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Published February 5, 2021

Act Now — Stark Law Revisions Will Impact Physician Group Practice Compensation Models on January 1, 2022

On November 19, 2020, the Centers for Medicare & Medicaid Services (CMS) and the Department of Health and Human Services Office of Inspector General issued a final rule modernizing the Stark Law. Many of the revisions to the Stark regulations became effective January 19, 2021; however, revisions to the physician group practice regulations will become effective January 1, 2022. Accordingly, now is the time to begin properly planning for the changes to the physician compensation models in group practices.

To follow is a recap of the “what,” “why,” and “how” the Stark Law changes affect group practice compensation methodologies, including the distribution of profits from designated health services (“DHS”). 

What occurred as a result of the revised Stark regulations is a clarification of the permitted formulas for the distribution of profit derived in a group practice, as defined by the Stark regulations, from DHS. A physician participating in a group practice is prohibited from sharing in the profits of DHS based on the number of DHS patient encounters (“the volume”) or the DHS revenues (“the value”) the provider is individually responsible for generating to the group practice. Ultimately, these changes state that the overall profits from all DHS of any component of a group that consists of at least five physicians must be aggregated before distribution. For further clarity, CMS also notes that if a group practice has less than 5 physicians, overall DHS profits means the DHS profit for all physicians in the group. Pods or subsets of the group practice members, each comprised of at least 5 physicians, may be compensated using different distribution formulas, so long as the same methodology is used for each member within the pod. 

Why these revisions are important to group practices providing DHS is that existing profit distributions might be prohibited under the revised standards. Further, compliance with these revisions will help determine what qualifies as a “group practice” to be eligible for protection under the Stark Law’s referral prohibition for the in-office ancillary services exception.

How to transition the current revenue distribution method to a compliant model is based on an understanding of the intent of the CMS changes to the Stark regulations. The basic premise from CMS is to discourage inappropriate utilization of DHS just for the economic benefit of group practice physicians. Each group practice needs to review its current profit distribution methodologies, modify in whole or by sub-group, and replace, if necessary, with a model compliant with the Stark rule changes, at least for Medicare payments related to DHS. Group practices are free to distribute all non-Medicare revenues in any manner they choose. 

With this understanding, presented below are several important takeaways from the Group Practices section of the Stark regulation changes. The takeaways expand on the “What?”, “Why?”, and “How?” descriptions presented above.

  • Prior to the newly approved Stark rule changes, group practices were already prohibited from using compensation methodologies linked to volume or value for DHS. However, many of these group practices were distributing DHS based on revenues, relying on CMS’s interchangeable use of the terms “revenue” and “profits” in previous guidance. Such a DHS distribution methodology will no longer be permissible. In its place, the newly enacted changes tighten CMS’s terminology to allow a group practice to distribute DHS based solely on profits for all DHS services. Specifically, CMS defined “overall profits” to mean “the profits derived from all the designated health services.” The revision continues by stating, “furthermore the profits from all the designated health services of any component of the group that consists of at least five physicians must be aggregated before distribution.”
  • Taking the above a step further, the revisions also make it clear that group practices cannot divide DHS profits differently by ancillary type. All DHS profits must be aggregated for the entire group or within each pod. For instance, some practices historically chose to allocate the profits associated with lab services differently (via a different formula or to a different pool of providers) than x-ray services. This methodology is no longer permissible.
  • In the Stark Law revisions, CMS reaffirmed the interpretation “compensation to a physician who is a member of a group practice may not be determined in any manner that takes into account the volume or value of the physician’s referrals.” However, there is now an exception to this standard for waivers provided in the Shared Savings Programs (“SSP”) and certain Innovation Center (“IC”) models. Outside of the SSP and IC models, profit shares or productivity bonuses paid to a physician in a group practice based on volume or value of referrals are strictly prohibited by the physician self-referral statute and regulations.
  • The Stark rules indirectly acknowledge the ongoing evolution of the patient care team models within group practices, particularly those that include advance practice providers who help address, among other issues, physician shortages. The recent Stark rules changes do not impact a physicians’ ability to continue earning bonuses for “incident to services.” Therefore, a physician in the group practice may continue to be paid a productivity bonus based on services that have been personally performed or services “incident to” such personally performed services or both.

Group practices may utilize eligibility standards as a gate (such as length of time in the practice, an owner, an employee, or if full-time or part-time) to determine if a physician is eligible for a profit share. This option provides a degree of autonomy for group practice partners/ owners who assumed financial risk in building the practice to preserve some level of economic equity within the physician practice. However, once a provider is eligible for DHS profit distributions, all distributions must be calculated in a manner that does not take into account the volume or value of the DHS services.

There are several possible solutions for group practices that do not currently meet the Stark revisions for the group practice compensation formula. For some larger group practices where certain pods or subsets of at least 5 physicians exist, multiple revenue distribution models can be adopted. As an example, Pod 1 can be on a per capita basis while Pod 2 can be based upon personal productivity as long as the same method for distributing overall profits for every physician in the Pod is the same. Practices with less than 5 physicians may identify other distribution models based on personally performed office visits. Some practices may want to consider a work relative value unit (wRVU) formula. CMS clarified that a compensation formula based solely on work personally performed by a physician (e.g., an office visit or wRVU model) is acceptable and meets the volume or value standard. 

PYA will continue to monitor and analyze the final Stark rules changes. Updates on this subject will be provided on the PYA website. For more information regarding these matters, contact a PYA executive below at (800) 270-9629.

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