CMS Revises Stark Law Indirect Compensation Arrangement Definition, Again

November 17, 2021
Firm Publication

The CY 2022 Medicare Physician Fee Schedule final rule includes further revisions to the definition of the term “indirect compensation arrangement” under the federal physician self-referral prohibition (Stark Law).  Less than a year ago, the Centers for Medicare & Medicaid Services (CMS) finalized a major revision to the indirect compensation arrangement definition as part of its Regulatory Sprint rule.

According to CMS, the latest change is designed to address an “inadvertent” impact on how unit of service-based payments for the rental or lease of office space or equipment are treated under the Regulatory Sprint formulation. While the stated goal of those changes to the framework for analyzing indirect compensation arrangements was to reduce the burden on providers and suppliers, CMS is now essentially reversing course and returning to the prior framework for analyzing unit of service-based payments for the rental or lease of office space or equipment. The revised regulations go into effect on January 1, 2022.

Regulatory Sprint Rule Changes

On December 2, 2020, CMS published a significant rule to revise the regulations that implement the Stark Law as part of the inter-agency Regulatory Sprint to Coordinated Care (Regulatory Sprint rule). Among the many changes made by the Regulatory Sprint rule was to revise the definition of “indirect compensation arrangement.”

Before the Regulatory Sprint rule, the analysis of a potential indirect compensation arrangement required some mental gymnastics. First, one considered whether an unbroken chain of financial relationships between a referring physician (or a member of his or her immediate family) and the entity furnishing designated health services met all of the elements of 42 C.F.R. § 411.354(c)(2). If so, to avoid Stark Law noncompliance, the indirect compensation arrangement must satisfy the requirements of an applicable exception, which in most cases was the indirect compensation arrangement exception at § 411.357(p).

When considering whether the indirect compensation exception was satisfied, one was to apply the special rules on unit-based compensation at § 411.354(d)(2) and (3) that deemed certain compensation not to take into account the volume or value of the physician’s referrals or other business generated.

CMS dispensed with this construct in the Regulatory Sprint rule. Instead, CMS built the conditions of the special rules on unit-based compensation into the definition of indirect compensation arrangement. Under the regulations in place as of January 19, 2021, an indirect compensation arrangement exists if the physician receives aggregate compensation from the person or entity in the chain with which the physician has a direct financial relationship that both varies with the volume or value of referrals or other business generated by the physician for the entity and for which any of the following are true:

  1. The individual unit of compensation is not fair market value for items or services actually provided.
  2. The individual unit of compensation is calculated using a formula that includes the physician’s referrals to the entity as a variable, resulting in an increase or decrease in compensation that positively correlates with the number or value of the physician’s referrals to the entity.
  3. The individual unit of compensation received by the physician is calculated using a formula that includes other business generated by the physician for the entity as a variable, resulting in an increase or decrease in compensation that positively correlates with the physician’s generation of other business for the entity.

Unless these conditions are met (as well as the other conditions of § 411.354(c)(2) that were not materially revised in the Regulatory Sprint rule), the financial relationship is not considered to be an indirect compensation arrangement for Stark Law purposes.

CY 2022 Physician Fee Schedule Changes

In the CY 2022 Physician Fee Schedule proposed rule, CMS noted that, in its efforts to streamline the analysis, it inadvertently failed to consider the impact of its changes on arrangements involving unit of service-based payment for the rental or lease of office space or equipment, often referred to as “per-click” leases. The Regulatory Sprint rule revisions leave open the possibility that, where a per-click lease is the direct financial relationship that is the object of the indirect compensation arrangement analysis, there would be no indirect compensation arrangement.

To close this loophole, CMS modified the definition of indirect compensation arrangement such that, if the arrangement at issue is the lease of office space or equipment (or for the use of space or equipment), then the arrangement will constitute an indirect compensation arrangement (provided the “aggregate compensation” test and all other elements of the definition are met). CMS did not, however, finalize its broader proposal to include within the definition all arrangements for anything other than services personally performed by the physician.

In effect, these changes mean that if the compensation arrangement closest to the physician is for the lease of office space or equipment (or for the use of space or equipment), then the analysis is the same as it was before the Regulatory Sprint rule. Where the financial relationship closest to the physician is not for the lease of office space or equipment, then the analysis follows the formulation articulated by the Regulatory Sprint rule.

Other Noteworthy Changes

As described above, whether an indirect compensation arrangement exists often requires the evaluation of the individual unit of compensation that the physician (or immediate family member) receives. In the CY 2022 Physician Fee Schedule final rule, CMS adds new regulatory text to clarify how to identify the unit of compensation to analyze in this context.

As revised, an individual unit is:

  1. An item, if the physician is compensated solely per item provided.
  2. A service, if the physician is compensation solely per service provided (including where the “service” includes both items and services, as in the case of “under arrangement” service arrangements).
  3. In all other instances, a unit of time.

“Hybrid” compensation—i.e., compensation that is comprised of payments for both time-based units and service-based or item-based units—should be analyzed by converting it to compensation for a unit of time. For example, if a physician is paid an annual salary plus a wRVU-based productivity bonus, with payments made monthly, the unit of compensation is a month.

If the arrangement includes more than one unit of the same type, each unit should be analyzed separately. Thus, if a physician is paid an annual salary plus an hourly stipend for medical director services, each time-based unit must be analyzed to determine whether the conditions for an indirect compensation arrangement exist.

Practical Implications

These most recent changes to the indirect compensation arrangement definition certainly add complexity to the analysis of indirect compensation arrangements under the Stark Law. However, without these changes, a host of per-click lease arrangements—long identified by CMS as presenting significant program integrity concerns—might have avoided scrutiny under the Stark Law.

As a technical matter, the analysis of whether an unbroken chain of financial relationships results in an indirect compensation arrangement will now start with the question of whether the operative arrangement—i.e., the direct financial relationship between the referring physician—is for the lease of office space or equipment (or for the use of space or equipment). If it is, there will be an indirect compensation arrangement (provided the “aggregate compensation” test and all other elements of the definition are met). If not, there will be an indirect compensation arrangement only if the individual unit of compensation meets one of the three specified conditions (and, again, all other elements are met).

Industry stakeholders should reevaluate existing arrangements in light of the revised definition, which takes effect on January 1, 2022. If the compensation arrangement closest to the referring physician is for the lease of office space or equipment (or for the use of premises or equipment) and the “aggregate compensation” test is met, the analysis that applied under the Regulatory Sprint rule revisions will be different and the conclusion may be as well.

If you have any questions about these changes, please contact the authors or your regular Bass, Berry & Sims contact.