New Stark Law Regulations May Impact Many Physician Practices

December 20, 2021

In my experience, most physician groups rely on the “in-office ancillary service” exception to the Stark Law when determining how to allocate revenues from designated health services among group members.  The Stark Law is, of course, the primary applicable area of law that is relevant to the structure of productivity compensation issues within medical groups.  That is why a change in the regulations governing the structure of production compensation relationships, even a “nuanced” or subtle change in interpretation of one element of the Stark Law, can impact a whole lot of practices.  Couple that with the Centers for Medicare and Medicaid Services (CMS) deciding to release some significant regulations making changes to laws in this area and you end up with a recipe for confusion.  The consequences of making the wrong decisions in the face of confusion can end up quite costly in this highly regulated area.

The new rules issued by CMS were aimed at modernizing the Stark Law and Anti-Kickback Statute to address value-based compensation systems and other issues developed over the years since the Stark Law was originally enacted.  Some of the most significant changes impacting physician group practice compensation structures will go into effect on January 1, 2022.  The compliance date crept up on a whole lot of practices from what I can tell.  Really, all group practices should review potential impact of new regulations on their method of compensation distribution among group members.  Some will find changes need to be made to the methodology used to divide certain types of revenues among members of a group; all with a compliance date of January 1, 2022.

One of the most significant changes involves revisions with how groups can divvy up “over-all profits” from the group.  New regulations end the practice that some groups have built into their compensation structures to pool together revenues from certain “designated health services” on a service-by-service basis.   The mechanism used to make the change was a change to regulatory wording involving how “overall profits” are defined.  In other words, as of January 1, 2022, group practices will no longer be permitted to group together revenues from specific types of designated health services and allocate those revenues to groups of 5 or more physicians within the group who may be high utilizers of the applicable designated health service.

The practice of segmenting specific designated health service revenues and allocating those revenues to higher utilizers of those Department of Health Services (DHS) services within the group will no longer be permitted after January 1, 2022.  Noncompliance with the specific requirements of the Stark Law and regulations can have very significant deleterious impacts on physician groups.  A violation of the new prohibition against the practice of segmenting DHS services as part of the group’s compensation structure is no exception.  Denial of revenues, potential False Claims Act damages, along with a host of civil penalties, are among the tools in the government’s toolbelt to “encourage” providers to change their practices.

This rather significant change, which will impact a broad range of medical groups, was accomplished with what is perhaps the fewest words of any regulatory change that I can remember in my long career as a health care attorney.  The pre-2022 regulations under the Stark Law include some detailed rules on how a group practice can divide “overall profits.”  Here is where it gets tricky, because the pre-2022 law defined “overall profits” to include the entire profits from the group derived from designated health services OR DHS derived profits from any group of at least 5 physicians.  This “loose” language permitted groups to interpret the rule to permit allocating in at least groups of 5 (the infamous “Rule of 5s”).  There was nothing in the language that clearly prohibited the group from allocating specific DHS revenues to the most prolific utilizers of those services.  CMS closed this hole with two simple short words, “all the,” which it strategically placed before the words “designated health services” in the relevant sentence of the regulation.  With the insertion of these two words, CMS ended the ability of medical practices to segment specific designated health service revenues to the largest producing “group of 5.”

Many practices have adopted the pre-2022 method for allocating designated health service revenues.  The compensation structure of these groups will need to be brought into compliance with the new regulations by the January 1, 2022 compliance date.  If your practice has not yet looked at the potential impact of the changes to the Stark Law regulations, you should take the time to do so now.  It is possible that at least a portion of your group’s compensation structure could need to be revised; particularly if you are currently using the Rule of 5s or otherwise allocating designated health service revenues disproportionately among group members.

Physician group participants in clinically integrated networks that might qualify as “value-based” enterprises or who may be performing “value-based” activities may also wish to look at some of the new provisions that apply to the division of value-based revenues within a group.  The details of the value-based regulations are beyond the scope of this article.

Feel free to contact any member of the Ruder Ware Health Care Focus Team for more information regarding this or other legal and regulatory issues impacting health care providers.

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