January 1st Stark Law Deadline Exposes Group Medical Practices to Significant Penalties
All medical practices that bill Medicare for services rendered must comply with the Stark Law regulations in order to be able to bill for “Designated Health Services” (DHS)
If the practice does not follow the rules for how the net income of DHS are handled then the $15,000 per item billed penalty can apply, not to mention possible exclusion from the Medicare program, which could then trigger exclusion from all managed care plans and cause a doctor to only be able to work in prisons or on cruise boats, or as a cash-only walk-in clinic. These things happen, so we hope that physician groups and their advisors will take these rules seriously, because they are changing significantly on January 1st, as described below.
Failure to follow these rules may also cause non-competition covenants to become unenforceable because the practice will be deemed to have “unclean hands” if it is not following the billing rules.
Health care lawyer Lester Perling and I will be discussing these changes and more in a free Webinar on January 11 at 4 pm. Those who e-mail firstname.lastname@example.org and put “Stark” in the subject line will receive free admission and a free replay. Those who mention “Stark Naked” in the email will also receive a recent, more extensive white paper.
The Stark Law was enacted in 1989 to prevent doctors and medical practices from receiving income from making referrals under many circumstances.
A paramount part of the law prevents doctors from referring patients for certain services within their own medical practices unless the practice is compliant with a number of rules.
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The primary rule that has been impacted by changes enacted in 2021 prevents doctors from referring patients within their own practice for DHS unless the net income from theses services are distributed in certain permitted ways which do not take into account the volume or value of such referrals.
The new regulations will apply to any “DHS” that constitutes 5% or more of the revenues of the practice and more than 5% of the income of any one doctor in the practice. This new 5% threshold relieves practices from having to worry so much about how they distribute income from “DHS” that is below the 5% thresholds.
Almost all of the other changes will require group practices to change how they handle DHS net income, and are stricter than the prior rules.
The big challenge is that the distribution of income from DHS has to be based upon rules that are put into place and recognized by the practice before the period of time to which they are to apply. This means that thousands of medical practices need to update their Operating Agreements and Employment Agreements before January 1st in order to avoid penalties of up to $15,000 for each and every item of DHS categories that are ordered for Medicare patients.
“Designated Health Services” consist of several categories of services that doctors are prohibited from receiving payment from if such payment takes into account the volume or value of the doctor’s referrals. The DHS consists of the following:
A. Clinical laboratory services
B. Physical therapy, occupational therapy, and outpatient speech-language pathology services
C. Radiology and certain other imaging services
D. Durable medical equipment and supplies
E. Parenteral and enteral nutrients, equipment and supplies
F. Prosthetics, orthotics, and prosthetic devices
G. Home health services
H. Outpatient prescription drugs
Please note that there is another exception besides the 5% thresholds which would be for incident to services. An “incident to” service is a service provided under the direct supervision of a doctor, and is further discussed below under “Change # 5.”
The new rule will apparently apply to revenue and net income from Designated Health Services that are performed after 2021. For example, in January of 2022 practices will receive payment for many 2021 DHS, which may be distributed based upon the prior rules, while revenues received from 2022 DHS must be distributed under the new rules. It is somewhat difficult to draft documents and administer monies based upon the year that services were rendered, but some practices may elect to do so, while others will apply the new rules to all 2022 revenues, including those derived from 2021 services.
Here are the top five changes that medical practices and their advisors need to be aware of:
Change #1: Doctor Compensation Can No Longer Come from Gross Revenues for DHS If Any Moneys Will Be Allocated to Doctors Other than Solely in Proportion to Ownership.
In this case, “in proportion to ownership” means that DHS profits would ultimately be paid out as dividends to owners, not appearing in the W-2 or 1099 income of the owner-doctor in proportion to their ownership.
Under the new rules, group practices must calculate net income from DHS income as opposed to the previous permissive allocation from practice revenue. For example, pre-2022 DHS income could have been allocated 10% from physical therapy pro rata to the professional services income of each doctor and 90% based upon percentage of ownership. On January 1st, this is strictly prohibited.
While the regulations call it “overall profits”, we are referring to it as “net income” to help avoid confusion for laymen readers. “Overall profits”, as defined in the regulations, are those “profits derived from all the [DHS] of any component of the group….”
The regulation directly states that profits must “be divided in a reasonable and verifiable manner”, and there is no further indication of how medical practices are expected to make these calculations. Group practices must aggregate DHS income, and reduce the income by accrued expenses of providing the service to get the net income amount.
Standard practice is for groups to prospectively determine their compensation arrangements, usually going into effect at the beginning of a calendar year. This comment from many stakeholders led to the later effective date of the rules regulating group practices.
This may be good news for practices that would like to make net income calculations simpler than what might otherwise be. On the other hand, with the threats of significant penalties, many practices will wonder if it is even worth the expense of keeping track of net income when allocation to doctors is not required.
Change #2: Doctors May Not Be Compensated by Volume or Value of DHS Referrals.
The common practice of dividing income or revenue from one or more DHS categories in different manners is now prohibited under the new rules. Each doctor must now receive the same portion of the aggregated DHS net income as calculated prospectively to the allocation. The formulas used to allocate net income must not be determined in any manner that is directly or indirectly related to the volume or value of the doctor’s referrals, but may be somewhat based upon the doctor’s overall volume within the practice (in proportion to professional service revenue, the number of patients seen, or predetermined percentages not based upon past referral percentages).
Practices with 9 or fewer doctors must allocate all DHS net income by the same formula. When a practice has 10 or more doctors, the practice may organize the doctors into “pods” of at least 5 doctors each and may use different allocation formulas for the DHS net income it wishes to distribute.
For example, a 9-doctor multi-specialty practice must allocate the predetermined 75% of DHS overall profit equally to the doctors. A 10-doctor multi-specialty practice may allocate the net income from DHS pro rata to professional services for one pod of doctors, while the remaining doctor pod receives DHS net income pro rata to patient visits.
Change #3: Medicaid and Other Federally Funded Health Care Payors are Exempt from Stark Law Regulation.
Prior to the final rule being issued, many conservative health care lawyers assumed that the Stark Law applied to all federal health care payors, in addition to Medicare. Medicaid was specifically named in the old version of the regulations, but thankfully has since been dropped, and therefore the interpretation of the aforementioned lawyers may be outdated. The exclusion of Medicaid likely also excludes other federal payors such as Medicare HMOs and TriCare from regulation.
This shift likely will have a significant impact on medical practices in states that do not regulate compensation for DHS profits. For example, since Florida regulates most DHS, but x-ray is excluded from Florida’s Patient Self-Referral Act list of DHS, Florida’s non-Medicare beneficiary revenue or profit from x-ray services may be allocated directly to Florida doctors, if healthcare counsel and advisors are comfortable with it. There is a possibility that this shift may slightly offset the additional expenses that practices may incur in performing the previously mentioned new allocation calculation rules.
Change #4: Shifts Toward Value-Based Arrangements Create New Stark Law Exemptions.
The circumstances of these exemptions do not appear to be applicable to most medical practices, but may be something to pay attention to once the smoke clears on when these exemptions may properly be taken. Generally, the newly defined terms and regulations on this topic are complex and confusing.
It seems that these exemptions will allow medical facilities to engage in contractual cost-and-quality assurance arrangements where direct and indirect profit sharing is permitted, regardless of whether the services provided are contained within the list of DHS.
Value-based arrangements are based upon participants in the arrangement striving to achieve a value-based purpose, in the interest of a previously designated target population. The following excerpt from the preamble to the final rule best explains a value-based arrangement:
For example, if the value-based purpose of the enterprise is to coordinate and manage the care of patients who undergo lower extremity joint replacement procedures, a value-based arrangement might require routine post-discharge meetings between a hospital and the physician primarily responsible for the care of the patient following discharge from the hospital. The value-based activity—that is, the physician’s participation in the post-discharge meetings—would be reasonably designed to achieve the enterprise’s value-based purpose. In contrast, if the value-based purpose of the enterprise is to reduce the costs to or growth in expenditures of payors while improving or maintaining the quality of care for the target patient population, providing patient care services (the purported value-based activity) without monitoring their utilization would not appear to be reasonably designed to achieve that purpose.
The lack of explicit guidance from CMS is explained by their intention for doctor groups to remain innovative in these types of arrangements, but may leave many confused as to how these arrangements may properly be utilized.
Change # 5: CMS Provides Better Guidance on “Incident To” Services.
A doctor may receive compensation directly related to the volume or value of DHS referrals for “incident to” services. This compensation comes in the form of a productivity bonus. Productivity bonuses are not new to this rule promulgation, but are clarified based on deeming provisions and dependent on the doctor’s personal productivity.
The regulations recognize that there are certain circumstances where a doctor must be involved in the supervision of a procedure, test or other service performed by a nurse or other practice contractor or employee, triggering permissive compensation to the doctor.
For an example, incident to services arise when a doctor is supervising the administration of a pharmaceutical by a nurse, or in an area that a Home Health Agency (HHA) is unavailable to provide care for a homebound patient and an employee of the practice provides certain in-home medical care.
For a redline version of the Stark Law updates, see this document from the ABA. (https://www.thehealthlawpartners.com/files/aba_stark_redline_publication_4845-7203-4473_v.10.pdf). For the entire preamble and final rule issued by CMS, click here. (https://www.govinfo.gov/content/pkg/FR-2020-12-02/pdf/2020-26140.pdf).
Please note that this article is our interpretation of a significant number of pages of guidance and may not be absolutely correct. Please confer with an experienced and knowledgeable health care attorney prior to making any decisions based upon the information set forth herein. We encourage you to follow along for any future changes to our interpretations.