CMS Finalizes Stark Law Changes in CY 2016 Medicare Physician Fee Schedule Final Rule

Healthcare Alert

Client Alert

This past July, on the heels of a decision in which a judge for the U.S. Court of Appeals for the Fourth Circuit characterized the federal physician self-referral prohibition commonly known as the “Stark Law” as, “even for well-intentioned health care providers, […] a booby trap rigged with strict liability and potentially ruinous exposure,”1 the Centers for Medicare and Medicaid Services (CMS) issued a proposed rule that, in many ways, signaled the agency’s intent to ease the burden of complying with the law. On October 30, 2015, CMS unveiled its final changes in this iteration of Stark Law rulemaking as part of the CY 2016 Medicare Physician Fee Schedule final rule (the “Final Rule”).2

With the stated goal of accommodating delivery and payment system reform, reducing burden, and facilitating compliance, the Final Rule makes several significant changes, including new exceptions for the recruitment of nonphysician practitioners and timeshare arrangements, important clarifications for physician-owned hospitals, and revisions to a handful of procedural requirements that are common to several oft-used Stark Law exceptions. Certain of the commentary in the Final Rule reflects current CMS policy and is, therefore, already in effect. The regulatory changes will become effective January 1, 2016, with the exception of the changes related to determining the level of physician ownership in physician-owned hospitals, which will take effect January 1, 2017.

Healthcare providers and other industry participants should study the Final Rule carefully, considering not only its effects on physician arrangements going forward, but also its implications for existing arrangements, including matters that have been voluntarily disclosed to CMS.


Nonphysician Practitioner Compensation Assistance

The Final Rule includes a new exception under which hospitals, federally qualified health centers (FQHCs), and rural health clinics (RHCs) may provide remuneration to a physician to aid the physician in employing or contracting with nonphysician providers (NPPs) in the geographic service area of the hospital, FQHC, or RHC. The Stark Law currently contains an exception permitting a hospital, FQHC, or RHC to pay a physician to relocate to the facility’s geographic service area. At the time that exception was created, however, CMS declined to extend it to similar payments for NPPs. Since then, demand for primary care services has increased dramatically, and changes in care delivery models have brought more NPPs into roles providing primary care services. In light of this shift, CMS revised its policy.

CMS modeled its proposed rule on the existing physician recruitment exception, and finalized the rule with only minor modifications. The new NPP compensation assistance exception has several limitations and requirements. Only six types of NPPs are included under the exception: physician assistants, nurse practitioners, clinical nurse specialists, certified nurse midwives, and, at the urging of several commenters, clinical social workers and clinical psychologists. Substantially all (i.e., at least 75 percent) of the services the NPP furnishes to the physician’s patients must be primary care and mental health services. Moreover, the exception applies only where there is a compensation arrangement directly between the physician and the NPP for employment or for contracted services; an arrangement involving an NPP contracted through a staffing agency does not qualify. The NPP’s aggregate salary, signing bonus, and benefits must be consistent with fair market value, and the physician may not impose practice restrictions on the NPP that unreasonably restrict his or her ability to provide patient care services within the geographic area serviced by the hospital, FQHC, or RHC.

In addition to its restrictions on the agreement between the physician and the NPP, the exception imposes several requirements on the remuneration between the hospital, FQHC, or RHC and the physician. To avoid such payments becoming an ongoing or permanent arrangement, the Final Rule expressly limits the remuneration under the exception to 50 percent of the actual aggregate compensation, signing bonus, and benefits paid to the NPP. The rule also dictates that the hospital, FQHC, or RHC may not provide assistance for longer than “the first [two] consecutive years” the NPP is employed by the physician. A hospital, FQHC, or RHC may not provide such assistance to the same physician more than once every three years (subject to a limited exception where the NPP leaves before a full year of employment).

To prevent “gaming” or “cycling” of NPPs through different physician practices in the same geographic area, the exception will not apply if the NPP has practiced in the geographic service area within one year prior to becoming employed by the physician (or the organization in whose shoes the physician stands). Nor may a hospital, FQHC, or RHC provide remuneration if the NPP was employed or otherwise engaged by a physician with a medical office in the geographic service area within one year prior to becoming employed or contracted—even if the NPP did not provide patient care services in that particular office.

The arrangement between the hospital, FQHC, or RHC and physician must meet several familiar Stark Law requirements. The arrangement must be in writing and signed by the hospital (or FQHC or RHC), physician, and NPP, and may not be conditioned on the physician or NPP’s referral of patients to the hospital, FQHC, or RHC. The remuneration may not be determined (directly or indirectly) in a manner that takes into account the volume or value of any actual or anticipated referrals to the hospital, FQHC, or RHC, or any other business generated between the parties. CMS notes that the definition of “referral” under the law will apply to NPPs for the purpose of this provision since the existing definition applies only to physicians. Records regarding the arrangement must be maintained for at least six years and must be available to the government on request. Finally, the arrangement must comply with all existing federal and state laws, including the Stark Law and the federal Anti-Kickback Statute.

Timeshare Arrangements

The Final Rule includes a new exception for “timeshare” arrangements in which a visiting physician pays a hospital or physician organization for the right to use office space—including furnishings, equipment, and personnel—on an exclusive, but periodic, basis. These arrangements are common in rural or underserved areas where demand for a given specialty cannot sustain a full-time practice. CMS emphasizes that such an arrangement is distinct from those currently covered by exceptions for leases of office space or equipment or payments made by a physician as compensation for items or services furnished at fair market value. The Final Rule leaves these and other exceptions intact, and parties may continue to choose among applicable exceptions to protect their agreements.

CMS refers to the parties to a timeshare arrangement as “licensor” and “licensee” to highlight the reason this exception differs from that for leases of office space and equipment. CMS clarifies that the parties need not use these terms, but that the essential nature of the property interest conveyed determines whether the parties can satisfy the requirements of the exception. A license is a mere privilege to act on another’s property--it does not transfer ownership or control of the property to the licensee. By contrast, a lease transfers dominion and control of the property from the lessor to the lessee, giving the lessee an exclusive “right against the world” (including a right against the lessor) with respect to the leased property. The exception protects only those arrangements that grant a right or permission to use the premises, equipment, personnel, etc. of another person or entity without establishing a possessory leasehold interest.

Beyond this threshold requirement, a timeshare arrangement must meet several additional criteria to qualify for the new exception. The arrangement must be in writing, signed by the parties, and specify the relevant premises, equipment, personnel, items, supplies, and services covered. Regardless of which party grants or receives use of the relevant office space, equipment, and personnel, the arrangement must be between a physician (or physician organization) and a hospital or physician organization of which the physician is not an owner, employee, or contractor. This definition broadens CMS’s proposed rule, which limited the exception to arrangements in which a hospital or physician organization was the licensor and a physician was the licensee.

In addition, the compensation structure of a timeshare arrangement must fall within certain limits. The compensation over the term of the arrangement must be set in advance, consistent with fair market value, and not determined in a manner that takes into account, directly or indirectly, the volume or value of referrals or other business generated between the parties. Per-unit-of-service compensation formulas are prohibited under the exception, consistent with CMS’s asserted authority under the D.C. Circuit Court’s opinion in Council for Urological Interests v. Burwell.3 The arrangement may not be conditioned on the licensee’s referral of patients to the licensor, and the arrangement must be one that would be commercially reasonable even if no referrals were made between the parties. The exception also requires that the arrangement not violate the federal Anti-Kickback Statute or any federal or state law or regulation governing billing or claims submission.

Finally, the licensed premises and equipment must fit within certain parameters. The licensed premises, equipment, personnel, items, supplies, and services must be used predominantly to furnish evaluation and management (E/M) services to patients of the licensee. While CMS had originally proposed that all equipment be located in the same office suite where the physician performs the E/M services, the Final Rule requires only that the equipment covered by the arrangement be located in the “same building” (as defined in 42 C.F.R. § 411.351) as the office suite where E/M services are furnished. However, all locations under the arrangement, including the premises where E/M services are furnished and the premises where designated health services (DHS) are furnished, must be used on identical schedules. The equipment covered by the arrangement may be used only to furnish DHS that are incidental to the physician’s E/M services and furnished at the time of such E/M services, and 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 Affordable Care Act amended the so-called “whole hospital” and rural provider exceptions to the Stark Law to impose significant restrictions on physician ownership and investment in hospitals. As amended, the exception for physician-owned hospitals is available only to hospitals that had physician ownership or investment and a Medicare provider agreement in effect as of December 31, 2010. The exception also requires, among other things, that (1) the percentage of the total value of the ownership or investment interests held in the hospital, or in an entity whose assets include the hospital, by physician owners or investors in the aggregate may not exceed such percentage as of March 23, 2010, and (2) a physician-owned hospital must disclose the fact that the hospital is owned or invested in by physicians on any public website and in any public advertising. Responding to stakeholders’ requests, CMS clarified and modified these requirements in the Final Rule.

Clarification of Ownership Disclosure Requirements

Finalizing its proposed rule without modification, CMS clarifies the requirement for disclosure of hospital’s physician ownership on public websites and public advertising materials, discusses what websites are public and what materials covered and statements included constitute sufficient disclosure, and explains the length of the period of noncompliance for failure to disclose.

CMS does not define what constitutes “a public website for the hospital” for disclosure purposes, but does specify that none of the following meet the concept: social media websites (including professional networking sites) and related messages, posts, or other communications; and electronic payment portals, electronic patient care portals, and electronic health information exchanges. CMS’s logic in excluding such sites is that their content differs in scope from the information found on a typical public website for a hospital (as in social media sites) or they are not publicly available (as in electronic portals of various types). CMS cautions that even if a website itself does not constitute a public website for the hospital, it may contain public advertising for the hospital, which falls under the second category requiring disclosure.

The Final Rule defines the term “public advertising for the hospital” for the purposes of the Stark Law to mean “any public communication paid for by the hospital that is primarily intended to persuade individuals to seek care at the hospital.” Accordingly, communications that fall outside this definition tend to serve some other primary purpose, namely, providing the general public with healthcare-related information, rather than advertising the hospital. CMS’s examples of communications that fall outside of the definition of “public advertising” include communications to recruit hospital staff and other human resources communications, public service announcements, and community outreach.

As to the sufficiency of a disclosure, CMS takes a flexible approach, stating that “any language that would put a reasonable person on notice that the hospital may be physician-owned” is sufficient. Examples of “sufficient” language include such phrases as “this hospital is owned or invested in by physicians” and “founded by physicians,” or even part of a hospital’s name, such as, “Doctors Hospital at Main Street, USA.” Each disclosure statement should place a reasonable person on notice that the hospital may be physician-owned. Requiring that the phrase or title be “located in a conspicuous place,” CMS declines to describe that “place” with particularity, preferring to allow hospitals the freedom to determine exactly how and where to display disclosure statements.

The Final Rule also clarifies that the period of noncompliance with the required disclosures is the period during which a physician-owned hospital failed to satisfy the requirement. Accordingly, the initial compliance date of September 23, 2011, is the earliest date any entity could be noncompliant for the purposes of the public website or advertising disclosure requirements. With regard to public advertising in particular, CMS explains that the period of noncompliance is the duration applicable to the advertisement’s predetermined initial circulation, unless the hospital amends the advertisement to satisfy the requirement at an earlier date. Thus, if the hospital purchases an advertisement in one issue of a monthly magazine, the period of noncompliance would likely be the applicable month of circulation.

Modification of Definition of Physician Ownership or Investment

As noted above, the Affordable Care Act amended the whole hospital and rural provider exceptions to the Stark Law to require that the percentage of physician ownership or investment interests in a hospital in the aggregate may not exceed such percentage as of March 23, 2010. In the Final Rule, CMS refers to the aggregate level of physician ownership as the “bona fide investment level,” and such level as of March 23, 2010 as the “baseline bona fide investment level.” In the CY 2011 OPPS/ASC final rule,4 CMS codified the bona fide investment requirement and stated that ownership or investment interests of non-referring physicians “need not be considered” when calculating the baseline bona fide investment level; the only ownership or investment interests that must be included in the baseline bona fide investment level calculation are those of referring physicians.5 Following the publication of the CY 2011 OPPS/ASC final rule, stakeholders noted that the statutory definition of “physician owner or investor” is broad and that if the Congress had intended to limit the definition to referring physicians, it would have done so. Stakeholders also observed that including only referring physicians in the definition frustrates the purpose of a statutory deadline. The Affordable Care Act required physician-owned hospitals to have physician ownership as of March 23, 2010, but allowed them until December 31, 2010, to obtain a provider agreement. To include only the ownership of referring physicians in calculating the baseline bona fide investment level would undermine the provider agreement allowance, since a pre-operational physician-owned hospital that did not have a provider agreement until after March 23, 2010, but before December 31, 2010, likely would not have had referring physician owners as of March 23, 2010.

Addressing this incongruity in the Final Rule, CMS redefines “ownership or investment interest” for the purpose of the rural provider and whole hospital exceptions to mean “direct or indirect ownership or investment interest in a hospital,” regardless of a physician’s referring or non-referring status. Under the Final Rule, a direct ownership or investment interest in a hospital exists if the ownership or investment interest in the hospital is held without any intervening persons or entities between the hospital and the owner or investor. An indirect ownership or investment interest in a hospital exists if: (1) between the owner or investor and the hospital there exists an unbroken chain of any number of persons or entities having ownership or investment interests; and (2) the hospital has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the owner or investor has some ownership or investment interest (via intermediary) in the hospital. “Physician” will continue to have the meaning set forth in 42 C.F.R. § 411.351.

To allow time for physician-owned hospitals to come into compliance with this revised policy, CMS is delaying the effective date of its revisions until January 1, 2017. Physician-owned hospitals that have added non-referring physician investors in reliance on the commentary to the CY 2011 OPPS/ASC final rule should consider whether action is required to ensure that the baseline bona fide investment level is not exceeded.


Geographic Area Served by FQHCs and RHCs

CMS finalized a new definition for the “geographic area served by an FQHC or RHC” for use by FQHCs and RHCs under the physician recruitment exception. Under the physician recruitment exception, hospitals may pay a physician to relocate his or her practice to the “geographic area served by the hospital,” a term which CMS primarily defines as the “area composed of the lowest number of contiguous zip codes from which the hospital draws at least 75 percent of its inpatients.” The definition has several additional dispensations to account for more sparsely populated areas. When CMS later extended the physician recruitment exception to FQHCs and RHCs, it did not provide guidance as to how to apply the geographic area definition to these facilities.

The Final Rule addresses this omission by creating a new definition for “geographic area served by an FHQC or RHC” for the purposes of the existing physician recruitment exception (and by association, the newly created NPP recruitment exception). The new provision defines the geographic area served by an FQHC or RHC as “the lowest number of contiguous or noncontiguous zip codes from which the FQHC or RHC draws at least 90 percent of its patients, as determined on an encounter basis.” Facilities may include one or more zip codes from which they draw no patients, provided that such zip codes are entirely surrounded by zip codes in the geographic area from which the facility draws at least 90 percent of its patients, determined on an encounter basis.

“Takes into Account”

Several exceptions for compensation arrangements under the Stark Law contain the requirement that a physician’s compensation cannot be determined in a manner that “takes into account” the volume or value of referrals. While CMS has a longstanding policy of interpreting this concept uniformly, the exceptions permitting physician payment subject to particular restrictions involving volume or value of referrals do not universally use the same “takes into account” phrasing. For example, one exception provides that a compensation arrangement may not be “based on” a physician’s value or volume of referrals, while another requires that such arrangements be made “without regard to” the value or volume of referrals. The Final Rule addresses this discrepancy by updating the language in all sections to use the “takes into account” phrasing. The updated provisions include the exceptions for physician recruitment, medical staff incidental benefits, obstetrical medical malpractice insurance subsidies, and professional courtesy. Notably, CMS declined to define the term “takes into account” or discuss its meaning in relation to the phrase “varies with,” but indicated that it may take up the issue in future rulemaking.

Retention Payments in Underserved Areas

CMS also updates language from a previous rulemaking to reflect its initial intention for physician retention payment calculations. The Stark Law contains an exception to permit a hospital, FQHC, or RHC to pay certain retention payments to a physician with a practice located in an underserved area. In the Final Rule, CMS notes that it intended that such retention payments be calculated in part based on a physician’s income over “the previous 24 months,” but the language of the finalized regulation instead incorporated the phrase “no more than a 24-month period,” effectively shortening the amount of time taken into account in several cases. The Final Rule revises the language of this provision to reflect CMS’s intent, and states that retention payments may not exceed the lower of (1) an amount equal to 25 percent of the physician’s current annual income (averaged over the previous 24 months) or (2) the reasonable costs the hospital, FQHC, or RHC would otherwise have to expend to recruit a new physician.


Many of the Stark Law exceptions for compensation arrangements include various procedural requirements, such as a requirement that the arrangement be documented in a signed, written agreement, in addition to substantive requirements that relate to the compensation methodology and the commercial reasonableness of the arrangement. Because compliance with all of the requirements of an applicable exception is required to avoid running afoul of the Stark Law’s prohibitions, and because so-called “technical violations” or “procedural deficiencies” are not distinguished or otherwise given preferential treatment in the Stark Law or its implementing regulations, noncompliance with these procedural requirements can give rise to the same significant risks as any other Stark Law violation. As a result, many healthcare providers have chosen to disclose such matters to CMS pursuant to its Self-Referral Disclosure Protocol (SRDP), which was established by directive of Congress in the Affordable Care Act.

In the proposed rule issued this past July, CMS noted that it has received numerous self-disclosures concerning the writing requirements of various compensation exceptions, including, for example, disclosures relating to the failure to set forth an arrangement in a written agreement, failure to obtain the parties’ signatures in a timely fashion, and failure to renew a written agreement that has expired by its terms. The Final Rule includes several changes to provide greater clarity and flexibility to healthcare providers.

Writing Requirement

In the Final Rule, CMS clarifies that arrangements need not be set forth in a single, formal contract to comply with the requirement that the arrangement be “in writing.” In furtherance of this policy, CMS modifies the language of several exceptions, including the space and equipment lease exceptions and the personal service arrangements exception, to use the terms “arrangement” and “writing” in lieu of “agreement,” “lease,” “contract,” and “written contract.”

Although in most instances a single written document memorializing the key features of an arrangement provides the “surest and most straightforward means” of establishing compliance, CMS notes that there is no requirement that an arrangement be documented in a single, formal contract. Rather, depending on the particular facts and circumstances, a collection of documents, including contemporaneous documents evidencing the course of conduct between the parties, may be sufficient. Although CMS declined to give an example of a collection of documents that would, taken as a whole, satisfy the writing requirement, it did provide several examples of individual documents that a party might consider as part of a collection of documents when determining whether the writing requirement was satisfied, including: (1) board meeting minutes or other documents authorizing payments for specified services; (2) written communication between the parties, including hard copy and electronic communication; (3) fee schedules for specified services; (4) check requests or invoices identifying items or services provided, relevant dates, and/or rate of compensation; (5) time sheets documenting services performed; (6) call coverage schedules or similar documents providing dates of services to be provided; (7) accounts payable or receivable records documenting the date and rate of payment and the reason for payment; and (8) checks issued for items, services, or rent.

The relevant inquiry when analyzing a collection of documents, according to CMS, is whether the available contemporaneous documents would permit a reasonable person to verify compliance with the applicable exception at the time that a referral is made. CMS emphasizes, however, that contemporaneous documents evidencing the course of conduct between the parties cannot be relied upon to protect referrals that predate the documents. To this end, CMS declined to adopt a grace period for satisfying the writing requirement and reminds stakeholders that providers retain the burden of proof to establish that the writing requirement was sufficiently met before referrals were made.

CMS also clarifies that state law contract principles do not determine whether an arrangement is set out in writing for purposes of the Stark Law, citing its concern that reliance on state law would result in different standards in different jurisdictions and that state law requirements for an enforceable contract may differ substantively from the requirements of the Stark Law. However, CMS states that the Stark Law does not negate or preempt state law, and that parties may draw upon state contract law principles, or other relevant law, to inform an analysis of whether contemporaneous writings would permit a reasonable person to verify that an arrangement was set out in writing.

Commenters noted that CMS’s clarifications regarding the writing requirement did not address the corresponding signature requirement found in many Stark Law exceptions. Responding to these comments, CMS states in the Final Rule that, when parties rely on a collection of documents to satisfy the writing requirement, not every document need bear the signature of one or both of the parties. Instead, a signature for each party is required on at least one contemporaneous writing that documents the arrangement, and that document must clearly relate to other documents and the arrangement the party is seeking to protect.

Importantly, the Final Rule is intended to “clarify and confirm” existing policy with respect to the writing requirement. Providers should carefully consider the effect of the Final Rule on both current and historic compliance matters.

Holdover Arrangements

The office space and equipment lease exceptions and the personal service arrangements exception currently permit a “holdover” arrangement for up to six months if a compliant arrangement of at least one year expires but continues on the same terms and conditions. In the Final Rule, CMS amends these exceptions to permit indefinite holdovers, provided that certain additional safeguards are met. The first safeguard, which is intended to prevent frequent renegotiation of short-term arrangements, is that the holdover must continue on the same terms and conditions as the original arrangement. The second safeguard, designed to ensure that compensation is consistent with or does not exceed fair market value, is that the holdover arrangement must satisfy all the elements of the applicable exception when the arrangement expires and on an ongoing basis during the holdover.

In the Final Rule, CMS notes that an arrangement falls out of compliance during a holdover period at the point in time when compensation under the arrangement falls below fair market value. Although CMS notes that it expects the parties to make a determination of fair market value at the time the financial relationship is created, each applicable exception requires compensation to be consistent with fair market value “over the term of the arrangement.” CMS cautions that rental payments may cease to be consistent with fair market value in long-term arrangements and that parties relying on a holdover provision bear the risk of fluctuations in the market that may cause the arrangement to no longer satisfy the fair market value requirement.

CMS reiterates that parties may charge a holdover premium, provided the premium is set in advance in the initial lease arrangement (or a subsequent renewal) and the rental rate (including the premium) remains consistent with fair market value and does not take into account the volume or value of referrals or other business generated between the parties. In addition, failure to apply a holdover premium set forth in a written arrangement may constitute a change in the terms and conditions of the original arrangement that requires written documentation. Likewise, doing so may constitute forgiveness of a debt, thus creating a secondary financial relationship that must satisfy the requirement of an applicable exception. In either event, CMS notes such a holdover arrangement would fail to meet that requirement that it continue on the same terms and conditions as the immediately preceding arrangement.

The indefinite holdover provisions are available to parties on the effective date of the Final Rule (i.e., January 1, 2016). Parties in a compliant six-month holdover arrangement under the current regulations as of January 1, 2016, may make use of the indefinite holdover provisions in the Final Rule. If, however, an arrangement no longer qualifies for the six-month holdover on January 1, 2016, the parties cannot make use of the indefinite holdover provision.

Special Rule on Temporary Noncompliance with Signature Requirements

The regulations that implement the Stark Law include a special rule for arrangements involving temporary noncompliance with signature requirements. Under the special rule, if the failure to comply with the signature requirement is inadvertent, the parties must obtain the required signatures within 90 days, but if the failure was not inadvertent (i.e., made knowingly), the parties must obtain the required signatures within 30 days. Effective January 1, 2016, the Final Rule specifies that parties have 90 days to obtain required signatures, regardless of whether the failure to obtain the signature(s) was inadvertent.

Aside from this modification, the special rule or arrangements involving temporary noncompliance with signature requirements remains unchanged. Specifically, to make use of the special rule, an arrangement would have to satisfy all other requirements of an applicable exception, including the requirement that the arrangement be set out in writing. In addition, CMS declined to eliminate the requirement that the special rule may be used only once every three years for the same referring physician. Lastly, in response to commenters who asked whether specific examples would constitute valid signatures for purposes of the Stark Law, CMS states that, as with the determination of whether an arrangement is set out in writing, state law principles do not determine whether a party complies with the signature requirement. However, CMS indicates that providers may look to state law and other bodies of relevant law, including federal and state law governing electronic signatures, to inform the analysis of whether a writing is signed for Stark Law purposes.

Term Requirement

The exceptions for office space and equipment leases and personal service arrangements each require arrangements to have a term of at least one year. In the Final Rule, CMS commented that a formal contract or other document with an explicit “term” provision is generally not necessary to satisfy this exception element. Instead, contemporaneous writings must establish that the arrangement in fact lasted for at least one year, or the parties must demonstrate that the arrangement terminated during the first year and the parties did not enter into a new arrangement for the same space, equipment, or services during the first year. As with its comments regarding the writing requirement, CMS’s comments regarding the term requirement are expressly intended to reflect existing policy.

Definition of “Remuneration”

The Final Rule provides policy guidance on whether remuneration is conferred upon a physician by a hospital when both facility and professional services are provided to patients in a hospital-based department (referred to as “split bill arrangements”). CMS explains its “existing policy” that although physicians make use of a hospital’s resources to treat patients in split bill arrangements (e.g., examination rooms, nursing personnel, and supplies), no remuneration is transferred between the hospital and the physician if the hospital bills the technical component for services it provides and the physician separately bills for his or her professional fees. CMS finalized this policy statement in response to contrary reasoning provided by the U.S. Court of Appeals for the Third Circuit in U.S. ex rel. Kosenske v. Carlisle HMA.6 Although CMS re-emphasized its current policy, it declined to comment on whether a split bill arrangement involves remuneration when the hospital grants a physician organization exclusive use of the hospital’s space, even when the services are billed separately by the hospital and the physician.


In its preamble to the Final Rule, CMS observes the significant changes in the delivery of and payment for healthcare that have occurred since the enactment of the Stark Law, including efforts to tie Medicare payments to quality and value through accountable care organizations, bundled payments, and value-based purchasing initiatives. CMS notes that the Stark Law, by design, separates the entities that furnish DHS from the physicians who refer Medicare patients to them, and that this design is in tension with evolving delivery and payment models that are premised on the close integration of a variety of different providers and DHS entities. In particular, the Final Rule highlights the industry’s concern that the Stark Law prohibits financial relationships necessary to achieve the clinical and financial integration necessary for delivery and payment reform, with the exception of the relatively limited number of initiatives for which CMS has issued waivers. Although the Final Rule contains no changes in CMS policy to accommodate evolving delivery and payment models, CMS states that the comments solicited in the rulemaking process will inform reports that the Secretary of the Department of Health and Human Services and its Office of the Inspector General must provide in 2016 and will assist CMS’s analysis of whether it should issue additional rulemaking or guidance.

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The authors would like to thank Stephanie Hoffmann for her excellent assistance with this alert.

1 U.S. ex rel. Drakeford v. Tuomey , 792 F.3d 364, 395 (4th Cir. 2015) (Wynn, J., concurring).

2 Medicare Program; Revisions to Payment Policies under the Physician Fee Schedule and Other Revisions to Part B for CY 2016, 80 Fed. Reg. 70885, 71300-71341 (Nov. 16, 2015). A pre-publication version of the Final Rule was released by CMS on October 30, 2015.

3 790 F.3d 212 (D.C. Cir. 2015). CMS explained that, under the Court’s analysis in Council for Urological Interests, “we possess the authority to exclude timeshare arrangements that use a compensation formula based on per-unit of service fees from the new exception at § 411.357(y), and we employ that authority here to ensure that the new exception will not pose a risk of program or patient abuse[.]” 80 Fed. Reg. at 71332.

4 75 Fed. Reg. 71799 (Nov. 24, 2010).

5 Id. at 72250.

6 554 F.3d 88 (3d Cir. 2009).

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