The Centers for Medicare & Medicaid Services (CMS) recently issued a new rule modernizing the “Stark Law” regulations. The rule aims to advance value-based care and ease the regulatory burden on physicians. Most of the reforms are effective January 2021; however, the rule includes important changes to how physician group practices may share profits that take effect next year.1
The Stark Law prohibits a physician from making referrals for certain “designated health services” (DHS) payable by Medicare to an entity with which the physician (or an immediate family member) has a “financial relationship,” unless an exception applies. The definition of “financial relationship” includes compensation arrangements and ownership interests. The term DHS applies to numerous health care services and supplies, including clinical laboratory services and diagnostic imaging services.2
Under the Stark Law exceptions,3 a group practice may pay its physicians a share of “overall Continued from page 38 profits,” provided that the payment is not “directly related to the volume or value of referrals” by the physician and other requirements are met.4 Effective January 1, 2022, the new rule redefines “overall profits” as “the profits derived from all the [DHS] of any component of the group that consists of at least five physicians . . . .”5
CMS intends this change to clarify that “the profits from all the [DHS] of any component of the group . . . must be aggregated before distribution” and “a group practice may not distribute profits from [DHS] on a service-by-service basis.”6 For example, a group practice “may not distribute the profits from clinical laboratory services to one subset of its physicians and distribute the profits from diagnostic imaging to a different subset of its physicians.”
The rule includes several other important changes related to group practice compensation. For instance, the rule clarifies that group practices may use different profit-sharing methodologies for different components (consisting of at least five physicians each) so long as certain requirements are met. Additionally, profits from partici -pation in a “value-based enterprise” under a new exception created by the rule may be distributed directly to the participating physician in some instances.7
Practitioners advising group practices should consider these changes carefully as it could be necessary for group practices to change their compensation models ahead of next year. The rule points out that group practices must establish their compensation models “prospectively” and notes CMS’s concern that group practices that relied on interpretations of the current regulatory text may need “to adjust their compensation methodologies” before the new rule takes effect.8
Republished with permission. This article, "Plan Ahead for Changes to Physician Group Practice Profit Sharing," was published in the May/June 2021 issue of the Hillsborough County Bar Association's Lawyer Magazine in the Health Care Law Section.
1 Medicare Program; Modernizing and Clarifying the Physician Self-Referral Regulations, 85 Fed. Reg. 77,492, 77,492 (Dec. 2, 2020) [hereinafter Final Rule].
2 42 U.S.C. § 1395nn; 42 C.F.R. § 411.350 et seq.; Final Rule at 77,492.
3 For instance, the in-office ancillary services exception is applicable to DHS furnished by the referring physician or a physician who is a member of the same group practice if certain requirements are met. 42 U.S.C. § 1395nn(b)(2); 42 C.F.R. § 411.355(b).
4 42 C.F.R. § 411.352(i)(1).
5 Final Rule at 77,561, 77,682 (to be codified at 42 C.F.R. § 411.352(i)(1)(iii)). A component “may include all physicians in the group,” and “[i]f there are fewer than five physicians in the group, overall profits means the profits derived from all the [DHS] of the group.” Id.
6 Id. at 77,561.
7 Id. at 77,653, 77,559.
8 Id. at 77,561 (citing 42 C.F.R. § 411.352(e)).