Stark Law: Clarification of Key Terms

On Jan. 19, 2021, the two recent final rules issued by the Department of Health and Human Services Office of Inspector General (OIG) and the Centers for Medicare and Medicaid Services (CMS) regarding changes to the Physician-Self Referral Law (Stark Law) and the Anti-Kickback Statute (AKS) regulations (respectively the OIG Final Rule and the CMS Rule, collectively the Final Rules) will become effective.[1] This alert is a part of the Dinsmore Health Care practice group’s ongoing summary of the Final Rules. The other alerts on this issue are located in our Stark and Anti-Kickback Hub, which can be found here.

The CMS Final Rule implements changes to the Stark Law and offers several clarifying provisions related to key Stark Law terms and concepts. Included in the changes are definitions and special rules related to: (1) commercial reasonableness, (2) the volume or value standard and other business generated standard, and (3) fair market value and general market value.

1. Commercial Reasonableness

The CMS Final Rule implements the CMS’s proposal to clarify the definition of “commercial reasonableness” under the Stark Law.[1] Under the CMS Final Rule, “‘commercially reasonable’ means that the particular arrangement furthers a legitimate business purpose of the parties to the arrangement and is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty.”[2] This definition does not impose a requirement of profitability for one or more of the parties.[3] Simply put, the arrangement must logically accomplish the parties’ goals.[4] CMS opined that qualifying value-based arrangements, which seek to reduce cost and improve quality, are likely to meet this definition.[5]  CMS further asserted the requirement ensures value-based arrangements are structured in a manner that further only legitimate business purposes.[6] Thus, arrangements which are unnecessarily duplicative or only legitimate on their face do not meet the commercial reasonableness standard.[7] An example provided of an unnecessarily duplicative arrangement was hiring two program directors without valid proof of need.[8] 

2. Volume or Value Standard and the Other Business Generated Standard

The “volume or value standard” and the “other business generated standard” refer to exceptions under the Stark Law prohibiting compensation on the basis of volume or value of referrals by a physician who is a party to the agreement, and on account of resulting business between the parties.[9] Before now, these two standards had not been codified regulations.[10]  However, the CMS Final Rule now establishes special rules for the aforementioned standards that will supersede previous guidance on the issues.[11] 

In its proposed rule which was released on Oct. 17, 2019, CMS established a goal of creating an objective test for the “volume and value” and “other business generated” standards.[12] Requests from commenters for clear guidelines led CMS to develop a bright-line rule.[13] As CMS stated in previous guidelines on the topic, compensation structures that do not directly account for referral volume or value do not violate the standard.[14] 

Under the new test, if an entity’s compensation to a physician (or his or her immediate family member) includes, as a variable, referrals, and if an increase in referrals to the entity positively correlates with the physician’s pay, the compensation is prohibited because it takes into account the volume or value of referrals.[15] In other words, if increased referrals to the entity directly results in higher pay for the physician, the compensation scheme considers volume or value of the referrals.[16] 

Some commenters requested clarification on the impact of the new test on fixed-rate and fixed-rate tiered compensation.[17] While CMS initially proposed special rules considering circumstances under which fixed-rate compensation would be deemed to have taken into account volume or value of referrals, it did not finalize these proposals, emphasizing only the standard set forth above.[18] CMS explained its concern was specifically with preventing “if X, then Y” correlations between compensation and referrals.[19]    

While the rule will be interpreted in the same manner as other Stark Law definitions, there are several instances in which it does not apply. Exceptions include certain medical staff incidental benefits under § 411.357(m), professional courtesies under § 411.357(s), community-wide health information systems under § 411.357(u), electronic prescribing services and electronic health records under § 411.357(v) and (w), as well as the new Stark Law exceptions pertaining to cybersecurity.[20] These exceptions contain unique “volume or value” requirements, rendering the new bright-line rule unnecessary.[21] CMS determined the best way to eliminate any future confusion was to explicitly indicate when the new test is inapplicable.[22]  

3. Fair Market Value and General Market Value

In addition to prohibiting compensation on the basis of volume or value of referrals, the Stark Law provides that certain compensation must be consistent with fair market value for items or services provided.[23] CMS clarified these are independent standards and thus, finalized its proposal to revise the definitions of “fair market value” and “general market value” to remove language related to the volume or value standard.[24] The Stark Law’s new definition of “fair market value” has three components for its general application and applications to rental of equipment and office space, found below.[25]

General Application: Fair market value is generally defined as “the value in an arm’s length transaction, consistent with the general market value of the transaction.”[26]

Rental of Equipment: In relation to the rental of equipment, fair market value is “the value in an arm's-length transaction of rental property for general commercial purposes (not taking into account its intended use), consistent with the general market value of the subject transaction.”[27]

Rental of Office Space: Finally, in relation to rental of office space, fair market value is “the value in an arm’s length transaction of rental property for general commercial purposes (not taking into account its intended use), without adjustment to reflect the additional value the prospective lessee or lessor would attribute to the proximity or convenience to the lessor where the lessor is a potential source of patient referrals to the lessee, and consistent with the general market value of the subject transaction.”[28]

CMS also finalized a separate definition for “general market value,” which was historically included in its definition of fair market value. The new definition considers the term as specifically related to asset acquisition, compensation for services, and rental of equipment or office space.[29] When applying this definition, only the economics of the relevant transaction should be considered, and not any external business relationships the parties have with each other.[30]

Purchase of an Asset: General market value is now defined as “the price that an asset would bring on the date of acquisition of the asset as the result of bona fide bargaining between a well-informed buyer and seller that are not otherwise in a position to generate business for each other.”[31] 

Compensation for Services: As related to compensation for services, general market value is “the compensation that would be paid at the time the parties enter into the service arrangement as the result of bona fide bargaining between well-informed parties that are not otherwise in a position to generate business for each other.”[32]

Rental of Equipment or Office Space: As pertaining to rental of equipment or office space, general market value is “the compensation that would be paid at the time the parties enter into the service arrangement as the result of bona fide bargaining between well-informed parties that are not otherwise in a position to generate business for each other.”[33]

CMS also commented on its view of the differentiation between the concepts of fair vs. general market value.[34] Fair market value generally pertains to the value that would be hypothetically given to assets or services were they to be subject to a typical transaction.[35] General market value is applicable under circumstances where actual transactions with specific parties are set to occur.[36] In response to comments, CMS declined to specify specific valuation standards, but clarified its intent to accept any commercially reasonable methods for value determination, as appropriately related to the nature of the transaction.[37] 

Key Takeaways

The CMS Final Rule clarifies many of the Stark Law’s key terms. While commercial reasonableness requires an arrangement to logically accomplish the parties’ goals, the test is highly dependent on a variety of facts and circumstances.  Parties should take into account characteristics such as the type of services being provided, the scope of the services, and the particular specialty. Alternatively, the CMS Final Rule takes a mathematical approach to the definitions of the “volume or value standard” and the “other business generated standard.” The test prohibits “X then Y” situations where increased referrals result in increased compensation.  Finally, clarifications regarding the definitional terms “fair market value” and “general market value” seek to ease confusion under a variety of circumstances in which they are pertinent, including asset purchases, rental of office space and equipment, and compensation for services. 

Please contact a member of Dinsmore’s Health Care practice group if you have any questions about these significant developments.