Skip to Content

Proposed New Stark Exceptions May Particularly Benefit Rural Providers

on Friday, 7 August 2015 in Health Law Alert: Erin E. Busch, Editor

On July 15, 2015, The Centers for Medicare and Medicaid Services (“CMS”) signaled its intent to implement two new exceptions to the Ethics in Patient Referral Act (“Stark”) and ease a number of other compliance burdens. These are proposed rules and rule changes; final versions will likely be published in October or November to go into effect in 2016 after CMS receives and processes comments. However, providers can reasonably anticipate that the proposed rules presage changes designed to address specific gaps in the exception structure together with specific technical burdens that CMS identifies and discusses in its commentary.

All of the proposed changes are welcome. Several appear to particularly target and benefit rural hospitals and other rural providers, while not being limited to them.

1. “Timeshare” Approach to Specialty Clinics. While not limited to the traditional rural hospital specialty clinic scenario, one proposed new exception for “timeshare arrangements” addresses the reality of how many specialty clinic services are arranged in rural communities when they are not conducted as hospital services.

The Preamble commentary starts by describing the common practice of specialists being invited to provide needed specialty services in a rural setting using hospital or physician office space on a very part-time scheduled basis. In connection with these visits, the specialists often also use equipment, personnel, services and supplies. CMS assumes many of these arrangements are not covered by the space or equipment lease exceptions or any other exception. Notably, CMS explains what providers already know – the rigid “exclusive use” requirement in the space and equipment lease exceptions can be difficult or impossible to meet. CMS concludes that an exception can be created with safeguards to prevent abuse and proceeds to propose a “license” or “timeshare” approach. CMS explains:

[a] lease transfers dominion and control of the property from the lessor to the lessee, but a license is a mere privilege to act on another’s property and does not confer a possessory interest in the property. . . . Often, a timeshare arrangement does not transfer dominion and control of the premises, equipment, personnel, items, supplies and services of the licensor to the licensee, but rather confers a privilege (or license) to use (during specified periods of time) the premises, equipment, personnel, items, supplies and services that are the subject of the license.

The proposed exception comes with conditions:

  1. The licensor must be a hospital or a physician organization. The exception expressly will not cover license arrangements between IDTFs, clinical laboratories, or other entities and visiting specialists. In fact, CMS expressly singles out IDTFs and clinical laboratories as posing a “heightened risk” of abuse.
  2. The licensed premises, equipment, etc., must be predominantly used to perform E&M services, and cannot be used, predominantly, to provide designated health services (“DHS”). CMS seeks comments on how to define “predominantly” and whether it is the right concept to use.
  3. The “licensed equipment” must be located in the licensed space where the E&M services are performed and not used to furnish DHS, other than as “incidental” to the E&M services.
  4. The “licensed equipment” may not include advanced imaging equipment, radiation therapy equipment, or clinical or pathology laboratory equipment (other than equipment used to perform CLIA-waived laboratory tests). The concern here is identical to CMS’s reason for singling out IDTFs and clinical laboratories — CMS is concerned if the arrangement serves to “lock in” referrals by visiting specialists to licensors by virtue of proximity.
  5.  The arrangement cannot be conditioned on referral of patients to the licensor.
  6. Compensation contains the standard set in advance, fair market value and volume or value requirement that are found in lease arrangements. Specifically, it carries forward the prohibition against basing compensation on a percentage of revenue generated or on a per unit of service basis. The proposed exception will only permit basing fees on an hourly, daily or other time-based formula.
  7. The proposed exception also carries forward the commercial reasonableness standard and the prohibition against violating anti-kickback.
  8. Finally, the exception contains the standard requirement that there must be a signed written agreement specifying “the premises, equipment, personnel, items, supplies, and services covered by the arrangement.”

This will be a welcome exception, but there will be a call to action once it is published in final form. Specifically, providers with specialty clinic arrangements described by CMS will want to strongly consider converting from their current lease format to the timeshare format, because it will be more flexible, reduce the documentation burden and be more certain of fitting an exception. The new exception would not affect the alternate specialty clinic model where the clinic is conducted by the hospital, which bills the technical component while the physician conducts and bills for the professional component.

2. Recruitment Assistance For Mid-Levels Employed by Physicians. The second proposed new exception permits hospitals, Federally Qualified Health Centers (“FQHCs”) and Rural Health Clinics (“RHCs”) to pay recruiting incentives to support recruitment of mid-levels to join physician practices and provide primary care services. The proposed exception needs some context.

As a starting point, recall that the current physician recruitment exception is an outlier — it does not require a traditional quid pro quo of equivalent value back to the hospital or FQHC that pays it. Its purpose is to facilitate recruitment of physicians to serve defined communities, rather than to provide services to the hospital or FQHC. Further, it is limited to recruiting physicians. CMS has gone out of its way to state that the current recruitment exception is not intended to confer a benefit on the physician practice that recruits the physician, but only to support the recruitment of a new physician to the community. Hence, in recruitment scenarios where a recruited physician will join a physician practice, the benefits must flow to the recruit, not the physician practice.

The proposed new exception is built on a somewhat different foundation. Like the physician recruitment exception, it would not require a quid pro quo in the form of service to the hospital, FQHC or RHC. However, unlike the physician recruitment exception, it views the incentives as creating a direct compensation arrangement with the physician or physician practice and proposes a new, albeit limited, exception to protect the parties. CMS believes that with safeguards incorporated as conditions to the proposed exception, the risk of abuse in minimal, and an exception to address the primary care shortage is needed.

To make certain the proposed exception would serve its limited purpose, it comes with the following proposed conditions:

  1. The proposed exception will apply only to remuneration paid by a hospital, FQHC or RHC.
  2. The mid-level must be recruited by the physician organization to provide patient care services. The exception would not be available, for example, if a group of internists sought to recruit a nurse practitioner to monitor and oversee research the group conducts.
  3. The focus is on primary care services. Hence eligible mid-levels are limited to physician assistants, nurse practitioners, certified nurse specialists and certified nurse midwives. The comments specifically note CRNAs are not covered, but solicits comments on this point.
  4. Continuing with the primary care theme, the mid-level can furnish “only primary care services to patients of the physician’s practice.” In the Preamble, CMS states it considers “general family practice, general internal medicine, pediatrics, geriatrics, and obstetrics and gynecology to be primary care services.” Thus, the exception would not extend to a physician hiring a mid-level to provide “specialty care services, such as cardiology or surgical services to the physician practice’s patients.” CMS is also seeking comments on how to define the requirement of how much time the mid-level must spend providing primary care services. It appears this will end up being either 75 percent or 90 percent, based on current discussion.
  5. The arrangement must be signed by the hospital, FQHCor RHC and by both the physician or physician organization and the recruited mid-level.
  6. The arrangement cannot be conditioned on referrals by the midlevel or the physician or physician practice to the hospital, FQHC or RHC.
  7. The recruit must become a W2 employee of the physician or physician practice. CMS seeks comments on whether this should be expanded to include independent contractor relationships.
  8. CMS believes the recruiting physician or physician practice should have an investment as evidence of commitment to the primary care purposes of the arrangement. Accordingly, the amount of incentive cannot exceed the lower of (i) 50 percent of the actual salary, signing bonus and benefits paid to the mid-level during the first two years of employment, or (ii) an amount calculated by subtracting all receipts attributable to services furnished by the non-physician from the actual salary, signing bonus and benefits paid to the mid-level during the first two years of employment. This is intended to prevent a “windfall” to the physician or physician practice and assure the midlevel is the “true beneficiary” of the payments.
  9. Amount paid to the physician or physician practice cannot be adjusted to account for any “tax consequences” to the physician or physician organization that receives the payment. Also, in calculating benefits, only general benefits offered to similarly situated employees are included. Finally, the proposed exception will not require that the salary and benefits be set in advance. This will present drafting issues for the agreement, as the hospital, FQHC or RHC will need to know what it is committing and the parties will need to steer clear of any modifications that could appear to relate to volume or value of referrals. The amount of incentive cannot be based on actual or anticipated volume or value of referrals or other business generated between the recruit, the physician or the physician practice and the hospital, FQHC or RHC.
  10. In an approach that differs from the physician recruitment exception, the salary, signing bonus and benefits paid to the non-physician practitioner must not exceed “fair market value for the patient care services furnished” by the non-physician practitioner to patients of the physician practice. It is not clear how this will be applied. We believe that if the mid-level provides 80 percent of his or her time furnishing patient care services to patients of the practice, the hospital, FQHC, or RHC would measure fair market value against that 80 percent of the mid-level’s time, rather than the actual FTE for employment purposes. This could add another element to contracts; potentially requiring physician practices to certify or represent the percent of time to be devoted to patient care services, and possibly regular verification.
  11. The mid-level cannot have practiced in the geographic area served by the hospital, FQHC or RHC have been employed or otherwise engaged to provide patient care services by a physician or physician practice that has a medical practice site located in the geographic area served by the hospital, FQHC or RHC, during the three years prior to the arrangement.
  12. Curiously, the proposed rule does not require that the recruited mid-level be recruited to or practice in the geographic area served by the hospital, FQHC or RHC. This seems to be an omission. In comments, for example, CMC states it is considering whether to condition the exception on documentation demonstrating a need for the primary care services in the geographic area served by the hospital, FQHC, or RHC. This may be corrected or clarified in the final rule.
  13. Like the physician recruitment exception, the physician or physician practice may not impose practice restrictions that unreasonably restrict the mid-level’s ability to provide patient care services in the geographic area served by the hospital, FQHC, or RHC.
  14. Finally, records of actual amounts paid to the physician or physician or by the physician or physician practice to he mid-level must be maintained for at least six years and furnished to the Secretary upon request.

The proposed exception will not be needed in settings where the hospital, FQHC or RHC employs the physicians and the mid-level. The employment exception will work in those cases. However, in communities where physicians continue to practice independently, the proposed exception could prove very useful in supporting recruitment of additional primary care providers.

3. Other Proposed Changes. There are numerous other changes, mostly intended to soften the technical regulatory burden of Stark, in areas where CMS’s experience in handling self-disclosure, advisory opinions, and in dialog with providers has concluded there is little risk of abuse. This article is not intended to cover the other technical corrections. However, the following proposed changes bear mention.

  1. Holdover Arrangements. A high percentage of self-disclosures and a high percentage of problems identified by providers result from contracts and leases being performed after expiration of their stated term. The almost universal scenario is that parties simply miss the expiration date, but continue to perform the contract or lease as written. CMS is proposing to amend the holdover provision to permit indefinite holdovers under the same terms and conditions as the original arrangement, so long as the arrangement continues to meet fair market value requirements. This is a very important and, from an enforcement perspective, benign change.
  2. Remuneration, or Rather, What is Not Remuneration, is Clarified. CMS repudiates the Third Circuit’s holding in the Kosenske case in which the Third Circuit concluded that when a hospital opened a new pain center and a physician who was contracted to provide other services was permitted to practice there and bill for his services, the hospital’s furnishing of space, equipment, personnel, services and supplies (i.e., the technical component of a hospital’s outpatient service) constituted remuneration to the physician. Using its “who benefits” analysis, CMS correctly states that the hospital’s technical component benefits the patient – its patient – not the physician who provides services there. Hence the commentary provides confirmation that a hospital providing and billing the technical component of a hospital outpatient service is not creating a compensation arrangement with the physician who practices there and separately bill for services. This is confirmation of position, not a proposed change.

CMS is seeking comment, so changes from the proposed rules are inevitable. Nevertheless, what CMS has proposed appears to be based on the realistic premise that additional exceptions and a lessening of several of the technical (sometimes nonsensical) burdens of Stark are needed.


Alex M. “Kelly” Clarke


1.There are two common models for conducting specialty clinics. In the first, a visiting specialist pays rent and/or fees for space, equipment, personnel, etc., and bills for the entire service as an extension of his or her office practice. In the second, the clinic is conducted as a hospital outpatient service for registered outpatients and the hospital billing the technical component and the physician bills the professional component. The proposed timeshare exception only addresses the first model.

2. 80 Fed. Reg. 41,686, 41,957 (July 15, 2015).

3. 80 Fed. Reg. at 41911 (July 15, 2015).

4. United States ex rel. Kosenske v. Carlisle HFME, 554 F.3d 88 (3rd Cir. 2009).

1700 Farnam Street | Suite 1500 | Omaha, NE 68102 | 402.344.0500

Law Firm Website Design