In a December 2, 2020 rulemaking (2020 Final Rule), the Centers for Medicare & Medicaid Services (CMS) finalized the most sweeping and significant revisions in over a decade to the regulations implementing the federal physician self-referral statute (Stark Law). The bulk of the new regulations took effect earlier this year on January 19, 2021. CMS is now proposing an additional set of modifications to the Stark Law regulations (Proposed Rule). The proposed modifications are scheduled to be published in the Federal Register on Friday, July 23, 2021, and comments on the Proposed Rule are due on or before Monday, September 13, 2021, at 5:00 p.m. ET. The two most significant changes being proposed relate to the definitions of the terms, “indirect compensation arrangement” (ICA) and “unit-based” compensation.

ICA Definition

The history of the ICA definition is long, tortured, and summarized here, in one of the white papers that we prepared in connection with our recent webinar series, Stark Law Overhaul: An In-Depth Series on CMS’s New Final Rule.

Under the current regulation, an ICA exists between a physician and an entity that furnishes designated health services (DHS entity) if three “prongs” are satisfied. In order to satisfy the second prong of the definition (which is the prong that is the most difficult to understand and challenging to apply) two conditions must be met:

• Aggregate Compensation Condition. First, the physician in question must receive “aggregate compensation” that “varies with the volume or value of referrals or other business generated” by the physician for the DHS entity.
• Individual Unit of Compensation Condition. Second, “the individual unit of compensation” received by the physician:
  • must not be “fair market value for items or services actually provided,” or
  • must include the physician's “referrals” to the DHS entity as a variable, or
  • must include “other business generated” by the physician for the DHS entity as a variable.

Although the Aggregate Compensation Condition had existed prior to the 2020 Final Rule, the 2020 Final Rule added the Individual Unit of Compensation Condition. This new condition narrowed the regulatory definition of an ICA, such that far fewer unbroken chains of financial relationships likely would result in an ICA.

In the Proposed Rule, CMS proposes to revise the ICA regulatory definition to add a fourth means by which the second condition (i.e., the Individual Unit of Compensation Condition) can be satisfied. Specifically, the Individual Unit of Compensation Condition also would be met if the individual unit of compensation involves “payment for anything other than services personally performed by the physician,” such as space, equipment, and services performed by the physician’s “employees, independent contractors, group practice members, or persons supervised by the physician.” Practically speaking, this new fourth condition would make the ICA definition decidedly easier to satisfy (albeit through a more cumbersome analytical approach requiring the accurate identification of the individual unit of compensation received by the physician), thereby increasing the potential for Stark Law violations.

According to CMS, this additional requirement is necessary “to more precisely address the concerns and effectuate the policies that we articulated in [the 2020 Final Rule].” According to the agency, “in streamlining” the “process” for identifying an ICA in the 2020 Final Rule, CMS “inadvertently excluded from the [ICA] definition... compensation arrangements that we have long identified as presenting significant program integrity concerns." Specifically, “certain arrangements involving unit of service-based payment for the rental of office space or equipment.”

We have repeatedly stated our view that unit of service-based compensation formulas in arrangements for the lease of space and equipment are inherently susceptible to abuse because the physician lessor has an incentive to profit from referring a higher volume of patients to the lessee...

Program integrity concerns arise when payment for items or services provided as the result of a physician’s referrals or the other business the physician generates, rather than the physician’s own labor, is included in the calculation of compensation.

The current regulations, however, “are not limited to indirect compensation arrangements under which a physician… is paid solely for services that he or she personally performs, which, as a general matter, do not raise significant program integrity concerns, provided that the compensation is consistent with fair market value for the personally performed services.” The proposed modification to the Individual Unit of Compensation Condition is intended to address this oversight. Effectively, unbroken chains of financial relationships where compensation is exchanged for equipment rentals, office space, or the services of anyone other than the referring physician (e.g., an employed advanced practice professional) would be analyzed in a manner similar to the analysis of potential ICAs prior to the 2020 Final Rule changes.

Unit Definition

As noted above, to apply the ICA definition, the “individual unit of compensation” must be identified. According to CMS, in the wake of the 2020 Final Rule, stakeholders asked how prong two of the ICA definition “should be applied in situations where compensation does not appear to be unit-based or is calculated using two or more different units or types of units.” In response, CMS proposes to define unit-based compensation.

As a threshold matter, CMS states that “all compensation essentially is unit-based compensation.” In effect, the agency then goes on to propose four categories of compensation:

• Compensation That Consists Solely of a Single Time-Based Unit. With respect to compensation that is entirely paid per hour, per day, per month, per year, or per similar period of time, the individual unit of compensation would be the smallest unit of time for which the compensation is paid. For example:
  • where a physician is paid US$150 per hour for her medical director services, the unit is an hour;
  • where a physician is paid US$350,000 per year for her full-time professional services, the unit is a year; and
  • where a physician is paid 50 percent of the amount collected for the professional services that she performs in a calendar year, the unit is a calendar year.

• Compensation That Consists Solely of a Single Service-Based Unit. With respect to compensation that is entirely paid per service, the unit is the individual service. For example:
  • where a physician is paid US$30 per wRVU that she personally performs, the unit is a wRVU;
  • where a physician is paid US$1,000 to provide a training session on infection control measures for an organization’s employees, the unit is a training session; and
  • where a physician is paid 95 percent of the Medicare PFS amount for a particular service that she personally performs, the unit is the service.

• Compensation That Consists of Both Time- and Service-Based Units. CMS notes that it is “aware that compensation arrangements may include different units of compensation paid to a physician.” For example, an employed physician may receive (i) an annual salary for her full-time professional services furnished to patients, and (ii) a productivity bonus for each wRVU that she personally performs. Under these circumstances, CMS would “consider the unit of compensation to be time-based and reflect the aggregate compensation paid to the physician during the period of time applicable to the payment; that is, the time-period during which compensation is paid (for example, per month or per year) or over the entire term of the arrangement.” According to the agency, “fair market valuations generally follow this construct, determining the fair market value of various types of compensation for a physician’s personally performed services, such as fixed salary payments and productivity or bonus compensation, by assessing the physician’s compensation in the aggregate over a period of time.” For example:
  • where an employment arrangement specifies compensation of US$200,000 per calendar year for the physician’s full-time professional services plus a productivity bonus of US$10 for each wRVU that she personally performs, and that the physician is paid on a monthly basis, the unit of compensation would be a month, and the formula for determining the compensation per month would be (US$200,000 ÷ 12 months) + (US$10 x the number of wRVUs personally performed during the month); and
  • where, instead of US$10 for each wRVU that the physician personally performs, the physician receives US$10 for the wRVUs that she personally performs in excess of 4,000 wRVUs per calendar year, the unit of compensation would be a calendar year, and the formula for determining the compensation per year would be US$200,000 + US$10 x (actual number of wRVUs personally performed during the calendar year – 4,000).

• Compensation That Consists of Multiple Time-Based Units or Multiple Service-Based Units. With respect to a compensation arrangement that involves multiple units of the same type, CMS proposes that each unit must be analyzed separately. For example:
  • where an employed physician receives (i) a salary of US$200,000 per year for her full-time professional services, and (ii) US$150 per hour for her personally performed medical director services, each of these time-based units would need to be analyzed separately; and
  • where a physician receives US$50 for service A, US$75 for service B, and US$100 for service C, each of these service-based units would need to be analyzed separately.

Personally Performed Services Definition

To further assist stakeholders in analyzing arrangements under the broadened ICA definition being proposed, CMS also proposes to include a definition of “personally performed services.” For purposes of prong two of the ICA definition, CMS proposes to include regulatory text clarifying that “[s]ervices that are personally performed by a physician (or immediate family member) do not include services that are performed by any person other than the physician (or immediate family member), including, but not limited to, the referring physician’s (or immediate family member’s) employees, independent contractors, group practice members, or persons supervised by the physician (or the immediate family member).” If promulgated, the narrow definition of “personally performed services” promises to contribute to a much larger number of ICAs in the future, assuming, of course, that the proposed revisions to the definition of an ICA become law.

Conclusion

CMS just overhauled the ICA definition in December 2020 and industry stakeholders are still grappling with how those changes impact existing financial relationships between physicians and DHS entities. These same stakeholders will now have to pause and re-assess how this second round of proposed changes to the ICA definition, if finalized in their current form, will impact these same relationships. We intend to keep analyzing the Proposed Rule (and its anticipated impact on the health care industry). In the coming days, we will prepare a long-form article summarizing our findings and conclusions. Among other questions we will want to address are these:

• If CMS is principally concerned with per-click rental arrangements where the physician is the lessor, why is the new requirement of the Individual Unit of Compensation Condition phrased so much more broadly than that?
• How does the revised ICA definition interact with the Stark Law’s flexibilities afforded to “group practice” compensation (which are not necessarily limited to personally performed services)?
• Given the proposed definition of unit-based compensation, what, if anything, is left of the purportedly important distinction between “aggregate compensation” and all other compensation?

Given the significant implications of this Proposed Rule, industry stakeholders may wish to consider submitting comments to CMS. If you would like assistance preparing comments on the Proposed Rule, or require any advice or counsel relating to the Stark Law in general or the Proposed Rule in particular, please feel free to contact us.