CMS’s Quest for Clarity: Changes to Stark Law Fundamental Terminology
Anyone who has grappled with the Stark Law likely knows the following terms: “commercially reasonable,” “fair market value compensation,” and “compensation that does not take into account the volume or value of referrals.” They are considered to be fundamental to the Stark Law because almost every Stark Law exception includes one or more of them. As we have previously written, on December 2, 2020, the Centers for Medicare & Medicaid Services (CMS) published final regulations aimed at modernizing and clarifying the Stark Law. As part of its attempt to achieve clarity, CMS revised the definitions of some of its “fundamental” terminology and requirements, including those listed above. In making the revisions, CMS said it was “endeavoring to establish bright-line, objective regulations” with the goal to reduce the burden of compliance under the Stark Law. Below are the new definitions, which became effective January 19, 2021 (the Effective Date).
Commercially Reasonable: The new definition of “commercially reasonable,” which can be found in the definitions section of the regulations (§411.351), is “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.” The new definition also clarifies that an arrangement does not need to be profitable to be commercially reasonable. In its commentary, CMS said that the key question to ask in determining commercial reasonability is “whether the arrangement makes senses as a means to accomplish the parties’ goals.” It is not a question of valuation.
Fair Market Value: The new definition of “fair market value” can also be found in the definitions section of the regulations (§411.351). CMS’s focus in revising “fair market value” was reorganization for the sake of clarity rather than changes to substance. The new definition of “fair market value” is:
(1) General. The value in an arm’s length transaction, consistent with the general market value of the subject transaction. (2) Rental of equipment. With respect to the rental of equipment, the value in an arm’s-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. (3) Rental of office space. With respect to the rental of office space, 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.
In reorganizing the definition of “fair market value,” CMS separated the term “general market value” into its own definition. The new definition of “general market value” is:
(1) Assets. With respect to the purchase of an asset, the price that an asset would bring on the date of acquisition of the asset as the result of bona fide bargaining between a well informed buyer and seller that are not otherwise in a position to generate business for each other. (2) Compensation. With respect to compensation for services, the compensation that would be paid at the time the parties enter into the service arrangement as the result of bona fide bargaining between well-informed parties that are not otherwise in a position to generate business for each other. (3) Rental of equipment or office space. With respect to the rental of equipment or the rental of office space, the price that rental property would bring at the time the parties enter into the rental arrangement as the result of bona fide bargaining between a well-informed lessor and lessee that are not otherwise in a position to generate business for each other.
Volume or Value Standard: The Volume or Value Standard is that the compensation paid under an arrangement is not determined in any manner that takes into account the volume or value of referrals by the physician who is party to the arrangement. In some exceptions it is paired with the additional requirement that the compensation is not determined in any manner that takes into account the volume or value of other business generated between the parties (the “Business Generated Standard”). Although the Volume or Value Standard and the Business Generated Standard are elements of many Stark Law exceptions, CMS never promulgated a regulatory definition of either prior to the 2020 final regulations; all guidance was in the form of commentary to the regulations. But now, in its quest for clarity, CMS has recognized the value in having an objective test to determine whether compensation takes into account the volume or value of referrals or other business generated. CMS stated that the special rules on the Volume or Value Standard and Business Generated Standard create “bright-line” rules for when compensation will be considered to take into account the volume or value of referrals or other business generated. As of the Effective Date, the special rules on the Volume or Value Standard and the Business Generated Standard supersede all previous guidance on the topic, including guidance that is inconsistent. The special rules can be found at § 411.354(d)(5) and (6). They are:
(5) Compensation to a physician. (i) Compensation from an entity furnishing designated health services to a physician (or immediate family member of the physician) takes into account the volume or value of referrals only if the formula used to calculate the physician’s (or immediate family member’s) compensation includes the physician’s referrals to the entity as a variable, resulting in an increase or decrease in the physician’s (or immediate family member’s) compensation that positively correlates with the number or value of the physician’s referrals to the entity. (ii) Compensation from an entity furnishing designated health services to a physician (or immediate family member of the physician) takes into account the volume or value of other business generated only if the formula used to calculate the physician’s (or immediate family member’s) compensation includes other business generated by the physician for the entity as a variable, resulting in an increase or decrease in the physician’s (or immediate family member’s) compensation that positively correlates with the physician’s generation of other business for the entity.
(6) Compensation from a physician. (i) Compensation from a physician (or immediate family member of the physician) to an entity furnishing designated health services takes into account the volume or value of referrals only if the formula used to calculate the entity’s compensation includes the physician’s referrals to the entity as a variable, resulting in an increase or decrease in the entity’s compensation that negatively correlates with the number or value of the physician’s referrals to the entity. (ii) Compensation from a physician (or immediate family member of the physician) to an entity furnishing designated health services takes into account the volume or value of other business generated only if the formula used to calculate the entity’s compensation includes other business generated by the physician for the entity as a variable, resulting in an increase or decrease in the entity’s compensation that negatively correlates with the physician’s generation of other business for the entity.
A few general items of note in connection with the new definitions above:
- CMS emphasized repeatedly in its commentary to the final regulations that each of the requirements above are separate and distinct requirements, each of which must be satisfied if included in an exception. This has been a point of confusion in the past.
- The definitions in the final regulations apply only to the Stark Law. They do not in any way bind the Office of the Inspector General (OIG) or any other governmental agency’s interpretation of such terms for anything other than the Stark Law.
- The new definitions are prospective only and effective as the Effective Date. When analyzing an arrangement established prior to the Effective Date for Stark Law compliance, you must use the old regulatory definitions or guidance from CMS.
