenters, CMS finalized clarifications to this exception.

New Exception for Cybersecurity Technology and Related Services

Just as CMS has been restructuring its regulations and guidance to incentivize robust participation in value-based payment models, the U.S. Department of Health and Human Services (DHS) has been focused on having health care providers take meaningful steps to enhance cybersecurity. This new exception tracks with similar changes to the regulations regarding the provision of electronic health record technology along with HHS’s larger goal to eliminate any potential barriers to physicians and other health care organizations participating in arrangements that could strengthen cybersecurity protections for providers and patients. Specifically, this exception would permit non-monetary remuneration in the form of technology (e.g., software or other types of information technology) and services that are necessary and used predominantly to implement, maintain, or reestablish cybersecurity if the eligibility of a physician to receive the technology or services is (1) not determined in a manner that directly takes into account the value or volume of referrals or other business generated between the parties; (2) neither the physician nor the physician’s practice (including employees and staff members) makes the receipt of technology or services a condition of doing business with the donor; and (3) the arrangement is documented in writing. 

Updates to the Definitions of Commercially Reasonable, Fair Market Value, and the Volume or Value Standard

The final rules emphasize that these three terms are separate and distinct from each other.

  • Revised Definition of Commercially Reasonable. The revised definition in the regulations clarifies an arrangement “may be commercially reasonable even if it does not result in profit for one or more of the parties.” The final rule used the example of arrangements that would not serve commercial purposes, such as those where there was an unmet community need for services but the arrangement to provide those services may not be profitable for the parties. CMS also included an example of where an arrangement that duplicates other facially legitimate arrangements may not be commercially reasonable, such as a hospital entering into a personal services arrangement with a physician for oversight of an oncology department when an existing medical director arrangement is already in place with another physician.
  • Revised Definition of Fair Market Value. The revised definition emphasizes that the fair market value is specific to the particular arrangement and defines it as “the value in an arm’s-length transaction, consistent with the general market value of the subject transaction.” The preamble discussion in the rule clarifies the distinction between CMS’s view of the fair market value versus the general market value but declined to finalize the framework from the proposed rule related to hypothetical or actual transactions.
    • Discussion in the rule also acknowledged instances where the rate of compensation set forth in a salary survey may not always be commensurate with the worth of a particular physician’s services. The final rule included an example where a hospital desires to employ an orthopedic surgeon that salary surveys would indicate $450,000 per year would be appropriate for the geographic location of the hospital but did not take into account that the particular surgeon is one of the top orthopedic surgeons in the entire country and is highly sought after by professional athletes due to his specialized techniques and success rate. Conversely, the rule also provided an example of a family physician where $250,000 is the national average provided by independent salary surveys, but the cost of living in the geographic location of the employer is below average with declining reimbursement rates and a poor payor mix. Under these circumstances, the fair market value for the family physician’s compensation may be less than the national average of $250,000.
    • The revised definition also provides additional detail regarding the fair market value for the rental of equipment, the rental of office space, and the general market value with respect to compensation.
  • Addition of Language Clarifying the Definition of the Volume or Value Standard and the Other Business Generated Standard. The final rule seeks to create a bright-line rule that would serve as an objective test for when an arrangement takes into account the value or volume of referrals or other business generated between the parties. Essentially, CMS would only view that an arrangement takes into account referrals or other business generated as a variable when the mathematical formula used to calculate the amount of the compensation includes, 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. Pointing to a specific mathematical formula and a direct correlation of that formula with the physician’s compensation is helpful guidance that eliminates a great deal of the ambiguity that has historically surrounded the interpretation of these standards. The final rule also clarifies that productivity-based compensation formulas based exclusively on a physician’s personally performed services would not take into account the volume or value of referrals or other business generated.

Clarifications on the Interpretation of the Formation of Distinct “Pods” Within a Group Practice Composed of at Least Five Physicians

The final rule also includes some helpful clarifications regarding when a group practice may pay shares of overall profits from any component of the group that consists of at least five physicians. For example, the discussion indicates that allocating overall profits using eligibility standards—such as length of time with the group practice, whether the physician is an owner/employee/independent contractor of the group practice, whether the physician is full or part-time, and whether the physicians practice in the same geographic location—would not run afoul of the regulatory requirements so long as the minimum five-physician threshold for a subcomponent of the group is satisfied and the allocation is not determined in a manner that directly relates to volume or value of a physician’s referrals. CMS also provided guidance regarding when a share of overall profits of the group for any subcomponent consisting of at least five physicians would not comply with the regulatory standards. For example, CMS clarified that permitting a subcomponent of the group to share in the profits from DHS on a service-by-service basis would not be appropriate. Rather, the group or any subcomponent of the group composed of at least five physicians must allocate the overall profits from all of the DHS services generated by the group or a subcomponent rather than on the basis of a specific DHS service (clinical laboratory, imaging, physical therapy, etc.).

Definition of Isolated Financial Transactions

The final rule includes a revised definition of an Isolated Financial Transaction that includes “a one-time transaction involving a single payment between two or more persons or a one-time transaction that involves integrally related installment payments.” If the total amount of the payment is fixed, set in advance, does not take into account volume or value of referrals or other business generated, and is secured by a repayment mechanism in the event of a default, the exception would be satisfied.

New Exception for Limited Remuneration to a Physician

CMS finalized the addition of a new exception at 42 C.F.R. 411.357(z) for limited remuneration paid to a physician that does not require a written document. Notably, the $5,000 annual limit included in the definition in the final rule increased from a $3,500 limit initially included in the proposed rule. The requirements for this exception generally track with those for other compensation arrangement exceptions in that the arrangement must be commercially reasonable, the compensation must be consistent with fair market value, and the compensation payable may not vary based on the volume or value of referrals or other business generated. Specific components of the exception are applicable for limited remuneration for the lease of office space or equipment.

Effective Dates for the Regulations

The Stark regulations finalized in the final rule will be effective January 19, 2021, with the exception of the changes to the group practice productivity compensation at 42 CFR § 411.352(i), which will be effective January 1, 2022.

Copyright © 2020 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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