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Revisions and Updates to the Physician Self-Referral Law

Publications - Client Alert | November 20, 2015

On October 30, 2015 the Centers for Medicare and Medicaid Services (CMS) issued its final Revisions to Payment Policies under the Physician Fee Schedule and Other Revisions to Part B for Calendar Year 2016 (the Final Rule). The Final Rule includes several modifications and additions to the federal physician self-referral law (Stark Law) regulations, including two new exceptions and clarification of regulatory terminology and requirements. In addition, the prefatory comments to the regulations provide clarification of CMS’ position on a number of Stark Law interpretive issues. While the new regulations are generally effective January 1, 2016, the comments specify a number of interpretations of Stark Law requirements that reflect CMS’ existing policy. Changes and comments that clarify CMS’ existing policy may be used when assessing compliance of current or past arrangements.

The Stark Law prohibits a physician from making a referral for designated health services (DHS) payable by Medicare to an entity with which he or she (or an immediate family member) has a financial relationship, unless the requirements of an applicable exception are met. The Stark Law also prohibits the DHS entity from presenting, or causing to be presented, to the Medicare program or to any individual, third-party payor or other entity, a claim or bill for DHS performed pursuant to a prohibited referral.

For the most part, the regulatory changes and stated interpretations reflect a welcome, more flexible approach to some of the technical Stark Law requirements. It appears that CMS has received a number of disclosures submitted under the Self-Referral Disclosure Protocol, and the processing of these self-disclosures has made CMS aware of a certain number of non-abusive arrangements that, under a strict reading of the existing regulations, result in technical Stark Law violations despite the arrangements presenting little likelihood of abuse. By revising the regulatory language and expressing a more reasonable interpretation of the existing regulations, CMS has made it easier for providers to avoid Stark Law violations and to minimize the impact of some violations that do occur. The changes are also likely to reduce CMS’ workload under the Self-Referral Disclosure Protocol, and entities that have submitted self-disclosures may want to consider whether to amend or withdraw them in light of the new guidance.

Although the changes are mostly liberalizations, there are a few aspects of the new regulations that may impose stricter requirements and should be carefully noted. These include the following:

  • A clarification that all members, employees and independent contractor physicians “stand in the shoes” of a physician organization for all purposes, except the signature requirement (which means that compensation to a physician practice cannot vary with referrals or other business from non-owner physicians of the practice);
  • An increase in the physician recruitment exception’s record retention requirement from five to six years (the new non-physician practitioner recruitment exception, discussed below, also has a six-year record retention requirement);
  • A clarification regarding the manner of calculating the cap on retention payments made to physicians with practices in underserved areas;
  • A change to include both referring and non-referring physicians in the calculation of a physician-owned hospital’s physician ownership percentage (effective January 1, 2017); and
  • Language in the discussion of the new timeshare exception (discussed below) calling into question the use of licenses rather than leases in situations that do not fall under the new exception. While the new timeshare exception is helpful, existing license agreements should be re-evaluated by legal counsel to determine Stark Law compliance.

A summary of these and the other major changes that appear in the Final Rule is set forth below.

New Exceptions

New Exception for Certain Timeshares: CMS finalized a new exception at 42 C.F.R. § 411.357(y) that permits timeshare arrangements for the use of office space, equipment, personnel, items, supplies and other services. These timeshare arrangements previously have had difficulty satisfying the requirements of the existing office space lease exception because these license-type arrangements do not ordinarily involve exclusive use of the premises (and may be for periods of less than one year). Further, timeshare arrangements do not fall under the fair market value compensation exception, as this exception does not protect the rental of office space. Additionally, CMS takes the position that timeshare arrangements have been unable to qualify for the exceptions for payments by physicians because of the inclusion of office space in the bundle of items or services involved in such arrangements. (CMS takes the position that office space is not an item or service.)

The new exception allows timeshare arrangements for the use of premises, equipment, personnel, items, supplies or services to furnish predominantly evaluation and management (“E/M”) services to patients. The timeshare arrangement must be between a physician (or physician organization) and a hospital or other physician organization. Either party can be the party granting permission to use its premises, equipment, personnel, items, supplies and services to the other party. Equipment covered by the timeshare arrangement must be in the same building as the office suite where E/M services are furnished, and all locations under the timeshare arrangement, including the premises where E/M services are furnished and the premises where DHS are furnished, must be used on identical schedules. The timeshare arrangement may not convey a possessory leasehold interest in the premises that is the subject of the arrangement.

In finalizing the new exception for timeshare arrangements, CMS also clarified its stance on license agreements. CMS stated that a license—or permission—to use the property of another person differs from a lease in that ownership and control of the property remains with the licensor; a license does not transfer dominion and control over the premises, equipment, personnel, items, supplies and services of their owner, but rather confers a personal privilege or permissive right to use the premises, equipment, personnel, items, supplies and services that are the subject of the arrangement. However, since the terms “license,” “licensor” and “licensee” could cause the Stark Law treatment of arrangements to turn on state law, and since compliance with the requirements of the exception turns on the facts and circumstances of the arrangement and not whether the arrangement is styled as a “license,” CMS opted to finalize the new timeshare exception without the use of those terms. Accordingly, existing license agreements should be re-evaluated by legal counsel to determine continued Stark Law compliance.

The new exception for timeshare arrangements becomes effective on January 1, 2016.

New Exception for Recruitment of Non-Physician Practitioners: CMS finalized a new exception at 42 C.F.R. § 411.357(x) that allows hospitals, federally qualified health centers (“FQHCs”) and rural health clinics (“RHCs”) to provide remuneration to physicians (and physician organizations) to assist with the recruitment and subsequent employment of physician assistants, nurse practitioners, clinical nurse specialists, certified nurse midwives, clinical social workers and clinical psychologists (collectively, “non-physician practitioners” or “NPPs”) in the geographic area served by the hospital, FQHC or RHC. The NPP must become a bona fide employee of the physician receiving the remuneration, and the NPP’s services must be at least 75% primary care services or mental health services. Permissible remuneration from the hospital, FQHC or RHC to the physician is limited to 50% of the actual aggregate compensation, signing bonus and paid benefits to the NPP for a maximum of two years. A hospital, FQHC or RHC may provide assistance to the same physician (or physician organization, due to the application of the stand-in-the-shoes rules) only once every three years, unless the NPP does not remain with the physician’s practice for at least one year, in which case support that would have been provided with respect to the departed NPP can be provided with respect to a replacement NPP.

The new exception for recruitment of non-physician practitioners becomes effective on January 1, 2016.

Writing Requirement in Certain Compensation Exceptions

Many of the exceptions to the Stark Law require that the arrangement be set out “in writing.” After receiving feedback that different terminology used in reference to the writing requirement was cause for uncertainty in the provider community, the Final Rule replaces the terms “agreement” and “contract” with the term “arrangement.” This does not represent a substantive change in any legal requirements but, rather, a clarification of terminology used in the regulations.

Further, CMS clarified that parties need not reduce the key terms of an arrangement to a single written, signed agreement to satisfy the writing and signature requirements contained in the various compensation exceptions. CMS stated that its existing policy is that a collection of documents, including contemporaneous documents evidencing the course of action between the parties, may satisfy the writing requirements; the Final Rule confirms this policy. To determine compliance with the writing requirement, the relevant inquiry is whether the available contemporaneous documents would permit a reasonable person to verify compliance with the applicable exception at the time the referral is made. Similarly, CMS clarified that the signature requirement may be fulfilled through signatures on contemporaneous (as of the time of referral) writings documenting the arrangement and that the parties’ signatures do not need to be on every document constituting the arrangement.

These clarifications provide more flexibility to parties in the event there is not a signed written agreement but there are other relevant documents that substantiate an arrangement. These clarifications may be applied when assessing Stark Law compliance of any arrangement, regardless of when the parties entered into the arrangement. Notwithstanding CMS’ clarifying changes in this area, we note that it is still best practice always to have a formal written agreement.

Term Requirements

The exceptions to the Stark Law for rental of office space, rental of equipment and personal service arrangements each require that the compensation arrangement between the DHS entity and referring physician has a term of at least one year. CMS clarified that the most important factor in the analysis is how long the term of an arrangement actually lasts. While the agreement may provide for a one-year term, the determining factor is whether the arrangement in fact lasts for at least one year.  This is a facts and circumstances analysis. If the parties conclude that the one-year term has not been satisfied, then the parties may not enter into a new arrangement for the same items and services until the one-year period has lapsed. 


Currently, the exceptions for rental of office space, rental of equipment and personal service arrangements permit a “holdover” arrangement for up to six months if an arrangement of at least one year expires, the arrangement satisfies the requirements of the exception when it expires, and the arrangement continues on the same terms and conditions after its stated expiration. For purposes of this discussion, a “holdover” arises when a contract has expired by its terms but the parties have continued with the arrangement. The Final Rule amends the holdover provisions to permit indefinite holdovers if certain additional safeguards are met.

The holdover must continue on the same terms and conditions as the original arrangement so as to prevent frequent renegotiation of short term arrangements that could potentially take into account a physician’s referrals and compensation. If the parties change the original terms and conditions during the holdover, CMS considers this a new arrangement that must satisfy applicable Stark Law requirements. Because the requirement that the arrangement be set out in writing continues to apply during the holdover, there must be documentation that the arrangement did in fact continue on the same terms and conditions.

The holdover arrangement must satisfy all of the elements of the applicable exception when the arrangement expires and on an ongoing basis throughout the holdover. Thus, if rental amounts fall below fair market value during a holdover, the lease arrangement will no longer meet the fair market value requirement of the applicable exception. CMS stated that any holdover premium must satisfy the fair market value requirement through the holdover period and cautions that the failure to apply a contractually required holdover premium may cause an arrangement to fall out of compliance. While CMS acknowledges that fair market value may be expressed as a range of values, it cautioned that rental payments may no longer reflect fair market value in long-term arrangements and noted that entering into a new agreement in a timely manner following the expiration of the prior contract is the best means to ensure ongoing compliance, with a fair market value reassessment at that time if necessary.

Since the regulatory change providing for an indefinite holdover period does not apply until January 1, 2016, a holdover in process prior to this date does not receive the benefit of this change and should, therefore, not exceed six months. A new arrangement would be required at the expiration of the six-month holdover period. We note, however, that this analysis is not applicable to contracts that expressly provide specific terms for a holdover period.

Temporary Noncompliance With Signature Requirements

Many Stark Law exceptions require that an arrangement be signed by the parties.  Under the current (pre-Final Rule) regulations, an entity may, for a limited time period, submit a claim or bill and receive payment for DHS even though the signature requirement has not yet been met. The time period is 90 days if the failure to comply with the signature requirement is inadvertent and 30 days if the failure is not inadvertent.

The Final Rule simplifies the analysis and clarifies the legal standard by providing a 90-day grace period to obtain all required signatures, regardless of whether the failure to obtain the signatures was inadvertent. A DHS entity may make use of the delayed signature provision only once every three years for the same referring physician. This change becomes effective on January 1, 2016; prior to this date, the 30- and 90-day distinctions under the current regulations remain in effect.

The preamble makes clear that the temporary noncompliance exception applies only to the signature requirement; the arrangement must satisfy all other requirements of the applicable exception, including the requirement that the arrangement be set out in writing. Depending on whether a written agreement exists, CMS’ position regarding multiple writings constituting an arrangement (as discussed above) may need to be factored into the analysis. 

Retention Payments in Underserved Areas

CMS modified the regulations regarding retention payments made to physicians with practices in underserved areas to reflect the language used in the Stark Law Phase III preamble. The current regulations state that such retention payments may not exceed the lower of (a) 25% of the physician’s current income (measured over no more than a 24-month period) using a reasonable and consistent methodology that is calculated uniformly, or (b) the reasonable costs the hospital would otherwise have to expend to recruit a new physician. The modified rule provides that retention payments based on physician certification may be no more than 25% of the physician’s current salary averaged over 24 months (as opposed to no more than 24 months). This change requires that entities consider a full 24-month period (rather than a portion of the 24-month period) when calculating retention payments.

Physician-Owned Hospitals

The Affordable Care Act established new restrictions on physician-owned hospitals, including requirements regarding disclosure of physician-ownership and restrictions on increasing the percentage of physician ownership of the hospital. The Final Rule provides more specific guidance on these requirements. With respect to the disclosure requirements, the Final Rule provides a broad range of actions through which physician-owned hospitals may meet the public website and public advertising disclosure requirements. CMS indicates that these changes represent clarification of existing policy and, as such, they may be applied retroactively.

With respect to the physician ownership requirement, CMS modified the regulations to clarify that the calculations of a hospital’s physician ownership percentage (referred to as the baseline bona fide investment level, which is measured from March 23, 2010, and the bona fide investment level) will include the ownership or investment interests held by both referring and non-referring physicians. This change in the manner of calculating physician ownership will take effect January 1, 2017. This means that, as of January 1, 2017, all physician ownership of a hospital (to include both referring and non-referring physicians) should be included in calculating the baseline level of ownership as of March 23, 2010 and the current level of ownership for purposes of determining whether there has been any increase in the overall percentage of physician ownership of a hospital. Referring and non-referring physician ownership is measured in the aggregate, not separately.

Additional Information

If your organization has questions about the revisions and updates to the physician self-referral law, please contact your Kutak Rock attorney, one of the authors listed below, or a member of our National Health Care Group.