Author: Andrea M. Ferrari, JD, MPH 

Since at least 2015, the Centers for Medicare and Medicaid Services (CMS), which is the Federal agency responsible for enforcing the Federal Physician Self-Referral Law (commonly known as the “Stark Law”), has acknowledged incongruity between the existing Federal law and regulations governing physician financial relationships and the Federal government’s newer push for value-based payment models for providers.  Of particular although not exclusive concern is the strict liability Stark Law, which prohibits entities from submitting claims for payment if such claims: (i) arose from referral of patients for one of a list of designated health services (DHS); (ii) the referrals were by a physician with which the entity has a financial relationship; and (iii) no Stark Law exception applies.  Financial repercussions for violations of the Stark Law can be severe, and have reached hundreds of millions of dollars when violations are adjudicated through proceedings under the Federal False Claims Act (FCA).  

The Stark Law was originally passed in 1989 and has expanded in scope over the years as concerns about physicians’ financial conflicts of interest have increased.  The current version of the law is more or less the product of the “Stark Phase III” regulations implemented in 2007, although there have been several notable modifications to the Stark Law regulations since 2007. From the outset to the current day, most legislative and rulemaking activity around the Stark Law has been based on study and identification of concerns related to fee-for-service payments.

On January 26, 2015, the United States Department of Health and Human Services (HHS), of which CMS is part, issued a press release stating its commitment to transition from primarily fee-for-service payments to value-based payments, and setting a goal to tie 85% of traditional Medicare payments to measures of quality and value by the end of 2016, and 90% by the end of 2018. In July of 2015, in its 2016 Medicare Physician Fee Schedule Proposed Rule, CMS acknowledged a major impediment to achieving this goal: “Entities furnishing [DHS] face the predicament of trying to achieve clinical and financial integration with other providers, including physicians, while simultaneously having to satisfy the requirements of an exception to the [Stark Law’s] prohibitions if they wish to compensate physicians to help them.”1  In the words of the American Hospital Association (AHA), this predicament is rooted in the fact that “[t]he Stark Law’s oversight of compensation arrangements is anchored in a fee-for-service world where physicians were self-employed, hospitals were separate entities, and both billed for services on a piecemeal basis.”2 New payor models – Medicare’s as well as well as those of private payors –  are such that the financial viability of hospitals and other providers is tied to reducing costs and improving quality across a coordinated continuum of care, a feat that  “can be accomplished only through teamwork among hospitals, physicians and other health care providers across sites of care,” and for which an essential component for success is “the use of financial incentives – specifically, arrangements that align incentives.”3

For many providers, including many of HAI’s clients, the incongruity between old law and new value-based payment models translates to confusion about whether and how new incentive and alignment arrangements may be structured to comply with the Stark Law.  How does one meet the requirements for an exception to the Stark Law prohibitions if all of the potentially-applicable exceptions require that compensation be fair market value (FMV), commercially reasonable and not determined in a manner that takes into account the volume or value of referrals, and traditional paradigms for meeting these criteria – paradigms that evolved in the fee-for-service era – do not seem to fit new alignment and incentive strategies?

Since 2015, there has been periodic discussion in various different government forums about the need and options for repealing or amending the Stark Law to address this predicament. The forums included a July 2016 hearing of the Senate Finance Committee, in which Senate Finance Committee Chairman Orrin Hatch remarked, “If, as some have claimed, the Stark Law is impeding the implementation of recently passed health reforms like the Medicare Access and CHIP Reauthorization Act and is preventing better integration in the delivery of medical treatment, we should address that.”4  The issue was to be taken up later in the year’s legislative session, but ultimately was deferred due to other legislative priorities.

After a period of relative quiet, CMS appears to have renewed interest in continuing discussion about issues with the Stark Law.  On January 17 of this year, current CMS Administrator Seema Verma announced in an AHA “Town Hall” webcast a plan to convene a Federal interagency task force to work toward minimizing the regulatory barriers – including, in particular, the Stark Law barriers – to more rapid adoption of value-based compensation models. The task force will include representation from CMS, which enforces the Stark Law; the Office of Inspector General of HHS (OIG), which enforces the Federal Anti-kickback Statute; and the United States Department of Justice (DOJ), which prosecutes violations of these laws. “I think the Stark Law was developed a long time ago,” Administrator Verma said. “[G]iven where we’re going in terms of modernizing, and the payment systems we are now operating under, we need to bring along some of those regulations.”5

Although CMS and other government agencies may have committed to studying, and, hopefully, eliminating Stark Law impediments to evolving physician alignment and payment arrangements, until the process is complete, financial arrangements between DHS entities such as hospitals and their physician referral sources must continue to meet requirements for one of the existing exceptions to Stark Law prohibitions.  For many types of physician alignment and incentive arrangements, including co-management arrangements, gainsharing agreements, “Hospital Quality and Efficiency Programs” and accountable care and clinical integration initiatives, the potentially-applicable exceptions are likely to be ones that require commercially reasonable and/or FMV compensation that is not determined in a manner that takes into account the volume or value of referrals.  Since the traditional paradigms for determining if these criteria have been met are paradigms that evolved around fee-for-service payments, the paradigms may need to be revisited in light of the disconnect between old rules and new realities.  

FMV Pitfall:  In this evolving accountable care era, parties should carefully consider whether traditional approaches and benchmarks – for example, review of previously-collected data regarding hours worked, hourly rates of compensation, or RVUs performed- are an appropriate basis for evaluating FMV and commercial reasonableness in a specific context.  If such data and methods are not appropriate for the circumstances, the necessary task is identifying alternative data or methods of analysis that are more appropriate.  A solid understanding of evolving market trends and regulatory guidance may be crucial for accomplishing this task.

1 80 Fed.Reg. 41685, 41928 (Jul. 15, 2015). 
2 United States. Senate. Committee on Finance. Examining the Stark Law: Current Issues and Opportunities. July 12, 2016. (statement of the American Hospital Association). 
3 Id. 
4 United States. Senate. Committee on Finance. Examining the Stark Law: Current Issues and Opportunities. July 12, 2016. (statement of Orrin Hatch, Chairman, Senate Committee on Finance).
5 Paige Minemyer, CMS’ Verma: Interagency group to examine Stark law. Fierce Healthcare (Jan. 18, 2018).