On October 9, 2019 the Department of Health and Human Services Centers for Medicare and Medicaid Services (CMS) published a proposed rule making changes to the Physician Self-Referral Law, also called the Stark Law (PSR Rule). Among other revisions to the PSR Rule, the proposed rule would modify the group practice special rule that allows physician profit sharing in certain circumstances. Under the proposed rule, the “overall profits” group practice physicians can share must be a combination of all designated health services (DHS) profits, not just the DHS profits from the type of service the physician renders. The clarification is significant as it resolves lingering uncertainty regarding proper compensation arrangements for group practice physicians.

The group practice special rule allows a physician group – or a subset of five or more physicians within the group – to pool DHS profits and distribute them, provided the distribution method does not take volume or value of referrals into account. Compliance with this rule is required for classification as a group practice, and classification as a group practice is required for in-office ancillary services exception eligibility.

Currently, “overall profits” means “the group’s entire profits derived from DHS payable by Medicare or Medicaid or the profits derived from DHS payable by Medicare or Medicaid of any component of the group practice that consists of at least five physicians.” There has been confusion regarding the application of this definition in group practices providing multiple DHS. In the proposed rule’s preamble, CMS responded to multiple inquiries from stakeholders seeking to clarify if the rule allowed profit share distributions for some but not all of a group practice’s DHS profits, and if a group practice can share DHS profits based on service – meaning subsets of physicians would share only in profits from the services they provide. To provide clarity, CMS offered its position that, “a physician practice that wishes to qualify as a group practice could not distribute profits from designated health services on a service-by-service basis.” Furthermore, CMS posed an illustrative hypothetical of a physician practice providing both clinical laboratory services and diagnostic imaging services. Under the proposed rule, profits from both DHS “must be aggregated and distributed.” To maintain group practice compliance, the group must 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.” This displays CMS’s position that if a group practice – or five or more physicians therein – seeks to profit share, it must combine all DHS profits and distribute from the combined pool.

CMS attributed the confusion to a lack of clarity in the current definition of “overall profits.” Accordingly, CMS’s new rule proposes to modify the definition to state: “Overall profits means the profits derived from all the designated health services of any component of the group that consists of at least five physicians, which may include all physicians in the group. If there are fewer than five physicians in the group, overall profits means the profits derived from all the designated health services of the group.” CMS indicated it believes inclusion of “all the designated health services,” coupled with the explanation in the preamble, clarifies the requirements for profit sharing while maintaining group practice compliance.

With this new definition, CMS strives to provide clarity to physician groups that seek to maintain group practice status for purposes of PSR Rule exceptions.  Physician practices that profit share may wish to review compensation methods in advance of the finalization of the rule to identify any restructuring that may be necessary.

CMS is soliciting feedback on the proposed rule. Comments must be received by 5:00 p.m. on December 31, 2019.  For our prior discussion of the proposed rule, click here.

This post was co-authored by Michael Lisitano, legal intern at Robinson+Cole. Michael is not yet admitted to practice law.