Challenges and opportunities in structuring group practice compensation under the revised self-referral and anti-kickback regulations

The final rules which were issued on November 20 by the Centers for Medicare & Medicaid Services (CMS) and the Department of Health and Human Services (HHS) Office of Inspector General (OIG) promise significant changes in how financial relationships involving physicians are analyzed for purposes of compliance with the physician self-referral law, known as the “Stark Law,” and the Federal anti-kickback statute.[1] The overview that follows seeks to highlight some challenges and opportunities for physician practices in structuring physician compensation to comply with the new and modified Stark Law standards and related anti-kickback considerations.

Conceptual Revisions: Fair Market Value, Commercial Reasonableness, Volume or Value of Referrals
The CMS final rule establishes important revisions to the standards for determining whether compensation is consistent with fair market value and whether a transaction is commercially reasonable, as well as whether compensation takes into account the volume or value of physician referrals or other business generated.

Under the revisions, CMS clarifies that compensation will be deemed to take into account the volume or value of physician referrals or other business generated only if the compensation formula includes the physician’s referrals to (or other business generated for) the entity as a variable, resulting in an increase or decrease in compensation that correlates positively (in the case of compensation from an entity to a physician or his or her immediate family member) or negatively (in the case of compensation from a physician or immediate family member to an entity).[2]

CMS also clarified the meanings of “commercially reasonable,” “general market value” and “fair market value,” which are central to many compensation-based arrangements involving physicians.

Revisions to Stark Law Group Practice Compensation Standards
Failure to satisfy the group practice definition will typically prevent a physician practice from qualifying for the in-office ancillary services and physician service exceptions. For many physician practices (particularly those with physician ownership) it is therefore crucial to structure the physician practice to satisfy all eight elements of the Stark Law regulatory “group practice” definition:

  1. The group must consist of a single legal entity operating primarily for the purpose of being a physician group practice.
  2. The group must have at least two physician members (generally, physician owners or employees).
  3. Each member must furnish, through the group, substantially the full range of patient care services that he or she routinely furnishes.
  4. Substantially all (i.e., at least 75 percent) of the patient care services of members must be furnished through the group and billed under the group’s billing number, and collections must be treated as the group’s receipts, subject to exceptions for health professional shortage areas (HPSAs), start-up period, and new, relocated physicians.
  5. The group’s overhead expenses and income must be distributed according to methods determined before receipt of payment for the services.
  6. The group must be a unified business with (i) centralized decision-making maintaining effective control over assets and liabilities, and (ii) consolidated billing, accounting and financial reporting (except that location and specialty-based compensation are allowed for revenues from non-designated health services (DHS) services, and for profit shares and productivity bonuses that are permitted under the special rules discussed below).
  7. No physician member of the group may directly or indirectly receive compensation based on the volume or value of his or her Medicare DHS referrals, except as permitted under special rules that allow a physician to be paid:
    • a share of overall profits of the group (or of a component with at least 5 physicians), so long as the share is not determined in a manner directly related to the volume or value of his or her DHS referrals; or
    • a productivity bonus based on his or her personally performed services, or on services “incident to” his or her personally performed services, so long as the bonus is not determined in a manner directly relating to his or her referrals of DHS (other than “incident to” the physician’s services).
  8. Members of the group must conduct at least 75 percent of the physician-patient encounters of the group practice.

Effective January 1, 2022, the CMS final rule will amend the special profit share and productivity bonus rules to:

  • revise the definition of “overall profits” that are allowed to be shared with physicians;
  • refine provisions recognizing specific profit sharing and productivity bonus methodologies as not directly related to the volume or value of referrals;
  • allow a physician to be paid based on DHS profits attributable to the physician’s participation in a value-based enterprise.

New Standards for Sharing Overall Profits Within a Group Practice.
The CMS final rule will continue to allow group practices to distribute overall profits to physicians in the entire group or to physicians within a component of the group having at least five physicians, so long as the shares are not directly related to the volume or value of the physician’s DHS referrals. Some group practices refer to components as “strategic business units” (SBUs), divisions, departments, or other terms.   

CMS revises the definition of “overall profits” to mean profits derived from all DHS of the entire group (or of a component with at least five physicians, if the group chooses to share profits through a component). This change will require that all DHS profits of the group or component be aggregated before paying profit shares to the physicians of the group (or of the component) and that the same methodology be used in distributing overall profits for physicians within each component (if the group has components) or within the entire group.  

This new standard will limit the ability of a physician practice to distribute DHS profits differently based on factors such as the types of DHS services involved, the location of DHS services, or the identity of the referring group practice physicians. Groups that are sufficiently large to maintain separate components with five or more physicians, however, will continue to have some flexibility to aggregate certain DHS profits within a component and pay those profits to the physicians of that component, as long as the new criteria are satisfied within each component.

CMS recognizes that group practices may establish components (of at least five physicians) based on a broad range of criteria, such as similar practice patterns, years of experience or tenure with the group, or location. These components may establish eligibility standards to determine which physicians are eligible for a profit share, so long as the profit shares are not determined in a manner directly related to the volume or value of the physician’s DHS referrals.  Overall profit distribution methodologies and eligibility to share in the profits can vary from component to component. Moreover, a group (or a component of a group with at least five physicians) is not required to distribute all of its overall profits.

Methods for Sharing Overall Profits and Calculating Productivity Bonuses
The special rules require that overall profits must be divided (and productivity bonuses must be calculated) in a reasonable and verifiable manner that is not directly related to the volume or value of a physician’s DHS referrals, except that a physician’s bonus may directly relate to the physician’s referrals for services “incident to” the physician’s personally performed services. 

The revised regulation will continue this requirement and specifically recognizes three permitted methodologies for sharing overall profits and three specifically permitted methodologies for productivity bonuses that will be deemed not directly related to the volume or value of referrals.

NOTE: It is important to keep in mind that group practices are not limited to the approaches of the specifically identified “deeming” provisions, although using one of the identified approaches may decrease the risk for a Stark Law violation.

The share of overall profits will be specifically recognized as not directly related to the volume or value of referrals if any of the following conditions is satisfied:

  1. Profits are divided per capita.
  2. Profits are distributed based on the distribution of the group’s revenues attributed to services that are not DHS and would not be considered DHS if they were payable by Medicare.

NOTE: this provision has been revised to clarify that this deeming provision protects the sharing of overall profits (not revenues, as referenced in the existing regulation), and that distribution methods for revenues from services within the DHS categories (even if not for Medicare patients) would not qualify for protection under this deeming provision.

  1. Revenues derived from DHS constitute less than five percent of the group’s total revenues and the portion of those revenues distributed (rather than allocated, as in the existing regulation) to each member in the group is five percent or less of his or her total compensation from the group.

A productivity bonus will be deemed not related directly to the volume or value of referrals if any of the following conditions is satisfied:

  • The productivity bonus is based on the physician’s total patient encounters or the RVUs personally performed by the physician;
    • NOTE:  the CMS final rule adds the requirement that the RVUs be personally performed by the physician and deletes a reference to the regulatory section for establishing RVUs.
  • The productivity bonus is based on services  that are not DHS and would not be considered DHS if they were payable by Medicare;
    • NOTE: the final rule will clarify that calculation methods based on services within the DHS categories (even if not for Medicare patients) would not qualify for protection under this deeming provision.
  • Revenues derived from DHS constitute less than five percent of the group’s total revenues and the portion of those revenues distributed to each member in the group is five percent or less of his or her total compensation from the group.

Distribution of Profits From a Physician’s Participation in a Value-Based Enterprise
A new Stark Law provision will allow a group practice to distribute DHS profits to a physician if the profits are directly attributable to the physician’s participation in a value-based enterprise. CMS has clarified that this provision will allow the distribution of profits (but not revenues) attributable to such participation.

New Value-Based Exceptions and Safe Harbors
The final rules created three new Stark Law exceptions and four new anti-kickback safe harbors for value-based enterprises and their participants who engage in value-based activities. These new exceptions and safe harbors generally provide more flexibility (and less stringent conditions) as the level of financial risk increases.

CMS pointed out that some group practices may qualify as a value-based enterprise and may be able to take advantage of the new exceptions for value-based arrangements. It is important to keep in mind, however, that the value-based arrangement exceptions protect compensation arrangements, and not ownership interests, so the in-office ancillary services and physician services exceptions will continue to be vital for compliance by group practices and their physician owners.

New Stark Exception for Limited Physician Remuneration
The CMS final rule establishes a new limited remuneration exception protecting arrangements under which a physician receives limited remuneration (up to $5,000 in a calendar year, subject to annual inflation adjustments) for items or services provided by a physician.

Expansion of Anti-Kickback Personal Services Safe Harbor
The OIG final rule revises the anti-kickback safe harbor for personal services and management contracts to add flexibility to structure productivity, time, and unit-based payment arrangements within the protection of the safe harbor. In particular, the final rule removes requirements that the aggregate compensation be set forth in the agreement (the methodology for determining compensation can be sufficient) and a part-time agreement will no longer need to set forth the exact schedule and charge for each interval. This safe harbor regulation has also been expanded to protect outcome-based payments arrangements.

Conditions for Directed Referral Requirements
The CMS final rule expanded the conditions for any requirement that a physician make referrals to a particular provider, practitioner or supplier to additional exceptions, including for:

  • academic medical centers
  • employment
  • personal service arrangements
  • physician incentive plans
  • fair market value
  • indirect compensation
  • limited remuneration

90 Day Deadlines for Written Documentation and Correction of Payment
The CMS final rule establishes important deadlines for obtaining written documentation and reconciling payment discrepancies:

  • the parties to an arrangement will have 90 days to obtain a writing or signature for a compensation arrangement that otherwise complies with an exception.
    • NOTE: the arrangement needs to satisfy all requirements of an exception (other than the writing requirement) during the entire period prior to the writing.
  • a new provision allows reconciliation of payment discrepancies within 90 days following the expiration or termination of a compensation arrangement.

Physician Practice Action Plan for 2021
Physician practices should review the implications, risks and benefits of the final rules and consider appropriate action steps, which may include but are not limited to the following:

  • Review the new final rule provisions regarding compensation structures and methodologies.
  • Determine whether changes are needed in order to comply with the new Stark Law standards for sharing overall profits and paying productivity bonuses within a group practice, or for satisfying other Stark Law exceptions or anti-kickback safe harbors.
  • Review compensation arrangements to identify any structures that take into account the volume or value of referrals or business generated between the parties.
  • Consider potential opportunities to participate in value-based arrangements or revise existing value-based arrangements.
  • Consult with an accountant and healthcare counsel in structuring new or revised profit-sharing and bonus structures, as well as other financial arrangements.
  • Consult with a valuation expert on whether financial arrangements satisfy the new Stark Law fair market value and commercial reasonableness standards.

For additional information on these CMS and OIG final rules and compensation standards, please contact the attorneys below.


[1] For additional information, see our recent Alerts on the Stark Law final rule and the Anti-Kickback Statute’s new and modified safe harbors.

[2] A positive correlation exists if compensation either decreases with a decrease in referrals or business generated, or increases with an increase in referrals or business generated. A negative correlation exists if compensation either increases with a decrease in referrals or business generated, or decreases with an increase in referrals or business generated.

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