Introduction

CMS’ most recent Stark Law rulemaking includes important changes to the rules that allow physician practices to satisfy the definition of “Group Practice” while distributing designated health services (“DHS”) – based profit shares and productivity bonuses. 85 Fed. Reg. 77492 (Dec. 2, 2020) (the “Final Rule”).  As these changes go into effect January 1, 2022, and the ability to bill Medicare for DHS is often contingent on satisfying the definition of “Group Practice,” physician practices should take action now to assess their physician compensation arrangements and methodologies under the new rules.

New Restrictions on Group Practice Compensation Methodologies

As discussed in our December 11, 2020 Critical Analysis and Practical Implications of CMS’ Changes to the Stark Law’s Implementing Regulations, CMS stated that it is concerned that current Group Practice profit share and productivity bonus distribution rules could have been interpreted as allowing compensation methodologies that may have the effect of linking compensation to DHS referrals, either by (i) directing all revenue from DHS most commonly ordered by a particular specialty component to only physicians within that specialty component, or (ii) varying compensation based on the volume of a physician’s orders for services that would be DHS, were they to be paid by Medicare.

Accordingly, the Final Rule includes two important changes to regulatory text that operate to preclude physician practices from satisfying the definition of “Group Practice” if they distribute DHS-based profits and productivity bonuses in certain manners. Specifically:

• Physician practices may not be Group Practices if they distribute DHS-based profits or productivity bonuses on a service-by-service basis; and

• DHS-based profits and productivity bonus distributions can be based on distributions of profits from (and production of) services that would not qualify as DHS even if they were paid by Medicare (g., personally performed professional services), but cannot be based on distributions of profits from (and production of) services that would qualify as DHS, but do not qualify as DHS because they are paid by non-Medicare payors (e.g., clinical laboratory services that are only billed to commercial insurers).

Should a physician practice not satisfy the definition of “Group Practice,” the practice and its provision of DHS within the practice would likely not satisfy the Stark Law’s exception for “In-Office Ancillary Services” (“IOAS”) which, in turn, would likely preclude the practice from billing Medicare for those DHS.  Accordingly, these recent regulatory changes may have significant implications for the practical viability of many Group Practices’ current profit-sharing and productivity bonus distribution methodologies. For instance, many multi-specialty group practices have longstanding profit-sharing distribution methodologies that distribute profits from different DHS to different groups of physicians within the practices. For example, a multi-specialty group practice may distribute profits from diagnostic radiological services to one component of the group (e.g., orthopedic surgeons) while distributing profits from office-based clinical laboratory services to another component of the group (e.g., dermatologists). The Final Rule will not allow a physician practice utilizing such a targeted methodology to continue to satisfy the definition of “Group Practice.”  Rather, to continue to satisfy the definition of “Group Practice” and thus utilize the IOAS exception, such a practice will be required to change its compensation methodologies and lump all DHS profits together prior to distribution to physicians within the Group.

In addition, other Group Practices interpret the current rules to allow the distribution of DHS-based profits and productivity bonuses (e.g., Medicare collections associated with the furnishing of x-rays to Medicare beneficiaries) on the basis of how the Group Practice distributes profits and bonuses associated with furnishing x-rays to non-Medicare patients. For example, a Group Practice might currently calculate a productivity bonus with reference to the volume of x-rays ordered by a physician for the Group’s non-Medicare patients. If a physician ordered 10% of the total non-Medicare x-rays furnished by the Group, that physician might receive 10% of the total non-Medicare x-ray bonus pool.  The Group might also pool Medicare x-ray revenues and divide this pool according to each physician’s percentage of the non-Medicare x-ray bonus pool.  The physician who ordered 10% of total non-Medicare x-rays would receive 10% of the Medicare x-ray bonus pool.  The Final Rule will not allow a practice to deploy such a methodology and still satisfy the definition of “Group Practice.” Rather, the bonus structure would need to be revised such that the Medicare x-ray bonus pool would not be divided on the basis of x-ray orders at all, whether for Medicare or non-Medicare patients. Instead, among other options, the Medicare x-ray bonus pool could be divided on a per-capita basis, based on the physicians’ relative wRVU productivity, or based on compensation attributable to a service that Medicare would not cover at all (for example, cosmetic surgery).

Flexibility of “Value-Based Enterprise” Compensation Methodologies

Despite these new restrictions, CMS also amended 42 C.F.R. § 411.352 to allow Group Practices to distribute to physicians DHS profits and productivity bonuses derived from the physicians’ participation in a “value-based enterprise” (as that term is defined in the Final Rule), even if the distribution would “directly” relate to the volume or value of the physicians’ DHS referrals. Given the broad meaning of the phrase “value-based enterprise” – to include, for example, Group Practices collaborating with their member physicians to further value-based purposes – this deeming clause may afford great leeway to Group Practices that would pursue, on their own, one or more “value-based purposes” and distribute associated DHS-based profit shares and productivity bonuses to their physicians, even in manners that directly relate to their DHS referrals.

Takeaways

As the second half of 2021 advances to closure, Group Practices should revisit their profit share and productivity bonus distribution methodologies to ensure that, as of January 1, 2022, the methodologies will not imperil continued compliance with the Stark Law’s definition of Group Practice – in particular, that DHS-based profit shares and productivity bonuses are neither (1) allocated on a service-by-service basis, nor (2) distributed in a manner that is based on the distribution of profits or bonuses associated with services that would constitute DHS if they were billed to Medicare. In doing so, Group Practices may also wish to consider the opportunity to structure their clinical operations as “value-based enterprises,” which would afford a great deal of regulatory flexibilities, including allowing the distribution of DHS-based profits and productivity bonuses to physicians in a manner more directly related to their DHS referrals.