On October 31, 2015, the Centers for Medicare & Medicaid Services (CMS) issued the first major changes to its regulations under the Physician Self-Referral Law (commonly referred to as the Stark Law) since 2009. Unfortunately for health care providers, the new regulations, most of which took effect on January 1, 2016, do little to simplify the Stark Law or narrow its reach. The new regulations do, however, create several new safe harbors and clarify a number of preexisting exceptions, making it easier for providers to comply with a law that a federal appeals court recently described as a “booby trap.” 

Doctors have some cause to celebrate — and should become familiar with — the new and modified safe harbors to the Stark laws. These updated safe harbor rules can offer strategic business opportunities not available previously.

 Law Basics

The Stark Law prohibits physicians from ordering designated health services for Medicare and Medicaid patients from an entity with which the physician, or an immediate family member of the physician, has a financial arrangement. When first enacted, the Stark Law applied only to relationships between physicians and clinical laboratories. The list of designated health services has, however, expanded over the years and now includes inpatient and outpatient hospital services, outpatient prescription drugs, home health services and supplies, prosthetics, orthotics and prosthetic devices, parenteral and enteral nutrients, equipment and supplies, durable medical equipment and supplies, radiation therapy services and supplies, radiology, occupational therapy services, and physical therapy services. 

Under the Stark Law, a financial relationship includes compensation arrangements, investment interests and ownership interests. Direct and indirect arrangements both implicate the Stark Law. As a result, when a physician has an ownership interest in a physician organization, financial relationships between providers of designated health services and the organization must be scrutinized. 

The Stark Law — unlike the Anti-Kickback Statute, the other pillar of the federal government’s battle against fraud, waste and abuse — is a strict liability statute. A violation is a violation, whether intentional, negligent, or inadvertent. The Stark Law is not a criminal statute, but providers who violate it face substantial civil penalties and exclusion from participating in federal health care programs. 

Much of the Stark Law’s complexity lies in its statutory exceptions and regulatory safe harbors. Without them, any physician who leases space to or from a provider of designated health services, receives compensation for participating in a compounding pharmacy’s clinical trial, receives free or discounted parking while working at a hospital, owns stock in a publicly traded company that provides designated health services, or allows a clinical laboratory to provide office staff with a pizza lunch would violate the law if s/he refers patients to the provider. Fortunately, safe harbors apply in each of these circumstances. If an arrangement does not satisfy each and every technical requirement of a safe harbor, however, the physician and the designated health services provider have violated the Stark Law. (Under the Anti-Kickback Statute, in contrast, the failure to fall squarely within a safe harbor does not necessarily mean that the arrangement is illegal or that it will be investigated or prosecuted.) 

The 2015 Amendments

1.    New safe harbor for physicians to retain nonphysician practitioners    

Effective January 1, 2016, CMS established a new safe harbor to permit hospitals, federally qualified health centers and rural health clinics to provide remuneration to physicians to assist the physicians in employing a nonphysician practitioner in the geographic area served by the entity. The exception protects a direct compensation arrangement between the entity and an individual physician by allowing the entity to compensate that individual for retaining the nonphysician practitioner to provide primary care services to patients of the physician practice. 

This new safe harbor promotes the expansion of primary care services — which CMS considers to include general family practice, general internal medicine, pediatrics, geriatrics, and obstetrics and gynecology patient care services — the definition of “nonphysician practitioner” is limited to physician assistants, nurse practitioners, clinical nurse specialists, certified nurse-midwives, clinical social workers, and clinical psychologists. Substantially all of the services that the nonphysician practitioner provides to patients of the physician’s practice must be primary care services or mental health care services; the exception does not protect arrangements for assistance to a physician that involve employing a practitioner who furnishes specialty care services, such as cardiology or surgical services, to the physician practice’s patients.

The nonphysician practitioner need not be an employee of the physician practice, but the practitioner must have a compensation arrangement with the physician or physician organization. If a staffing agency pays a practitioner, then the safe harbor does not apply. CMS was concerned that entities only be allowed to incentivize hiring nonphysician practitioners when the physician has indicated a commitment to increase the availability of patient care services to his or her patients on an ongoing basis. Hiring “temps” does not demonstrate the required commitment.

The safe harbor does not allow ongoing or permanent subsidies of the costs associated with a nonphysician practitioner independent contractor or employee. It caps the amount of remuneration from the hospital, health center or health clinic to the physician at 50 percent of the actual compensation, signing bonus and benefits paid by the physician to the practitioner, and it limits assistance to a period not to exceed the first two years of the practitioner’s employment by the physician. 

The safe harbor also includes requirements to prevent gaming by rotating or cycling nonphysician practitioners through multiple physician practices located in the geographic area served by the hospital, health center or health clinic. The entity may not provide assistance to a physician to employ a practitioner if the practitioner has, within one year of his or her compensation arrangement with the physician, either (a) practiced in the geographic area served by the entity or (b) been employed or otherwise engaged to provide patient care services by a physician that has a medical practice site located in the geographic area served by the entity, regardless of whether the practitioner furnished services at that site. 

Just as demanded by many other Stark Law safe harbors, the nonphysician practitioner safe harbor requires that (a) the arrangement between the hospital, health center or health clinic and the physician be set forth in a writing signed by all parties, (b) the arrangement not be conditioned on referrals by the physician or practitioner to the entity, and, (c) compensation from the entity not be determined in a manner that takes into account the volume or value of referrals by the physician or practitioner.

2.    New safe harbor for timeshare arrangements

CMS has also established a new safe harbor for “timeshare” leasing arrangements for premises, equipment, personnel, items, or supplies. From its outset, the Stark Law included an exception for the rental of office space. To qualify for the exception, the lease must satisfy six specific criteria, one of which is that the space be used exclusively by the lessee. A “timeshare” arrangement, under which a hospital or physician practice makes its space available for other physicians on an as-needed basis, would not fit with the office rental safe harbor.

Many circumstances exist, however, under which a physician may require premises, equipment, personnel, items, supplies, or services but does not need or is not interested in a traditional office space lease arrangement. For example, in a rural or underserved area, there may be a need in the community or certain specialty services, but the need is not great enough to support the full-time services of a physician specialist. Under timeshare arrangements, a hospital or local physician practice may ask a specialist from a neighboring community to provide the services in space owned by the hospital or practice on a limited or as-needed basis. The hospital or practice makes available the space, equipment and services necessary to treat patients so that the physician is not required to establish an office, make improvements to the space or bring medical or office supplies to begin treating patients. CMS determined that legitimate reasons exist for timeshare arrangements that do not pose a risk of waste or abuse, provided that they are properly structured. Although the need for such arrangements often arises in rural or underserved areas, CMS has not limited the timeshare exception to those areas. 

Under the exception, timeshare arrangements are characterized as “licenses,” with the physician being the licensee and the hospital or physician organization who provides space, equipment, personnel, items or supplies being the “licensor.” Only a hospital or physician organization of which the physician is not an owner, employee, or contractor may be a licensor; the exception does not apply to other types of designated health services entities. 

The safe harbor protects only those timeshare arrangements under which the physician uses the licensed premises, equipment, personnel, items, supplies, and services predominantly for the evaluation and management of patients. It does not protect the license of office space used by the physician solely or primarily to furnish designated health services. The equipment covered by the arrangement must be located in the same building where the evaluation and management services are furnished at the time of the patient’s visit, and the equipment cannot be advanced imaging equipment, radiation therapy equipment, or clinical or pathology equipment (other than equipment to provide CLIA-waived laboratory tests). 

To meet the safe harbor, the arrangement must be in writing, signed by the parties, and specify all space, items, and services covered by the arrangement. The arrangement cannot be conditioned upon the physician-licensee’s referral of patients to the licensor, and compensation must be set in advance, consistent with fair market value, and not determined on the volume or value of referrals or other business generated between the parties. The compensation formula cannot be based on a percentage of revenue attributable to the services provided by the physician while using the premises, equipment, supplies, or personnel. The parties to a timeshare arrangement can determine license fees on an hourly, daily or other time-based basis. The arrangement would have to be commercially reasonable even if it were never to result in referrals, and it cannot violate the Anti-Kickback Statute. Lastly, if the arrangement conveys a possessory interest in the office space that is the subject of the arrangement, as opposed to a non-exclusive right to use it, then the safe harbor does not apply. 

3.    Amendments to existing safe harbors that make them less confusing, more consistent and less technical

a.    Taking into account the volume or value of referrals

The Stark Law provides that when remuneration passes between a physician and a provider of designated health services, the amount cannot take into account the volume or value of referrals. Some of the safe harbors use the phrase “take into account,” but others use “based on” or “without regard to.” CMS consistently interprets all these phrases as meaning “takes into account,” but the inconsistent terminology has nonetheless caused confusion. To eliminate that confusion, the safe harbors have been amended so that all use the same phrase: “takes into account.” 

b.    Satisfying the writing requirement

Many of the existing exceptions require a writing, including the ones for office space, equipment rental, personal services arrangements, physician recruitment, and fair market value arrangements. Until now, the exceptions used the word “agreement,” which led to providers asking CMS whether the safe harbor applies only when a financial arrangement is reduced to a single, formal written contract that includes all material terms. The new safe harbor regulations eliminate that confusion by substituting the word “arrangement” for “agreement.” 

Depending upon the facts and circumstances of the arrangement and the available documentation, a collection of documents, including contemporaneous documents evidencing the course of conduct between the parties, may satisfy the writing requirements of any safe harbor that require that an arrangement be set out in writing. A single written document memorializing each term of an arrangement still provides the surest way to comply with an exception, but CMS has clarified that there is no requirement under the Stark Law that an arrangement be documented in a single, formal contract.

c.    Establishing the term of an arrangement

The safe harbors for office rental, equipment rental, and personal services arrangements all require that the compensation arrangement between the physician and the designated health services entity be for a term of at least one year. Some stakeholders interpreted this to mean that writings contain a “term” provision and specify its duration. CMS, however, has clarified that an explicit “term” provision is not necessary to satisfy this element of the safe harbor and that parties can satisfy the safe harbor by having a written agreement that lasts as a matter of fact for at least one year. The new regulations accomplish this by using the word “arrangement” instead of “agreement” when mentioning the one-year requirement. Nonetheless, it is still good practice to memorialize the term of the agreement in writing, provide for a term of at least one year and include provisions for early termination.  

d.    Holdover arrangements

The office rental, equipment rental, and personal services arrangements safe harbors previously permitted a “holdover” arrangement for up to six months following their expiration. This eliminated the need for the parties to ensure that a new contract was signed by the time the original agreement expired and allowed them to continue their arrangement on the same terms and conditions for a limited, six-month period. It still, however, required the parties to negotiate and document a new agreement relatively quickly. 

The amended safe harbors now permit holdovers for an indefinite period, provided that the arrangement continues to satisfy the specific requirements of the applicable exception. To prevent frequent renegotiation of short-term arrangements, the holdover must continue on the same terms and conditions as the original arrangement. To ensure that compensation meets fair market value requirements, the holdover arrangement must satisfy all the elements of the applicable exception at the time the original arrangement expires and on an ongoing basis during the holdover. If, during the course of the original term of the agreement, the market changed such that by the end of the term, rent falls below market value, then a holdover arrangement would not fit the safe harbor. Similarly, if rental payments are fair market value at the time an arrangement expires, but later fall below fair market value at some point during the holdover, then the arrangement would cease to meet the safe harbor as soon as the fair market value requirement is no longer satisfied. 

e.    Definition of “remuneration”

CMS has also amended the definition of “remuneration” to clarify the circumstances under which a designed health services provider may supply a physician with items, devices or supplies. The definition previously had a carve-out for items, devices or supplies “used solely” for six purposes: collecting, transporting, processing, or storing items for the entity providing them, or ordering or communicating the results of tests or procedures for that entity. The phrase “used solely,” however, misleadingly suggested that if an item was used for two or more of those purposes, then the provision of the item, device or supply would be “remuneration.” 

Effective January 1, 2016, the definition carves out “the furnishing of items, devices, or supplies . . . that are used solely for one or more of the following purposes,” and then goes on to list the same six purposes. This clarifies that if an item is used for two or more of the enumerated purposes and is not used for any other purpose, then provision of the item does not constitute remuneration between the parties. 

f.    Temporary non-compliance with signature requirements

Lastly, the new regulations ease the burden of complying with the signature requirements that exist under several of the safe harbors, by allowing the parties to obtain signatures within 90 days of a compensation arrangement taking effect. Previously, the regulations had a 90-day grace period only if the failure to comply with the signature requirement was inadvertent; otherwise, the grace period was just 30 days. In allowing a 90-day grace period regardless of whether or not the failure to obtain a signature is inadvertent, CMS recognized that it is not uncommon for parties who are aware of a missing signature to take up to 90 days to obtain all required signatures. The grace period applies only to signature requirements and not to any other requirements of an applicable exception, including the requirement that the arrangement be set out in writing. Moreover, an entity may only invoke the grace period once every three years with respect to the same referring physician.