On April 21, 2020, the Centers for Medicare and Medicaid Services (CMS) issued explanatory guidance on the scope and application of a series of nationwide Section 1135 waivers of the physician self-referral law (Stark Law) issued on March 30, 2020 in response to the novel Coronavirus (COVID-19) pandemic. The waivers exempt healthcare entities from sanctions under section 1877(g) of the Social Security Act for noncompliance, provided certain conditions are met, and absent the government’s determination of fraud or abuse. CMS has structured the waivers to apply only to arrangements that meet one of the specified COVID-19-related purposes (a COVID-19 Purpose). We discussed and analyzed the nationwide blanket Stark Law waivers in detail in a previous article.

IN DEPTH

In response to questions and concerns raised by stakeholders, CMS has issued the explanatory guidance to clarify and elaborate on the scope and application of the blanket Stark Law waivers. CMS also took the opportunity to indicate that it will actively work with the US Department of Justice to address False Claims Act qui tam suits where a party believes, in good faith, that the arrangement in question satisfies a blanket Stark Law waiver.

Stark Law Waiver Scope Limitations

CMS confirmed that the waivers do not relieve entities that furnish designated health services (DHS) from compliance with the other elements of Stark Law exceptions that were not waived, such as the requirement that the arrangement not take into account the volume or value of referrals. Thus, financial relationships involving payments made by an entity that furnishes DHS (DHS Entity) to a physician or physician organization (PO) for the purchase of items or services, where the payments do not reflect fair market value (FMV), must still satisfy the other requirements of an applicable exception even though a blanket Stark Law waiver would protect the non-FMV payment aspect of relationships.

Amending Direct Compensation Arrangements

CMS explained that it has historically interpreted, and currently interprets, the Stark Law to permit parties to amend the terms of compensation arrangements multiple times over the course of the arrangement, even within the first year of the arrangement, provided the elements of a Stark Law exception are met. This interpretive statement from CMS provides parties welcome flexibility to amend arrangements where the overall arrangement will last at least a year following each amendment, regardless of whether the amendment itself lasts at least a year. Notwithstanding the difficulty in squaring this interpretive statement with CMS’s past commentary on the Stark Law’s “set in advance” and one-year duration requirements, the flexibility is welcome and means that parties do not necessarily need to wait a year after a first amendment to the compensation terms to make a second amendment to the compensation terms.

For example, suppose a hospital entered into a professional services agreement with a physician effective January 1, 2020. Although the agreement was entered into less than a year ago, the parties may amend the terms of the agreement during the national emergency period to reflect the changed needs of the parties, regardless of whether the parties are attempting to use a Stark Law waiver. The hospital may need the physician to perform different or more services than initially contemplated, including services that might involve greater risk of COVID-19 exposure. If the parties increase the compensation provided to a rate above FMV, the Stark Law compensation exception waivers would permit such above-FMV compensation. The agreement would need to meet all other, non-waived elements of a Stark Law compensation exception. Following the expiration of the emergency period, the compensation terms of the agreement could be again modified to meet the FMV element of the applicable exception, even within the first year of the amended arrangement. The parties must still evaluate whether an amendment furthers a specified COVID-19 Purpose, however. Reopening the compensation terms of an arrangement for the sole benefit of the physician or PO can itself confer a benefit on the physician or PO for which an exception is needed.

Read literally, the explanatory guidance requires that the arrangement last at least a year following an amendment. If an arrangement has served its commercially reasonable purposes before the first anniversary of the arrangement, key Stark Law compensation exceptions expressly permit termination of the compensation arrangement before the first year has expired so long as the parties do not enter into the same or a substantially similar arrangement until the anniversary of the original arrangement’s commencement date. This balances the parties’ need for flexibility to address changed circumstances warranting early termination with CMS’s interest in guarding against the use of replacement arrangements to reward or punish a physician for referrals during the course of the first year. By implication and analogy, amended compensation arrangements should be eligible for the same early termination option, albeit one tied to the first anniversary of the amendment instead of the first anniversary of the original commencement date. However, based on the literal text of the explanatory guidance, the industry cannot rely on this implication and analogy without risk based on current CMS guidance.

Indirect Compensation Arrangements

The blanket compensation waivers only pertain to direct compensation exceptions. In the explanatory guidance, CMS confirmed that it does not intend at this time to issue a blanket indirect compensation waiver. Parties may request an individual waiver from CMS for specific indirect compensation arrangements.

CMS observed, however, that the direct compensation analysis and waivers can be used for arrangements between a DHS Entity and a PO because all of a PO’s physicians are permitted to “stand in the shoes” of the PO.

Given the variety of arrangements between DHS Entities and non-POs that have physician ownership, it seems that CMS may not believe it has sufficient information to issue a blanket indirect compensation waiver at this time. But, these arrangements also likely have experienced changed circumstances in light of COVID-19’s impact on healthcare delivery. If the indirect compensation definition is met (i.e., the arrangement gives rise to an indirect compensation arrangement for Stark Law purposes), then the arrangement must meet the indirect compensation arrangement exception. The exception has a FMV requirement that may pose the same challenges that led to the need for the FMV waiver for direct compensation arrangements.

Loans and Other Debts

The Stark Law waivers contain two blanket waivers that address remuneration resulting from a loan between a DHS Entity and a physician, or a physician’s immediate family member, where the interest rate is below FMV or on terms that are unavailable from a bank or other commercial lender.

First, CMS clarified that no potentially applicable Stark Law exception would require cash payments to satisfy a borrower’s debt to a lender, and therefore a debtor could repay the loan with in-kind services or items. However, CMS noted that the Stark Law blanket waivers do not extend to forgiving repayment of the loan. Therefore, while a DHS Entity may permit a physician to repay a loan through in-kind payments, the value of the physician’s in-kind payments must be consistent with the amount of the loan balance. CMS acknowledged that the value of a physician agreeing to and in fact operating a medical practice in the community where a DHS Entity is located might be sufficient to constitute a physician’s in-kind repayment of a cash loan depending on each party’s unique facts and circumstances. CMS highlighted that the existing Stark Law exception for retention payments in underserved areas may also be available to protect certain retention payments to physicians in the DHS Entity’s geographic service area. CMS further noted that compensation arrangements involving in-kind payments must be commercially reasonable and may implicate the federal anti-kickback statute.

Second, CMS clarified that loan balance and interest payment terms agreed to in reliance on the blanket waivers may continue beyond the termination of the waivers. However, loan proceeds may not be dispersed and other remuneration may not be conveyed by parties after the termination of the blanket waivers without full compliance with an existing Stark Law exception. This clarification is helpful for providers concerned about the scope of protection for arrangements initiated, but arguably not completed, during the waiver period.

Restructuring of Physician Recruitment Agreements

The Stark Law and its implementing regulations contain both a statutory and regulatory exception permitting certain physician recruitment arrangements to induce a physician to relocate her practice to the geographic area served by a hospital in order to become a member of the hospital’s medical staff, provided the arrangement meets all of the elements of the exception. In a 2007 advisory opinion, CMS stated that parties to a recruitment arrangement are not permitted to amend the arrangement after it has commenced to provide for additional compensation to the recruited physician, because the additional compensation would not be for the purpose of inducing relocation and may directly or indirectly reflect the volume or value of the recruited physician’s actual or potential referrals.

In the guidance, CMS reiterated that an income guarantee may not be extended under an existing physician recruitment arrangement in light of interruption to the recruited physician’s medical practice due to the COVID-19 pandemic. However, a hospital may enter into other arrangements with a recruited physician to address COVID-19 disruption, which could be covered by the blanket Stark Law waivers as needed.

Key Takeaways and Outstanding Questions

The additional guidance provided by CMS clarifies a number of issues, including the applicability and scope of the blanket Stark Law waivers in relation to loans made in reliance on the waivers, and application of the waivers to indirect compensation arrangements. CMS’s commentary also appears to support the notion that the COVID-19 Purpose related to addressing medical practice or business interruption requires a close nexus between a DHS Entity providing financial support to a physician and that physician continuing to provide medical care in the community during the current pandemic.

A few questions still remain and additional commentary from CMS would be helpful. Specifically, additional guidance regarding the interplay between the non-monetary compensation limit (NMC) and the NMC blanket waiver would benefit the provider community. Typically, DHS entities can offer physicians remuneration in the form of NMC up to a specified annual limit ($413 for 2020) if certain other requirements are satisfied. CMS waived the NMC limit with a blanket waiver if the provision of the NMC is for a specified COVID-19 Purpose. Outstanding questions include the following:

• How will CMS analyze the applicability of the NMC limits if the emergency period ends in the middle of the calendar year?

• Will the published NMC limit spring back into effect at that time and, if so, what happens if a DHS entity has already exceeded the published limit for a particular physician in reliance on the waiver?

• Will the DHS entity no longer be able to use the NMC exception for this particular physician for the balance of the calendar year?

Similarly, CMS may wish to consider providing additional clarity regarding lifting the blanket waivers and any effects such lifting may have on healthcare entities’ reliance on the blanket waivers. For example, physician-owned hospitals that expanded their capacity to treat or respond to COVID-19, or ambulatory surgery centers that converted to hospitals, may be adversely affected by an abrupt lifting of the emergency period. Providers may need time after expiration of the national emergency period to unwind such expansion and/or hospital operations. A key question is whether CMS will provide a “grace period” for such physician-owned hospitals or ambulatory surgery centers to complete an unwinding of operations should the termination of the national emergency period come without sufficient advance notice. This unwinding scenario applies to compensation relationships as well. If the emergency declaration ends unexpectedly, and thus the waiver disappears, it will take some time to adjust all of the arrangements that have been entered into during the emergency, especially if care delivery has not returned to “normal.”

Best Practices

While notice to CMS before using a blanket Stark Law waiver is not required, it is advisable for providers to document that the arrangement meets a specified COVID-19 Purpose as well as the particular facts and circumstances for each arrangement where a Stark Law waiver applies. While CMS has provided some clarity on the status of arrangements entered into in reliance on a Stark Law waiver that continue after the emergency period ends, questions remain. Providers should include traditional “change of law/illegality” provisions in the event these clauses are necessary to modify or end an arrangement.