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Employment of Physicians: The Affirmative Obligation of § 411.354(d)(4) Under the Stark Law Final Rule

  • January 08, 2021
  • Alex Krouse , Parkview Health
  • Bob Wade , Barnes & Thornburg

Historically, the bona fide employment exception under the Stark Law[1] has included fairly standard requirements to fulfill the exception. Those standards include fair market value compensation, payments not based upon the volume or value of referrals, and a commercially reasonable arrangement. The employment exception, unlike most other Stark Law exceptions, does not require the arrangement to be in writing signed by the parties.

The employment exception is one of the most widely utilized exceptions, whether it be for health systems or private practices with employed physicians. However, the Centers for Medicare & Medicaid Services (CMS) in the recently published Stark Final Rule[2] made some substantive changes to this exception and clarified when additional conditions might apply. Specifically, conditions under § 411.354(d)(4).

What is the history and use of § 411.354(d)(4), the “Directed Referral” requirement?

Historically, organizations could use § 411.354(d)(4) as a process to ensure that if their arrangement included processes that steered referrals, policies that directed referrals, or actual mandates of referrals, such a process, policy, or mandate would not violate the volume or value standard. In 1998, the Stark Law was updated to include § 411.354(d)(4), which outlines this Directed Referral process to mitigate the concern that directed or mandated referrals could inherently violate the volume or value standard under the employment or other exceptions, including the personal service arrangements and fair market value exceptions.

Under this Directed Referral process, if an organization wished to avoid potential risk of liability under the volume or value standard, the arrangement would need to meet specific requirements under § 411.354(d)(4). If an organization fulfilled these requirements, under the previous CMS guidance, if processes, policies, or mandates on referrals existed, the arrangement would avoid liability under the volume or value standard.

What many organizations believed was that this Direct Referral process’ purpose was to mandate referrals. This is incorrect. Although an organization could mandate referrals under an employment agreement and follow these requirements, this mandate would merely allow them to avoid liability under the volume or value standard. Further, assuming the conditions were met, it would not allow an organization to direct the referrals of employees or contractors. The additional conditions required that same organization to include exceptions for patient choice, payer choice, and physician choice.

In short, it has been irrelevant whether an organization intends to mandate referrals through a contract or implement processes influencing and directing referrals under a bundled payment program. In both cases, to have absolute defensibility under the volume or value standard, the organization could choose to follow these additional conditions under the Directed Referral requirements of § 411.354(d)(4). If the conditions were not fulfilled, the organization was subject to potential risk of liability.

This created a safe harbor for the volume or value standard where in Phase II of the regulations, CMS specifically wrote that the “provisions at § 411.354(d) are intended to be ‘deeming’ or ‘safe harbor’ provisions.” Even in the most recent Final Rule, CMS stated that where “such referral requirements have existed . . . parties would have had to comply with the conditions of § 411.354(d)(4) in order to be assured not to run afoul of the volume or value standard, or offer some other proof of compliance with the volume or value standard.” This clearly outlines that organizations could historically choose to comply with § 411.354(d)(4).

What changes occurred in the Final Rule?

In the Final Rule, CMS wrote that “[w]e continue to believe in the importance of preserving patient choice, protecting the physician’s professional medical judgment, and avoiding interference in the operations of a managed care organization.” Because of this, “[w]e [CMS] are finalizing our proposal to include an affirmative requirement that the compensation arrangement meet the conditions of the special rule at § 411.354(d)(4) in all of the exceptions identified in the proposed rule.”

Further, CMS stated that “[t]o reiterate how critical these protections are, we proposed to include in the exceptions applicable to the types of contracts or arrangements to which the special rule has historically applied an affirmative requirement that the compensation arrangement meet the conditions of the special rule at § 411.354(d)(4).”

In short, § 411.354(d)(4) is an affirmative requirement, no longer a safe harbor, and is meant to apply to the types of contracts or arrangements to which the special rule has historically applied if Directed Referrals are mandated or institutionally implemented by process.

Why did CMS mandate compliance with § 411.354(d)(4) under the employment exception?

Under the Final Rule, this substantive change was influenced by the change to the volume or value standard. Under the new volume or value standard, an organization is only deemed to violate the volume or value standard “if the formula used to calculate the physician’s compensation includes the physician’s referrals to the entity as a variable.” This is much narrower than prior definitions. Because of this, CMS wrote that “we expressed concern that, given our proposed interpretation of the volume or value standard, § 411.354(d)(4) may apply in fewer instances, if at all, to serve these important goals.”

Specifically, CMS stated that “we no longer believe that compensation predicated, either expressly or otherwise, on the physician making referrals of designated health services to a particular provider, practitioner, or supplier should be evaluated for compliance with the volume or value standard.” CMS reasoned that “a review of the mathematical formula that determines the amount of the physician’s compensation would not be sufficient to identify a referral requirement that could lead to program or patient abuse.”

Because the application of the volume or value standard has now been modified, if not rendered irrelevant, under this special rule, “payment conditioned on the physician’s referrals of designated health services to a given entity, such as an employer or an affiliated entity, should be evaluated for compliance with the special rule at § 411.354(d)(4), which is mandatory under the policies finalized in this final rule.”

When did (historically) this special rule apply, and how does it apply now?

Historically, the special rule applied to arrangements in which a physician’s compensation was predicated, either expressly or otherwise, on the physician making referrals. However, CMS interpreted this broadly. Here is the example CMS utilized in 1998[3] in how the volume or value standard could be implicated.

For example, a hospital might include as a condition of a physician’s employment the requirement that the physician refer only within the hospital’s own network of ancillary service providers, such as to the hospital’s own home health agency. We believe that in these situations, a physician’s compensation reflects the volume or value of his or her referrals in the sense that the physician will receive no future compensation if he or she fails to refer as required.[4]

Further, although CMS wrote that the volume or value standard would not be implicated in situations in which a physician is choosing to refer within the entity’s network, this requires that the physician has the choice.[5]

In Phase II, CMS wrote that “§ 411.354(d)(4) will apply to employment, managed care, and other contractual arrangements that include required referrals.” In both of these examples, § 411.354(d)(4) historically applied when there was some sort of referral requirement, regardless of the compensation itself, thus highlighting the broad interpretation historically.

The current regulation, before the Final Rule, states that § 411.354(d)(4) may be met when:

A physician’s compensation from a bona fide employer or under a managed care contract or other contract for personal services may be conditioned on the physician’s referrals to a particular provider, practitioner, or supplier, provided that the compensation arrangement meets all of the following conditions.

CMS in the Final Rule changed the beginning of § 411.354(d)(4) to the following:

If a physician’s compensation under a bona fide employment relationship, personal service arrangement, or managed care contract is conditioned on the physician's referrals to a particular provider, practitioner, or supplier, all of the following conditions must be met.

The Final Rule makes it an affirmative requirement and adds Section 5 to the Bona Fide Employment Exception stating, “If remuneration to the physician is conditioned on the physician’s referrals to a particular provider, practitioner, or supplier, the arrangement satisfies the conditions of § 411.354(d)(4).”

There is little difference in the terminology. If CMS intended this change to make “an affirmative requirement that the compensation arrangement meet the conditions of the special rule at § 411.354(d)(4)” for “the types of contracts or arrangements to which the special rule has historically applied” then this requirement applies in those historical situations that are occurring at present.

Does § 411.354(d)(4) apply now in other situations?

Although CMS may not view these as expansions to current regulations, there are two key changes. First, CMS is writing about directing referrals throughout the Final Rule. While it is unclear, initially, the difference between “directing,” “required,” “mandated,” or “conditioned,” CMS, does highlight when this requirement must be met.

Specifically, it appears that § 411.354(d)(4) must be followed if processes that steer a physician’s referrals are utilized within organizations. This is a deviation from the historical framework of when the volume or value standard was implicated.[6] For example, in the Final Rule, CMS noted this commentary:

Comment: One commenter expressed support for the affirmative requirement for compliance with the conditions of § 411.354(d)(4), where a physician is directed to refer patients to a particular provider, practitioner, or supplier under the physician’s compensation arrangement with the entity directing the referrals. The commenter recommended that we finalize our proposal to make the compliance requirement mandatory, and that we apply the rule where the referral requirement is not only express, but where it occurs as the practical result of processes that steer a physician’s referrals for designated health service to a provider, practitioner, or supplier selected by the entity.

Response: The affirmative obligation finalized in the exceptions at §§ 411.355(e) and 411.357(c), (d)(1), (d)(2), (h), (l), (p), and (z) is not limited to express or written requirements to refer patients to particular provider, practitioner, or supplier selected by the entity paying the compensation. Rather, the condition at § 411.354(d)(4)(vi), as finalized, prohibits making the existence of the compensation arrangement or any compensation paid to the referring physician contingent on the physician’s referrals to a particular provider, practitioner, or supplier.

This highlights that even if an organization does not have a written requirement to refer, but through processes directs or steers referrals, organizations now have an affirmative obligation to meet compliance with the conditions of § 411.354(d)(4). While many organizations might believe this is an expanded view, it may not be. CMS clearly noted that there were historical situations in which § 411.354(d)(4) did not apply as it relates to the volume or value standard. Therefore, employers or contractors of referring physicians need to evaluate where processes or mechanisms are in place that steer patients to the employer/contractor regardless of whether the physician made a conscious choice regarding the referral of designated health services (i.e., laboratory, home health, orthotics).

When, under the bona fide employment exception, would § 411.354(d)(4) not apply?

If there was no condition to refer either through process, policy, or mandate, § 411.354(d)(4) would not apply as historically, a “pure arrangement” would not trigger these requirements. A pure arrangement may be one in which a health system could hope for referrals, but ultimately did not steer and allowed total and complete choice with the physician.

Affirmative Obligation

The difficulty most health systems will have is analyzing whether they provide the employed or contracted physician with unfettered choice of designated health service providers for their patients. For example, many health systems have electronic health record systems (EHRs). In these EHRs, if a physician were to order blood work for a patient, the EHR automatically routes the referral for laboratory services to the hospital-owned lab. It is common for EHRs to route internally for services offered by a health system and externally for services not offered. This would clearly represent a situation in which the choice of lab is not provided, and the referral itself is steered, without a conscious and intentional decision by the physician or patient.

In another example, a hospital might have an exclusive arrangement with a radiology group. In this arrangement, the hospital has agreed that any professional interventional radiology services will be referred to the group. Thus, if a physician working for the health system makes a referral, the hospital is obligated to ensure that the interventional radiology referral is sent to the radiology group.

A final common example might be the establishment of a plan of care within a health system employed primary care network. For example, a network might be developing standardized plans of care for patients presenting with out-of-control diabetes. In this case, the primary care network is mandating physicians following the standardized plan of care, which include certifying the need for designated health services such as imaging and lab work. This common form of steerage is actually being developed on the clinical side.

Above all, organizations historically understood § 411.354(d)(4) as a provision to avoid liability under the volume or value standard and as a choice. The Final Rule makes it clear that § 411.354(d)(4) now is an affirmative obligation for organizations in which referrals are directed or steered either through contract, process, policy, or mandate. The conditions at § 411.354(d)(4) now serve as protections for patient, physician, and managed care choice, as well as protections for ensuring compensation arrangements do not indirectly take into account the volume or value of

 

[1] 42 U.S.C. § 1395nn.

[2] 85 Fed. Reg. 77492 (Dec. 2, 2020).

[3] 63 Fed. Reg. 1700.

[4] Id.

[5] Id.

[6] See id.