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CMS Final Stark Rule Creates New Exceptions, Modifies Existing Fundamentals

November 24, 2020

On Friday, November 20, 2020, the Centers for Medicare & Medicaid Services (“CMS”) released a final rule containing what CMS calls the most significant alterations to the Physician Self-Referral Law (or “Stark Law”) since it was passed in 1989.  This final rule is intended to remove some of the Stark Law barriers that might have a chilling effect on a provider or supplier’s participation in value-based arrangements.  Specifically, the final rule creates: (i) permanent exceptions for value-based arrangements; (ii) protections for certain non-abusive, beneficial arrangements involving limited remuneration; and (iii) protections for the standalone donation of cybersecurity technology.  In addition, the 627-page rule contains new guidance from CMS and clarifications on key hallmark requirements of the law, namely the meaning and interpretation of the commercially reasonable, fair market value (or “FMV”), and volume or value standards.  CMS’ stated aim in finalizing this rule was to recognize a shift in the health delivery landscape, and create exceptions to the Stark Law that permit innovation in value-based care, while also reducing the perceived regulatory burden of compliance for these and all Stark Law exceptions.  The provisions of this final rule will generally take effect on January 19, 2021.

New Stark Law Exceptions:

          A.       Value-Based Exceptions

The major revision in the final rule comes in the form of a new, permanent exception to the Stark Law for “value-based arrangements,” or those “arrangements that facilitate value-based health care delivery and payment” at what will be codified under 42 CFR 411.357(aa).  This exception is highly definition-dependent and is limited to compensation arrangements that qualify as ‘value-based arrangements.’”  According to CMS, value-based arrangements that qualify for the exception must include: (i) an entity, as defined at 42 CFR 411.351, and a physician; and (ii) a compensation agreement, as defined at 42 CFR 411.354(c), (i.e. and not another type of financial relationship to which the Stark Law applies).

CMS defined “value-based arrangement” as “an arrangement for the provision of at least one value-based activity for a target patient population between or among: (1) the value-based enterprise and one or more of its VBE participants; or (2) VBE participants in the same value-based enterprise.”  In turn, a “value-based activity” is defined as “any of the following activities, provided that the activity is reasonably designed to achieve at least one value-based purpose of the value-based enterprise: (1) the provision of an item or service; (2) the taking of an action; or (3) the refraining from taking an action.”  Next, a “value-based purpose” is defined as “(1) coordinating and managing the care of a target patient population; (2) improving the quality of care for a target patient population; (3) appropriately reducing the costs to, or growth in expenditures of, payors without reducing the quality of care for a target patient population; or (4) transitioning from health care delivery and payment mechanisms based on the volume of items and services provided to mechanisms based on the quality of care and control of costs of care for a target patient population.”

“Value-based enterprise” is defined as “two or more VBE participants: (1) collaborating to achieve at least one value-based purpose; (2) each of which is a party to a value-based arrangement with the other or at least one other VBE participant in the value-based enterprise; (3) that have an accountable body or person responsible for financial and operational oversight of the value-based enterprise; and (4) that have a governing document that describes the value-based enterprise and how the VBE participants intend to achieve its value-based purpose(s).”  “VBE participant” is defined as “an individual or entity that engages in at least one value-based activity as part of a value-based enterprise.” And finally, the “target patient population” is defined as “an identified patient population selected by a value-based enterprise or its VBE participants based on legitimate and verifiable criteria that are set out in writing in advance of the commencement of the value-based arrangement and further the value-based enterprise’s value-based purpose(s).”  Although CMS expects that most value-based arrangements would “involve activities that coordinate and manage the care of a target patient population,” it did not propose to limit the universe of value-based arrangements to those specifically for the coordination and management of patient care.  In addition, CMS is not requiring that a “value-based enterprise” be a separate legal entity with the power to contract on its own.

CMS’ final rule creates three categories for value-based arrangements, which will appear at 42 CFR 411.357(aa)(1), (2) and (3), and which apply to value-based arrangements with different risk profiles.  First, at 411.357(aa)(1), CMS created an exception for value-based arrangements during which a value-based enterprise has assumed full financial risk from a payor for patient care services for a target patient population, for the entire duration of the arrangement.  Second, at 411.357(aa)(2), CMS created an exception for value-based arrangements under which the physician is at meaningful downside financial risk for failure to achieve the value-based purposes of the value-based enterprise, for the entire duration of the arrangement. And third, at 411.357(aa)(3), CMS created an exception for any value-based arrangement, provided that such arrangement satisfies specified requirements related to certain written agreed-upon outcome measures set forth in advance, and other safeguards CMS found necessary due to the lack of financial risk permitted under this exception. 

Under the “full financial risk” exception, the value-based enterprise would be financially responsible at the start of, or contractually obligated to be financially responsible within 12 months of, the arrangement beginning on a prospective basis for the cost of value-based patient care items and services. For Medicare beneficiaries, CMS intends for this requirement to mean that the value-based enterprise would be responsible for all items and services covered under Parts A and B, at a minimum.  CMS said these arrangements can take the form of, for example, capitation payments of predetermined amounts per patient per month or other period of time, or global budget payments from payors that compensate the value-based enterprise for providing patient care items and services for the target patient population for a predetermined period of time.  But CMS also noted that the full financial risk exception does not necessarily prohibit other approaches, and that CMS is not prescribing a specific model for the assumption of full financial risk.

Under the “meaningful downside financial risk” exception, although the physician must be at meaningful downside financial risk for the entire term of the value-based arrangement, the remuneration in question could be paid to or from the physician.  CMS defined “meaningful downside financial risk” to mean that the “physician is responsible to repay or forgo no less than 10 percent of the total value of the remuneration the physician receives under the value-based arrangement.”  As stated, the physician must be at meaningful downside financial risk for the entire duration of the value-based arrangement to curb the possibility that meaningful downside financial risk to a physician could be added for only a short portion of an arrangement. In addition, the nature and extent of the physician’s financial risk must be set forth in writing, and the methodology used to determine the amount of the remuneration must be set in advance of the furnishing of the items or services for which the remuneration is provided. 

Under the third, simply-named “value-based arrangement” exception, compensation arrangements that qualify as value-based arrangements are permitted regardless of the level of risk undertaken by the value-based entity or any of its participants.  Both monetary and nonmonetary remuneration between the parties is permitted, and the value-based purpose of the arrangement must relate to the value-based enterprise as a whole, but the exception will not protect a “side” arrangement between two VBE participants that is unrelated to the goals and objectives of the value-based enterprise of which they are participants.  The “outcome measures” against which the recipient of remuneration will be measured, if any, must be “objective, measurable, and selected based on clinical evidence or credible medical support,” although CMS also recognized that outcome measures may not be applicable to all value-based agreements.  When they are, however, they must be determined in advance, and arrangements where the outcome measures are set retrospectively would not be protected.  Finally, these value-based arrangements must be monitored no less frequently than annually to determine whether the parties have actually provided the value-based activities required and whether the continuation of those activities is expected to further the value-based purpose(s) of the value-based enterprise. As noted above, these exceptions are highly driven by the interconnected definitions of persons, entities, activities and purposes applicable thereto. 

These three exceptions also share some common requirements, as follows: (i) the remuneration is for or results from value-based activities undertaken by the recipient of the remuneration for patients in the target patient population; (ii) the remuneration is not an inducement to reduce or limit medically necessary items or services to any patient; (iii) The remuneration is not conditioned on referrals of patients who are not part of the target patient population or business not covered under the value-based arrangement; and  (iv) if the remuneration paid to the physician is conditioned on the physician’s referrals to a particular provider, practitioner, or supplier, the value-based arrangement complies with both of the following conditions: (a) the requirement to make referrals to a particular provider, practitioner, or supplier is set out in writing and signed by the parties; and (b) the requirement to make referrals to a particular provider, practitioner, or supplier does not apply if the patient expresses a preference for a different provider, practitioner, or supplier; the patient's insurer determines the provider, practitioner, or supplier; or the referral is not in the patient's best medical interests in the physician's judgment.  Thus, patient choice must be protected and honored under any of the value-based arrangement exceptions.

          B.       Cybersecurity Exception.

In addition to these new exceptions for value-based arrangements, the final rule also includes an exception at what will be 42 CFR 411.357(bb) for “nonmonetary remuneration (consisting of technology and services) necessary and used predominantly to implement, maintain, or reestablish cybersecurity.”  While it had originally proposed amending the existing EHR exception at 411.357(w) to clarify that the exception is and always has been applicable to certain cybersecurity software and services, the new standalone cybersecurity exception it created at 411.357(bb) is broader than the EHR exception and includes fewer requirements than the existing exception.  For example, whereas the EHR exception requires that the donated cybersecurity software and services are used predominantly to protect electronic health records, that the recipient physician pay 15 percent of the donor’s costs and that the donated software meet interoperability standards, the new exception at 411.357(bb) has none of those restrictions.  CMS also did end up expanding the EHR exception at 411.357(w) to expressly include cybersecurity software and services so that it is clear that an entity donating electronic health records software and providing training and other related services may utilize whichever exception fits their donation model.  Thus, the EHR exception continues to protect donations of cybersecurity software for electronic health records, and the new cybersecurity exception more generally is permitted for cybersecurity technology (hardware, software, or items or services) generally related to the operation of the physician. 

          C.       Incidental Remuneration Exception

The value-based arrangement exceptions and the cybersecurity exception were also joined in this final rule by an exception for limited remuneration to a physician, to be codified at 42 CFR 411.357(z).  This exception is the latest in a line of other exceptions CMS has created in the past recognizing certain non-abusive relationships, such as an exception for nonmonetary compensation at 411.357(k) and the exception for medical staff incidental benefits at 411.357(m).  Thus, CMS has finalized this exception, permitting remuneration from an entity to a physician for the provision of items or services provided by the physician to the entity, up to an aggregate of $5,000 per calendar year, if certain conditions are met.  As is usual, the compensation must nevertheless not be determined in any manner that takes into account the volume or value of referrals or other business generated by the physician, must not exceed FMV of the items or services, and must be commercially reasonable even if no referrals were made between the parties. 

Revisions to Stark Law Fundamental Terminology:     

The final rule contains a new definition of “commercially reasonable,” revisions to the definitions of “fair market value,” and modifications to the “volume or value” standard.  In developing these new provisions regarding what it calls the “fundamental terminology,” CMS states that it considered three basic questions:

  • Does the arrangement make sense as a means to accomplish the parties’ goals?
  • How did the parties calculate the remuneration?
  • Did the calculation result in compensation that is fair market value for the asset, item, service, or rental property?

In the final rule, then, “commercially reasonable” is defined as “the particular arrangement furthers a legitimate business purpose of the parties to the arrangement and is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty” and that “an arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.”  Prior to this final rule, “commercially reasonable” was not defined by CMS, although many exceptions at 411.357 require that an arrangement is commercially reasonable “even if no referrals were made between the parties,” or other similar language with varying phrasing.  CMS noted that despite not including that language in the final definition of “commercially reasonable,” that it nevertheless remains an important element of many of the Stark Law exceptions, and must be analyzed to determine whether an arrangement fits within an applicable exception.  CMS also used this final rule to revise the fair market value compensation exception at §411.357(l)(4) to include this constraint that a compensation arrangement be commercially reasonable even if no referrals were made between the parties, and also included this requirement in the new exception it created for limited remuneration to a physician that we are finalizing at §411.357(z).

Prior to the final rule, the definition of FMV was actually three definitions, including a general definition, a modifier applicable to the lease of equipment and space, and another modifier applicable to lease of space only.  To provide some clarification, CMS actually broke out the definition of FMV into the following three definitional categories: “general,” “rental of equipment,” and “rental of space.” Thus, FMV is defined to mean, generally, “the value in an arms-length transaction, consistent with the general market value of the subject transaction.” With respect to the rental of equipment, fair market value means “the value in an arms-length transaction of rental property for general commercial purposes (not taking into account its intended use), consistent with the general market value of the subject transaction.” And with respect to the rental of office space, fair market value means “the value in an arm’s length transaction of rental property for general commercial purposes (not taking into account its intended use), without adjustment to reflect the additional value the prospective lessee or lessor would attribute to the proximity or convenience to the lessor where the lessor is a potential source of patient referrals to the lessee, and consistent with the general market value of the subject transaction.”  CMS believes this breakdown in the definitions will provide greater clarity with respect to the applicable definition in each compensation arrangement at issue.

CMS also therefore finalized definitions of “general market value” specific to each of the types of FMV transactions contemplated in the Stark Law exceptions, and retracted its previous interpretive statements that equate “general market value,” as defined, with “market value.”   For illustrative purposes, CMS had previously proposed its view that the concept of fair market value “relates to the value of an asset or service to hypothetical parties in a hypothetical transaction (that is, typical transactions for like assets or services, with like buyers and sellers, and under like circumstances),” whereas general market value “relates to the value of an asset or service to the actual parties to a transaction that is set to occur within a specified timeframe.”  In the final rule, however, CMS did not finalize that proposed analytical framework of “hypothetical” versus “actual” transactions, but it continues “to believe that the fair market value of a transaction—and particularly, compensation for physician services—may not always align with published valuation data compilations, such as salary surveys.”  For example, the salary set forth in a salary survey may not always be identical to the worth of a particular physician’s services, which may be higher or lower depending on the circumstance. 

With respect to the “volume or value” standard, CMS had not, until now, codified regulations defining that standard or the “other business generated” standard that appears in many of the Stark Law exceptions.  CMS has now created a bright-line rule that compensation will not be considered to take into account the volume or value of referrals or other business generated between the parties unless “the mathematical formula used to calculate the amount of the compensation includes referrals or other business generated as a variable, and the amount of the compensation correlates with the number or value of the physician’s referrals to or the physician’s generation of other business for the entity.”  For example, if a physician receives additional compensation as the number or value of his or her referrals to the entity increase, the physician’s compensation positively correlates with the number or value of the physician’s referrals, and the compensation would be taking into account the volume or value of referrals.  This is a particularly important clarification in the value-based care context, as the exact goal of certain value-based arrangements is to encourage the use of less or lower costs services when medically appropriate to do so.  CMS acknowledged that the existing Stark rules in effect prior to the final rule may have had an unintended chilling effect on the creation of value-based arrangements due to their ambiguity with respect to whether certain physician compensation arrangements would violate the “volume or value” standard.

Overall, CMS’ final rule contains significant alterations both in terms of creating new exceptions specifically for value-based arrangements, but also revises existing fundamental terminologies to aid regulated entities’ compliance with the Stark Law overall, with the stated intent to reduce regulatory burdens and eliminate any barriers to value-based care and other health care delivery and payment innovations that might be in place due to the Stark Law.  Obviously, protecting the integrity of Medicare and protecting its beneficiaries is also paramount for CMS, so each of these new provisions contains very specific criteria that must be met to meet the rules and qualify for a Stark Law exception, thus it is very important to fully understand the background, development, definitions, and regulatory schemes at play before running full steam into what you think is a “value-based arrangement” come January.  Only time will tell whether or not the final rule will increase the willingness of providers to assume greater financial risk in value-based arrangements.  Finally, whether or not CMS has created greater clarity under the Stark Law is unlikely to be known until more and more providers attempt to grapple with its application.  Nevertheless, Shipman & Goodwin LLP is available to help with any questions you might have regarding the interpretation of and compliance with the new Stark Law regulations.

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