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Earlier this year, the U.S. Department of Health and Human Services (HHS) and Centers for Medicare and Medicaid Services (CMS) issued new rules modernizing the Stark and Anti-Kickback laws. Significant changes to the federal physician self-referral law (“Stark Law” or “Stark”) “group practice” definition special compensation rule goes into effect on January 1, 2022.  These changes revise the rule related to “overall profits” to prohibit pooling and distributing profits or productivity bonuses from designated health services (“DHS”), such as in-office laboratory or imaging services, on a service-by-service basis. This practice is sometimes referred to as “split pooling.”

These changes are part of a sweeping set of final rules issued last fall by CMS to revise the Stark regulations, which were part of the “Regulatory Sprint to Coordinated Care” initiative (the “Final Rules”).  Through the Final Rules, CMS and the Office of Inspector General (OIG) offer new pathways for providers and payors to come together in innovative ways, without fear of violating fraud and abuse regulations, for both governmental and nongovernmental value-based arrangements.

Broadly stated, the Stark Law generally prohibits physicians from referring DHS payable by Medicare or Medicaid to any entity with which the physician (or an immediate family member) has a financial relationship unless a specification exception is met. If no exception exists, severe penalties exist including denial of payment, refund of payment, imposition of a $15,000 per service civil monetary penalty and imposition of a $100,000 civil monetary penalty for each arrangement considered to be a circumvention scheme.

Many physician practices rely on the “in-office ancillary services” exception to the Stark Law to permit their physicians to make internal referrals within the practice for DHS, which includes (among other things) clinical laboratory services, physical therapy services, occupational therapy services, outpatient speech-language pathology services, radiology and certain other imaging services, and radiation therapy services and supplies.  The in-office ancillary services exception generally requires, among other things, that the physician practice qualify as a “group practice” under the Stark Law at 42 C.F.R. § 411.352.

Under the current Stark regulations, a group practice may pay a physician a share of “overall profits” derived from DHS as long as the physician’s share is not calculated in a way that is directly related to the volume or value of DHS referrals by that physician. “Overall profits” means the group’s entire profits derived from DHS payable by Medicare or Medicaid, or the profits derived from DHS payable by Medicare or Medicaid of any component of the group practice that consists of at least five physicians (also known as a “pod”).

In changes to the special rules for payments based on a share of overall profits in the Final Rules, CMS added the words “all the” before “designated health services.”  This means that the profits from all the DHS of the practice or a component of the practice that consists of at least five physicians (i.e., a pod) must be aggregated before distribution. Thus, under the revised regulations, a physician practice that wants to qualify as a group practice cannot pool and distribute profits from DHS on a service-by-service basis (i.e., “split pooling”)

Instead, profits must be shared in group practices in one of two ways:


     1) the practice can aggregate all of the DHS profits of the entire group practice and then distribute those aggregated profits to any physician in the group practice; or


     2) the practice can aggregate all of the DHS profits (not just profits from a particular service line) of any pods of at least five physicians and then distribute the profits within the pod. In both cases, other components of the rule, such as not accounting for the value or volume of any single physician’s referrals, must be followed.

If an entity has multiple pods, each pod may use its own distribution formula. However, the same distribution method must be used for each member of the pod and must be used for all of the DHS profits generated by the pod.

Further, CMS confirmed that any physician can take advantage of these profit-sharing arrangements, not just owners. Assignments to pods may be based on any criteria, such as practice location, practice pattern, or longevity, so long as pods are not assigned in a way that accounts for the volume or value of referrals.

CMS also amended 42 C.F.R. § 411.352 to allow “group practices” to distribute to physicians DHS profits and productivity bonuses derived from the physicians’ participation in a “value-based enterprise” (as that term is defined in the Final Rule), even if the distribution would “directly” relate to the volume or value of the physicians’ DHS referrals. Given the broad meaning of the phrase “value-based enterprise” to include, for example, group practices collaborating with their member physicians to further a “value-based purpose” this clause may afford great leeway to group practices that would pursue, on their own, one or more “value-based purposes” and distribute associated DHS-based profit shares and productivity bonuses to their physicians, even in manners that directly relate to their DHS referrals.

Because of the time and effort involved in modifying physician compensation methodologies, group practices should revisit their profit share and productivity bonus distribution methodologies to ensure that, as of January 1, 2022, these methodologies will not imperil continued compliance with the Stark Law’s definition of group practice. Specifically, that DHS-based profit shares and productivity bonuses are neither


     1) allocated on a service-by-service basis, nor


     2) distributed in a manner that is based on the distribution of profits or bonuses associated with services that would constitute DHS if they were billed to Medicare.


In doing so, group practices may also wish to consider the opportunity to structure their clinical operations as “value-based enterprises,” which would afford a great deal of regulatory flexibilities, including allowing the distribution of DHS-based profits and productivity bonuses to physicians in a manner more directly related to their DHS referrals.

Who knows for sure if and when these “rules” will change again.  However, what is a given is that these new rules should cause practices to look at how they are splitting the pie to assure that what they are doing is in compliance and will be in compliance as of January 1, 2022.

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