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New Stark Law Proposed Regulations Provide More Flexibility for Hospital-Physician Relationships

February 2020

On October 9, 2019, the Centers for Medicare & Medicaid Services (CMS) issued proposed rules creating new exceptions and updating and clarifying various regulatory requirements related to interpreting 42 U.S.C. § 1395nn, commonly known as the “Stark Law.”  Many of these proposals focus on changes to requirements that CMS believes will support value-based payment arrangements.  In addition to these “modernizing” measures, CMS also included proposed revisions and provided clarifying commentary for several existing exceptions to the Stark Law prohibition on “financial relationships” at 42 C.F.R. § 411.357.  Two of these proposed revisions—to the fair market value compensation exception and the payments by a physician exception—are the focus of this alert.  If CMS finalizes the proposed regulations without significant changes, these updates will provide hospitals with more options when considering financial arrangements with physicians. 

Exception for Fair Market Value Compensation 42 C.F.R. § 411.357(l)

In the proposed regulations, CMS proposes expanding the exception for fair market value compensation to include arrangements involving space leases between physicians and DHS entities.  Currently, the fair market value exception only applies to signed written arrangements for items or services that meet compensation and other requirements specified in the regulation, and cannot be used for the rental of office space. 

In issuing the proposed regulations, CMS noted that it has become aware of lease arrangements between DHS entities and physicians that are not inherently abusive, but that may not satisfy the requirements of other Stark Law exceptions.  In particular, CMS noted that in some circumstances, space may not be used exclusively by the tenant as required by the space lease exception or the arrangement may not satisfy the technical requirements of the timeshare exception, or the term of the arrangement was less than 1 year.  Because the fair market value exception continues to contain various requirements that CMS believes protect against abusive arrangements (e.g., that the arrangement is in writing, signed by the parties, that the parties only enter into one arrangement for the same space lease in the course of a year, that the compensation be specified in the agreement and not take into account the volume or value of referrals, be set in advance, and be consistent with fair market value, and that the arrangement be commercially reasonable), CMS believes that expanding the fair market value exception to space lease arrangements would continue to prohibit abusive arrangements while also providing DHS entities and physicians more flexibility to enter into agreements that pose a low risk of fraud and abuse.

Exception for Payments by a Physician 42 C.F.R. § 411.357(i)

Many commentators have historically criticized CMS’s regulatory exception for payments by a physician (PBAP).  This is because the existing regulatory text of this exception contains additional requirements beyond the analogous statutory exception, and CMS arguably did not have regulatory authority to add additional requirements to this exception.  Further, the PBAP exception can only be used for compensation for items or services “that are not specifically excepted by another provision in §§411.355 through 4.11.357 (including, but not limited to §411.357(l).”  As noted above §411.357(l) is the fair market value compensation exception.  Some have argued that when CMS expanded the fair market value exception to apply to payments made by a physician in addition to payments made by a DHS entity, CMS effectively nullified the PBAP exception by making it no longer available for payments by a physician.  This is because the PBAP exception cannot be used if the fair market value exception may be available.

In the commentary to the proposed regulations, CMS acknowledged, for the first time, that these arguments have merit.  In response, CMS proposes revisions to the PBAP exception to cover arrangements that cannot be structured to satisfy a statutory exception and their interpreting regulations.  CMS specifically noted that this exception may be available to protect use of space that is not office space, including physician’s lease of storage space or residential real estate.

Next Steps

CMS is currently reviewing public comments submitted on the proposed regulations.  We are watching for the final regulations, which we anticipate will support CMS’s goal of modernizing the Stark Law and permitting a wider array of physician-hospital relationships.  We are hopeful that the final regulations will provide hospitals with additional ways to demonstrate Stark Law compliance.