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New Stark & Anti-Kickback Rules: Changes to the Big 3 Under Stark — Fair Market Value, Commercial Reasonableness, and Tie to Referrals

on Tuesday, 22 December 2020 in Health Law Advisory: Zachary J. Buxton, Editor

On December 2, 2020, CMS finally issued the much anticipated additions and modifications to the Stark law and the federal Anti-Kickback Statute (AKS).  The changes came over one year following the publication of proposed rules and, with a few exceptions, are effective as of January 19, 2021.  This is one of a series of articles we are preparing on the impact of these new rules on healthcare providers.

Under Stark, most transactions must be evaluated against standards that require the amounts paid be consistent with fair market value, the arrangement be commercially reasonable, and the amounts paid not be based on the volume or value of referrals or other business generated for a party.  In the new Stark rules CMS (i) revised the definition of “fair market value”, (ii) included a formal definition of “commercially reasonable” and (iii) created a bright-line test for determining whether a compensation arrangement “takes into account the volume or value of referrals or other business generated”.  CMS also decoupled these concepts from one another, meaning that each issue should be evaluated on its own.  Some of these changes may not move the needle much in the current valuation landscape as they apply to physician compensation arrangements.  But, nonetheless, CMS’s commentary in preamble still remains valuable.  

Fair Market Value

CMS revised the definition of “fair market value” to explicitly provide a general definition and breakout a separate, more detailed standard in the case of equipment and office rental arrangements.  The definition makes reference to “general market value”, which also now includes separate standards for asset acquisitions, compensation arrangements and the rental of equipment and space.  While these revised definitions do not result in much substantive change, CMS’s commentary as to fair market value provides important insight:

  • While the concept of fair market value has been decoupled from the volume or value of referrals, “general market value” should be based solely on the economics of the proposed transaction and should not include other considerations, such as referrals and other arrangements between the parties.
  • Fair market value may not always align with published surveys.
    • In certain circumstances compensation at median may not be consistent with fair market value while compensation above the 75th percentile may be consistent with fair market value.
    • Extenuating circumstances may justify compensation above certain thresholds in published surveys.
  • CMS is willing to accept any reasonable method that provides evidence that compensation is comparable to what is ordinarily paid for an item or service in the location at issue by parties that are not in a position to refer to one another.

The changes are also notable for what they didn’t do.  There had been some thought that CMS might establish safe harbors or rebuttable presumptions with respect to physician compensation so that compensation within specified survey data ranges could be presumed to be at fair market value.  CMS specifically declined to add any such safe harbor or rebuttable presumption.

Commercially Reasonable

The term “commercially reasonable” or “commercial reasonableness” has been an important but murky legal concept in the Stark law given its presence in many of the regulatory exceptions.  However, as is well documented, prior to these final rules the term has never been formally defined by CMS and has only been subject of a few minor comments in preamble from long ago.  

Over the years, and after a number of False Claims Act qui tam suits, concern grew as to whether arrangements that may not result in a profit for one party are ever “commercially reasonable”.  In what is likely the most important clarification brought about by the inclusion of a formal definition of “commercially reasonable”, CMS put an end to the debate.  CMS emphatically stated “[a]n arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.”  This does not serve as a blanket statement that all arrangements that lose money will be commercially reasonable and that losses would be permitted in every case.  

The statement regarding profitability is more the result of the rest of the new definition, which clarifies that the business purposes of the parties are the ultimate factor.  Commercial reasonableness is not a question of value; it is a question of whether the arrangement furthers the parties’ business goals even if no referrals are made between the parties.  Even when a party loses money on an arrangement, there may very well be other legitimate business purposes behind the arrangement, such as furthering the entity’s charitable purposes or increasing access to care in a community.  Profitability is one of many factors that should be considered.

We do note, however, that while the formal definition of “commercially reasonable” provides greater certainty when evaluating arrangements, especially in the area related to the economic consequences of an arrangement, the process of and standards for evaluating an arrangement for commercial reasonableness will likely not vary substantively.  Most health care lawyers have historically been encouraging management to take into account factors such as the entity’s charitable purposes and access to care and community need, among other factors, to appropriately document and substantiate commercial reasonableness.  Likewise, “commercial reasonableness” will always remain a facts and circumstances test that will continue to rely in large part on management’s and the board’s best business case for the arrangement.

Volume and Value Standard

With the final rules, CMS provides bright-line tests for determining whether a compensation arrangement will vary with the volume or value of referrals or other business generated by a party.  Essentially, the deciding point in any compensation arrangement will be whether the compensation to (or from) the physician includes referrals as a variable in the formula and results in an increase (or decrease) in compensation in a manner that positively (or negatively) correlates with referrals.  In other words, in compensation arrangements where a physician receives compensation from an entity, the compensation will only “take into account” the volume or value of referrals or other business generated if the compensation increases for each referral to the entity (a “positive correlation”).  Conversely, in compensation arrangements where a physician pays compensation to an entity (for example, rent paid to a hospital), there must be a “negative correlation”, that is the rent paid by the physician must go down as his/her referrals or other business generated for the hospital go up.

Finally, CMS reaffirmed that physicians who are compensated for their personally performed professional services, such as compensation based on wRVUs, with not take into account the volume or value of referrals or other business generated even though wRVUs are often tied to designated health services.  

Overall, this new special rule regarding the volume or value standard likely greatly reduces the number of compensation arrangements that could otherwise be thought to “vary with the volume or value of referrals”.  It also is likely to reduce the number of arrangements that will qualify as “indirect compensation arrangements”.  

Finally, we note that CMS declined to adopt a portion of its proposed rule setting forth certain instances where it would consider a fixed compensation arrangement to take into account the volume or value of referrals.  In its proposed rule, CMS believed that terminating a fixed compensation arrangement because certain levels of referrals were not reached would also violate the standard.  Instead, CMS deferred to the expanded special rule related to directed referrals as sufficient protection against fraud and abuse in fixed fee compensation arrangements.  

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