Medical groups that have division-based or service-level approaches to physician compensation should spend their summer evaluating their models in light of Stark Law revisions that go into effect on January 1, 2022. The revisions, seen by CMS as a clarification of original intent, will effectively prohibit distributions of profits from designated health services, or DHS, on a service-by-service basis.

Background

The physician self-referral law or Stark Law prohibits a physician from referring a patient to an entity with which the physician (or an immediate family member) has a financial relationship, for the furnishing of DHS—including lab, imaging, and hospital inpatient and outpatient services—for which payment otherwise may be made under Medicare or Medicaid, unless an exception applies. Physician group practices commonly rely on the in-office ancillary services exception (IOAS) to protect referrals for DHS among physicians within the practice or for ancillary services provided by the practice. In short, if the practice satisfies the highly technical requirements to be considered a “group practice” (defined at 42 C.F.R. §411.352), both the physicians’ ownership and compensation arrangements can be structured to be compliant with the Stark Law.

In the 1998 proposed rule for Phase I of the Stark Law, CMS proposed to define “overall profits” as the entire profits of the entire group (or any component of the group that consists of at least five physicians). However, in an important nuance, the final 2001 regulation defined “overall profits” as a 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. By including a portion of the definition of DHS within the context of “overall profits”, Phase I has been commonly interpreted to support distributions of profits based on individual categories of DHS, including division-based or service-level compensation.

In its January 2021 Stark Law update (previously covered in a two-part blog post by Jana Kolarik on Health Care Law Today), CMS moved to finally clarify its intent by redefining “overall profits” as a group’s entire profits derived from all the designated health services of any component of the group that consists of at least five physicians. However, recognizing that this could create challenges for many practices, CMS made the revisions prospective, to be effective in January 2022.

Takeaways

The following helpful tips should be taken into account in reviewing compensation practices for compliance. The group practice requirements are technically complex, however, and physician group practices that have questions about their compensation models or the definitional changes are advised to consult with counsel well in advance of year-end.

1. If a practice wishes to pay shares of overall profits to any of its physicians, it must first aggregate: (1) all DHS profits from the entire group, or (2) the all DHS profits from any component of the group that consists of at least five physicians. Once aggregated, the group practice may choose to retain some of the profits or distribute all of the profits through shares of overall profits paid to its physicians.

2. Overall DHS profits should be divided in a reasonable and verifiable manner that is not directly related to the volume or value of the physician's referrals of DHS. Per capita (e.g., per member of the group or per physician in the group) distributions are an acceptable approach. A practice may also distribute DHS revenues based on the practice’s revenues attributed to services that are not DHS. There is also a de minimis exception, if DHS revenues comprise less than 5% of the group’s overall revenues and less than 5% of any given physician’s total compensation from the practice. With respect to income derived from other, non-DHS sources, groups are free to divide it in any manner they choose, provided they meet the other requirements of the “group practice” definition.

3. A group practice may designate more than one component of at least five physicians for the allocation of overall profits from DHS, and utilize different distribution methodologies to distribute shares of the overall profits from all the DHS of each such component, so long as the profits from all the DHS referred by the physicians within the component are aggregated and the profits shared with the physicians in that component. The same methodology for distributing overall profits must be applied to every physician within a component.

4. A component may be comprised of physicians with similar practice patterns, who practice in the same location, with similar years of experience, with similar tenure with the group practice, or who meet other criteria determined by the group practice, provided that the share of overall profits received by a physician is not determined in any manner that is directly related to the volume or value of the physician’s referrals. (CMS has reaffirmed its belief that a “pod of five” or more is likely to be broad enough to attenuate the ties between compensation and referrals of DHS; if a particular component does not have five physicians, physician(s) should be added and their DHS revenues aggregated with the others in the component to satisfy this requirement.)

5. A practice need not treat all components of five or more physicians the same with respect to the distribution of shares of overall profits from DHS. That is, the practice may choose to distribute all of the overall profits from DHS of one of its components of five physicians to the physicians in that component, and choose to retain some or all of the overall profits from DHS of another of its components of five physicians.

6. Nothing in the “group practice” definition limits the payment of a share of overall profits to owners of a group practice. In fact, any physician “in the group practice” may be paid a share of overall profits of the group, provided that the share is not determined in any manner that is directly related to the volume or value of referrals of DHS. In Phase I, CMS specifically contemplated that in addition to physician owners and employees, independent contractor physicians could be considered to be “in a group practice” if they have a contractual arrangement to provide services to the group’s patients in the group’s facilities and the independent contractor’s arrangement with the group complies with Medicare reassignment rules.

In issuing this important clarification, CMS recognized the time and effort involved in revising compensation arrangements for physician group practices that have separated profits by service type until now. For that reason, CMS is delaying the effective date of the final rule until January 1, 2022.