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November 25, 2020
Health Law Weekly

Extensive Changes to the Physician Self-Referral Law and Anti-Kickback Statute Increase Innovation and Remove Administrative Burden

  • November 25, 2020
  • Julie E. Kass , BakerOber Health Law, practice group of Baker Donelson
  • Kristin M. Bohl , BakerOber Health Law, practice group of Baker Donelson

The Department of Health and Human Services (HHS) has taken further steps in its effort to create a more hospitable regulatory climate for innovation in health care by releasing extensive and significant revised final rules governing the Physician Self-Referral Law (Stark) and the Medicare Anti-Kickback Statute[1] (AKS). The final rules went on display at the Federal Register on November 20 and are scheduled for official publication on December 2. They are part of the HHS Regulatory Sprint to Coordinated Care and have the goal of removing regulatory barriers to coordinated care and value-based care in order to permit innovation designed to improve quality of care, health outcomes, and efficiency in our health care system. These final regulations, issued by the Centers for Medicare & Medicaid Services (CMS) and the Office of the Inspector General (OIG), considered comments received in response to proposed rules published in October 2019.[2] The final rules, which adopt most of the proposals with some notable modifications, generally take effect on January 19, 2021. This article reviews highlights of the new rules.

Value-Based Rules

While it is clear that CMS and OIG worked together in considering comments and developing these final rules, differences remain between the regulations. Both CMS and OIG acknowledged that they received comments asking that the final regulations mirror each other as much as possible. While there are indeed a number of similarities, and the clarifications provided are very helpful, the Agencies did not completely align the exceptions and safe harbors. CMS and OIG determined that the final regulations will operate somewhat differently due to the different purposes and authorities of the underlying statutes. The final regulations include intentional differences that allow the AKS to “provide ‘backstop’ protection for Federal health care programs and beneficiaries against abusive arrangements that involve the exchange of remuneration intended to induce or reward referrals under arrangements that could potentially satisfy the requirements of an exception to the physician self-referral law.” In this way, the final rules work to balance each other and permit parties with arrangements that are subject to both laws to develop and implement value-based arrangements that avoid the strict liability referral and billing prohibitions of the physician self-referral law, while ensuring that law enforcement, including OIG, can take action against parties engaging in arrangements that are intentional pay-for-referral schemes.

Value-Based Enterprise Proposed Exceptions

CMS created the new exceptions in the final rule with a focus on removing regulatory barriers and creating space and flexibility for industry-led innovation in the delivery of better and more efficient coordinated health care for patients and improved health outcomes while supporting the Secretary’s priorities and the trend toward adoption of value-based models in the health care industry. The final exceptions are meant to provide incentives to move toward non-fee-for-service payment models while also ensuring strong program integrity safeguards are in place to prevent the potential risks of value-based models such as stinting on care (underutilization), cherry-picking (choosing to care for valuable patients), lemon-dropping (denying care to undesirable patients), and manipulation or falsification of data used to verify outcomes.

The new exceptions and definitions work together to form the framework for value-based arrangements to function and succeed while being protected from the physician self-referral law’s prohibition on referrals and claims submission. The new exceptions do not require that compensation be set in advance, consistent with fair market value, or determined in manner that does not take into account the volume or value of the physician’s referrals or other business generated by the physician. There is, however, a commercial reasonableness standard for compensation. The exceptions apply regardless of whether the arrangement includes care furnished to Medicare beneficiaries, non-Medicare patients, or a combination of both.

The parties to a value-based arrangement must include an entity and a physician (otherwise, the physician self-referral law’s prohibitions would not be implicated.) Also, because the exceptions at final § 411.357(aa) apply only to compensation arrangements, the value-based arrangement must be a compensation arrangement and not another type of financial relationship to which the physician self-referral law applies. CMS notes that existing value-based arrangements that already comply with an exception are not required to use one of the new exceptions. As long as the arrangement satisfies all elements of an applicable exception, the arrangement is permitted under the physician self-referral law.

The final definitions for the value-based exceptions include: value-based activity; value-based arrangement; value-based enterprise (VBE); value-based purpose; VBE participant; and target patient population. While the definitions remain similar to those in the proposed rule, CMS made some modifications. For example, now “VBE participant” means a person or entity that engages in at least one value-based activity as part of a value-based enterprise. CMS clarifies, however, that “entity” in this case refers to its common usage, rather than the specific definition of “entity” in the physician self-referral law.

CMS considered excluding laboratories, durable medical equipment, prosthetics, orthotics and supplies (DMEPOS) suppliers, pharmaceutical manufacturers; manufacturers and distributors of DMEPOS; pharmacy benefit managers (PBMs); wholesalers; and distributors from the definition of VBE participant. Nonetheless, the final definition of “VBE participant” does not exclude any specific persons, entities, or organizations from qualifying as a VBE participant.

In a shift from the proposed rule, CMS made a change in identifying activities that are specifically responsible for value-based outcomes. Previously, CMS indicated that the act of referring patients (developing a plan of care) for designated health services (DHS) is itself not a “value-based activity.” Generally speaking, referrals are not items or services for which a physician may be compensated under the physician self-referral law. Payment for referrals is in direct contradiction to the purpose of the physician self-referral law. Based on the comments received, care planning activities that meet the definition of “referral” at § 411.351 will qualify as “the taking of an action” for purposes of applying the definition of “value-based activity.”

The final exceptions include:

  • Full financial risk § 411.357(aa)(1);
  • Value-based arrangements with meaningful downside financial risk to the physician § 411.357(aa)(2); and
  • Value-based arrangements § 411.357(aa)(3).

The Full Financial Risk exception applies to value-based arrangements between VBE participants in a value-based enterprise that has assumed “full financial risk” for the cost of all patient care items and services covered by the applicable payor for each patient in the target patient population for a specified time period. This includes for example, capitation payments or global budget payments from a payor. The final rule makes clear that the exception is not limited in application to only these approaches listed in the regulation.

This exception is also available to protect value-based arrangements entered into in preparation for the implementation of the value-based enterprise’s full financial risk payor contract where such arrangements begin after the value-based enterprise is contractually obligated to assume full financial risk for the cost of patient care. In the final rule, CMS extends this protection from six months to 12 months for the transition period. The exception does not have a writing requirement, but CMS does advise that it is good business practice to reduce to writing any arrangement between referral sources to ensure the arrangement can be monitored.     

The Value-Based Arrangements with Meaningful Downside Financial Risk to the Physician exception protects remuneration paid under a value-based arrangement where the physician is at meaningful downside financial risk for failure to achieve the value-based purpose(s) of the value-based enterprise. Previously, CMS proposed to define “meaningful downside financial risk” where a physician is responsible to pay the entity no less than 25% of the value of the remuneration the physician receives under the value-based arrangement. In response to the comments, CMS has reconsidered this threshold, physicians will qualify for the exception where no less than 10% of the total value of the remuneration the physician receives under the value-based arrangement is at risk. The nature and extent of the physician’s financial risk must be in writing under this exception.

The Value-Based Arrangements exception includes compensation arrangements that qualify as value-based arrangements, regardless of the level of risk undertaken by the value-based enterprise or any of its VBE participants and will permit both monetary and nonmonetary remuneration between the parties. With the parties undertaking less risk, this exception has additional safeguards. The safeguards include the requirement of a signed writing not required by the two other value-based exceptions, as well as annual monitoring requirements to track the value based-activities and related impact and progress of such activities.

In the final rule, CMS opted not to include a separate exception to specifically protect CMS-sponsored models, whereas the OIG did. CMS’ response to commenters who requested such an exception was that the exceptions created at § 411.357(aa) would be applicable to the compensation arrangements between parties in a CMS-sponsored model, program, or other initiative (provided that the compensation arrangement at issue qualifies as “value-based arrangement”). While CMS stated that it does not anticipate the need for new Section 1877 waivers, the final rule makes clear parties may continue to use waivers applicable to the specific CMS-sponsored models issued previously.

Indirect Compensation Arrangements to Which the Exceptions at § 411.357(aa) Are Applicable

CMS acknowledges the challenges that could arise related to certain indirect compensation arrangements that include a value-based arrangement in the unbroken chain of financial relationships. Prior to this final rulemaking, the only exception available for protection under the physician self-referral law was the indirect compensation exception at § 411.357(p). To address these concerns, CMS finalized at § 411.354(c)(4)(iii) that the exceptions at § 411.357(aa) are available to protect the physician’s referrals to the entity when an indirect compensation arrangement includes a value-based arrangement to which the physician (or the physician organization in whose shoes the physician stands) is a direct party. In order for these exceptions to be applicable, the link closest to the physician may not be an ownership interest; it must be a compensation arrangement that meets the definition of value-based arrangement. This is a beneficial change that permits certain value-based arrangements that could not otherwise satisfy the indirect compensation exception at § 411.357(p) to consider analysis under the less restrictive exceptions at § 411.357(aa).

Price Transparency

CMS remains committed to protecting patient choice and the ability of physicians and patients to make health care decisions in the patient’s best interest. CMS sought comments on price transparency in both the Request for Information, as well as in response to the proposed rule. While many commenters support the ultimate goals and purposes of price transparency, many commenters also asserted that requiring price transparency disclosures under the physician self-referral law is not an appropriate mechanism given the strict liability nature of the law. As such, CMS did not finalize any price transparency provisions in this rulemaking.

Anti-Kickback Statute

Similar to CMS, the OIG finalized new safe harbors and definitions for value-based arrangements to achieve certain goals and principles. The OIG finalized these rules in an effort to further the goals of access, quality, patient choice, appropriate utilization, and competition, while protecting against increased costs, inappropriate steering of patients, and harms associated with inappropriate incentives tied to referrals. In developing these new rules, the OIG worked to balance the competing challenges of the flexibility needed for change and innovation with the safeguards necessary to protect federal health care programs and patients. The OIG indicates that it endeavored to create rules that are clear, objective, and flexible and easy to implement while at the same time include adequate safeguards. Although OIG discussed the efforts undertaken in aligning the final rules with those of CMS to the extent possible, the fundamental differences in statutory structures and sanctions between the two laws caused OIG to contemplate the broad range of conduct that potentially implicates the AKS.

Value-Based Enterprise Safe Harbors

The safe harbors finalized by the OIG address a broad range of value-based arrangements for coordinated care activities. In order to offer safe harbor protection to a variety of potential arrangements, the final safe harbors vary by the types of remuneration protected (not all protect monetary remuneration), as well as by the types of entities that may rely on the safe harbors, the level of financial risk undertaken by the parties, and the required safeguards. The intent is that these safe harbors will protect both existing and emerging value-based arrangements.

The final rule includes three new safe harbors encompassing a variety of arrangements for VBEs intended to “foster better care at lower cost through improved care coordination for patients.” VBEs can take many forms. They are generally networks of individuals or entities (at least two) that collaborate to achieve a value-based purpose. VBEs include the universe of entities participating in arrangements eligible for safe harbor protection. The VBE is also the body that is accountable for making sure that all the criteria of a safe harbor are met. Each of the safe harbors protects a variety of arrangements. They share a common terminology, such as VBE Participant, Value-Based Arrangement, and Value-Based Activity.

The value-based safe harbors, as finalized, do not include the traditional fraud and abuse safeguards of fair market value or a broad prohibition on taking into account the volume or value of any referrals. Rather, the OIG included safeguards intended to prevent potential risk of fraud and abuse in value-based payment systems, such as a prohibition on taking into account the volume or value of referrals outside the target patient population and limits on directed referrals. The required levels of risk-sharing offer additional protections in the applicable safe harbors, with specific safeguards in the care-coordination arrangements safe harbor including a contribution requirement of recipients because parties are not required to assume financial risk or meet certain traditional safeguards.

Although OIG and CMS have some notable differences in their final rules, the value-based terminology finalized for value-based enterprises and value-based arrangements that are eligible for protection under a value-based safe harbor under the anti-kickback statute or a value-based exception under the physician self-referral law are aligned in nearly all respects.

Unlike CMS however, the OIG did include restrictions on the parties who are eligible to use the value-based safe-harbors. Ineligible entities include: pharmaceutical manufacturers, distributors, and wholesalers; PBMs; laboratory companies; pharmacies that primarily compound drugs or primarily dispense compounded drugs; manufacturers of devices or medical supplies; entities or individuals that sell or rent DMEPOS (other than a pharmacy or a physician, provider, or other entity that primarily furnishes services); and medical device distributors and wholesalers. The OIG did permit manufacturers of devices or medical supplies and DMEPOS, under specific conditions, to use the care coordination arrangements safe harbor.

In addition to the three value-based enterprise safe harbors, the OIG finalized other options for additional arrangements that might not satisfy one of these specific safe harbors. For example, if an arrangement includes monetary remuneration, such as shared savings or performance bonus payments, these parties may be eligible for protection of outcomes-based payments at § 1001.952(d)(2). In addition, unlike CMS, OIG finalized an additional safe harbor specifically for CMS-sponsored models at § 1001.952(ii).

The VBE safe harbors are:

  1. Care coordination arrangements to improve quality, health outcomes, and efficiency (§ 1001.952(ee));
  2. Value-based arrangements with substantial downside financial risk (§ 1001.952(ff)); and
  3. Value-based arrangements with full financial risk (§ 1001.9529gg))

The care coordination arrangements safe harbor protects only in-kind remuneration. This safe harbor is the least flexible because while it does not require the participants to take on risk, it does require that the arrangement be measured based on at least one evidence-based outcome measure, along with several other safeguards that ensure transparency. The exchange of in-kind remuneration is permitted under this safe harbor pursuant to value-based arrangement, where the parties establish legitimate outcome measures to advance the coordination and management of care for the target patient population; the arrangement is commercially reasonable; and the recipient contributes at least 15% of either the offeror’s cost or the fair market value of the remuneration. The care coordination arrangements safe harbor does not protect monetary payments, including payments for services such as radiology or imaging.

The safe harbor for value-based arrangements with substantial downside risk protects both in-kind and monetary remuneration between a VBE and a VBE participant if the VBE undertakes the requisite amount of risk. In this safe harbor, VBE Participants are required to “meaningfully share” in downside risk. In the proposed rule, substantial downside risk would have required participants to undertake risk of at least 8% of the amount for which the VBE is at risk. In response to comments, the OIG reduced this amount so that the participant need only share at least 5% of the risk. If parties use the “Shared Savings and Losses Methodology” of this safe harbor, the OIG reduced the risk threshold the parties must assume from 40% to 30%. The OIG retained the 20% risk threshold for the Episodic Payment Methodology. The final rule does not include the proposed population-based payment methodology because population-based payments may not always involve downside financial risk.

The final VBE safe harbor for value-based arrangements with full financial risk provides the greatest flexibility, as it also requires the assumption of the most risk. Full Financial Risk is defined as responsibility for all the costs of all items and services covered by a payor for each patient in the target populations for the term of one year. The remuneration protected under this safe harbor includes both monetary and in-kind remuneration from a VBE to a VBE participant.

CMS-Sponsored Models Safe Harbor

Although CMS believes that CMS-sponsored models did not require a specific exception to the physician self-referral law, the OIG finalized the proposed safe harbor for these models. The purpose of this safe harbor is to provide greater predictability for model participants as well as uniformity across models. With the implementation of this new exception, OIG believes the need for separate fraud and abuse waivers from the OIG for new CMS-sponsored models should be reduced.

A related new patient engagement and support safe harbor provides protection for certain patient engagement tools (§ 1001.952(hh)). This safe harbor addresses items and services that patients might need to adhere to treatment regimens. Its protection is limited to in-kind remuneration provided by VBE Participants to patients to assist with the patient’s engagement in their care.

Protected patient engagement tools are limited to in-kind goods or services such as health-related technology, patient health-related monitoring tools and services, and support services designed to identify and address a patient’s social determinants of health. Patient engagement tools must have a direct connection to the coordination and management of care of the target patient population. The safe harbor does not protect the giving of cash, cash equivalents, and certain types of gift cards. The aggregate value of the tools and supports cannot exceed $500 per year.

The tools must be recommended by a licensed health care professional and must advance one of five goals: (1) adherence to a treatment regimen; (2) adherence to a drug regimen; (3) adherence to a follow-up care plan; (4) prevention or management of a disease or condition, or (4) ensuring patient safety.

The safe harbor does not apply to certain VBE participants, including pharmaceutical manufacturers, distributors, wholesalers, PBMs, laboratory companies, compound pharmacies, certain device manufacturers, and DMEPOS suppliers.

Anti-Kickback Safe Harbors

In addition to new safe harbors for value-based arrangements, the OIG modified existing safe harbors and created new safe harbors. The goal of these changes was to modernize the safe harbors and reduce administrative burden while continuing to protect against fraudulent activities.

Personal Services and Management Contracts and Outcomes-Based Payments Safe Harbor

The OIG modified the personal services and management contracts safe harbor include the protection of certain outcome-based payment arrangements. To be protected, the payments must be based on the achievement of measures with clinical evidence or credible medical support. The safe harbor requires that payments for any such arrangement measurably improve or maintain care or materially reduce costs. Outcomes measures related solely to patient satisfaction or patient convenience are not included. Outcomes-based payments that relate only to internal cost savings also are excluded from safe harbor protection. Safe harbor protection under this new provision is not available to pharmaceutical manufacturers, distributors, wholesalers, PBMs, laboratory companies, compound pharmacies, certain device manufacturers, and durable medical equipment suppliers.

In addition, the OIG removed the current safe harbor requirement that the aggregate payment for a management or services arrangement be set out in advance. Going forward, only the methodology need be set in advance. This makes the safe harbor consistent with the parallel physician self-referral law exception. The OIG removed the requirement that part-time arrangements have a schedule of services specifically set out in the written agreement.

Modification to the Warranty Safe Harbor

The OIG finalized changes to the Warranty Safe Harbor to allow protection for a bundle of one or more items and related services, provided the items and services are all paid for by the same payor and under the same payment. Population-based warranties do not receive safe harbor protection. Service-only warranties are also not protected. Finally, the safe harbor caps compensation paid under a warranty at the amount paid for the item(s) or bundle of items and services.

Modification to Local Transportation Safe Harbor

The OIG finalized, with some modifications, the proposed changes to the local transportation safe harbor. The OIG expanded the mileage limits up to 75 miles for residents in rural areas. Additionally, the final rule eliminated any distance requirement for conveying inpatients to their residence upon discharge. Ride-sharing arrangements are included in the final rule as permissible under the safe harbor.

ACO Beneficiary Incentive Program Safe Harbor

The Balanced Budget Act of 2018 included a statutory provision excluding incentive payments made to a beneficiary who receives such payments as part of the ACO Beneficiary Incentive Program under Section 1899(m) of the statute from the definition of remuneration. The OIG codified the Balanced Budget Act provision as a new safe harbor without any modification from the statute and made no modifications in the provision that was finalized. The new safe harbor at 1001.952(kk) protects incentive payments made by an ACO to an assigned beneficiary under a beneficiary incentive program established under Section 1899(m) of the Act if the incentive payment is made in accordance with the requirements found in Section 1899(m) of the Act.

Civil Money Penalty Exception

Statutory Exception for Telehealth Technologies for In-Home Dialysis

The Creating High-Quality Results and Outcomes Necessary to Improve Chronic Care Act of 2018 (Act) included a provision to permit individuals with end-stage renal disease (ESRD) receiving home dialysis treatment to be provided monthly clinical assessments through telehealth and created an exception from the definition of remuneration under the Civil Money Penalty for beneficiary inducements (42 U.S.C. § 1320a-7a(a)(5)) for telehealth technologies provided to those patients. The OIG finalized certain safeguards for such telehealth technologies to implement the statutory provision. For purposes of the telehealth technologies exception to the definition of “remuneration” authorized under Section 1128A(i)(6)(J) of the Act, “telehealth technologies” is defined to include hardware, software, and services that support distant or remote communication between the patient and provider, physician, or renal dialysis facility for the diagnosis, intervention, or ongoing care management. Although OIG finalized a broad definition that focuses on the function of the technology, the other conditions of the exception provide safeguards, such as that the technologies are provided for the purpose of furnishing telehealth services related to the recipient’s ESRD, placing a prohibition on advertisement or solicitation, and limits on who can provide such technology to ESRD patients, that serve as protection for beneficiaries and the federal health care programs.

Physician Self-Referral (Stark) Law

Fundamental Terminology Requirements

CMS used the final rule to address many ambiguities under the existing physician self-referral law regulations that had prompted requests for clarification and guidance and/or were the basis for approximately 1,200 self-disclosures under the CMS protocol. These involved situations that were technically non-compliant but did not create fraud or abuse concern for CMS. In the rules, CMS finalized most of its original proposals, with some modifications to incorporate comments on the proposed rule.

CMS’ stated intent in making the changes to existing regulations and the addition of new exceptions is to reduce any undue impact of the physician self-referral law and regulations by interpreting the physician self-referral law prohibitions narrowly and the exceptions broadly. CMS states that it has strived to modernize and clarify the regulations to reduce unnecessary regulatory burden, while continuing to protect Medicare from program and patient abuse.

The Big 3

Since the issuance of the proposed regulations last October, much discussion has focused on three requirements that are found in most of the regulatory exceptions to the physician self-referral law—commercial reasonableness, fair market value, and the volume or value of services. The final rule aims to establish bright line, objective criteria to provide those regulated by the physician self-referral law with greater certainty regarding their compliance with the physician self-referral law. The final rules confirm that each of these terms are separate and distinct, each with their own requirements as described below.

Commercial Reasonableness

In clarifying the definition of commercial reasonableness, CMS stated that the key question to consider when determining if an arrangement is commercially reasonable is whether the arrangement makes sense as a means to accomplish the parties’ goals. Since the specific facts of an arrangement are key to this determination, the analysis must be based on the perspective of the particular parties involved in the arrangement. CMS highlights that a commercial reasonableness determination is not one of valuation. More notably, it is expressly not based on whether the arrangement is profitable or not. In the final rule, CMS explicitly codifies that arrangements that do not result in profit for one or more of the parties may nonetheless be commercially reasonable. Under the final rule the definition of “commercially reasonable” means only that an arrangement furthers a legitimate business purpose of the specific parties to the arrangement and is sensible, considering the size, type, scope, and specialty of the parties.

Volume or Value Standard and the Other Business Generated Standard

The final rules relating to the volume or value standard and the other business generated standard expressly supersede CMS’ previous rules and guidance. While not adding a definition of volume or value, CMS codifies the meaning of the term volume or value of referral and other business generated within the special rules on compensation. CMS does this by creating rules for both compensation to a physician and for compensation from a physician. Each rule is subdivided to address compensation that varies based on the volume or value of referrals and compensation that varies based on other business generated.

Rather than deeming compensation under certain circumstances not to have been determined in a manner that takes into account the volume or value of referrals or takes into account other business generated between the parties, the new rule takes the approach of identifying the universe of arrangements that will be considered to take into account the volume or value of referrals or other business generated.

Under the final rules, the amount of compensation will be considered to take into account the volume or value of referrals or other business generated only when the formula used to calculate compensation to or from a physician includes the volume or value of referrals or other business generated as a variable, either increasing or decreasing the amount of compensation in a way that directly correlates with referrals or other business generated. This special rule is to be used whenever the regulations refer to compensation “taking into account” “related to” or “based on” the volume or value of referrals or other business generated. This special rule also applies to the group practice definition to ensure that a physician member of a group practice cannot receive compensation that directly or indirectly takes into account the volume or value of referrals for designated health services unless it is otherwise permitted by the special rules for profit shares and productivity bonuses.

Fair Market Value and General Market Value

The definition for fair market value was finalized to mean the value in an arm's-length transaction consistent with the general market value of the subject transaction. Additionally, with respect to equipment, fair market value is determined without taking into account its intended use. Similarly, the fair market value of an office space lease considers the space as used for general commercial purposes (not taking into account its intended use) and without any 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 lesee.

For clarity, CMS finalized definitions for “general market value” related to each type of transaction (asset acquisition, compensation for services, and rental of equipment or office space). Each definition is premised on bona fide bargaining between a well-informed buyer and seller that are not in a position to refer to each other. CMS did not finalize its proposal to equate general market value with “market value.”

Period of Disallowance

CMS finalized its proposal to delete the rules on the period of disallowance in their entirety, noting that while the rule was intended to create the outermost limit of the time period of non-compliance, it had been interpreted in ways that created confusion. CMS did create a new special rule that allows parties to reconcile compensation errors for up to 90 days after a compensation arrangement ends (§ 411.353(h)).

Financial Relationship, Compensation, and Ownership or Investment Interest

CMS made other important changes to the rules relating to financial relationships, including indirect compensation and the special rules on compensation (§ 411.354). In the section on special rules for compensation, CMS created greater flexibility for documenting compensation arrangements and added requirements to the rule regarding directed referrals, as discussed below.

Indirect Compensation Arrangement Definition

Notably, CMS took the opportunity in the final rules to simplify the analysis for indirect compensation arrangements to include only those arrangements where the individual unit of compensation is not fair market value, or the individual unit of compensation received by the physician is calculated using a formula that varies with the referrals of the physician or varies with the other business generated by the physician in a way that positively correlates to the compensation received by the physician as indirect compensation. By changing this rule, fewer arrangements will be considered indirect compensation arrangements requiring the use of the indirect compensation exception. While CMS acknowledged this would create many more unbroken chains of financial relationships not requiring a writing, CMS cautioned that best practice is to have a written agreement, CMS concluded that removing the unnecessary burden outweighed potential risk to the Medicare program.

Patient Choice and Directed Referrals

Under the special rule for directed referrals, an entity is permitted to direct a physician who is a bona fide employee, independent contractor, or party to a managed care contract, to refer to a specific provider, practitioner, or supplier. The underlying compensation arrangement must meet specified conditions designed to preserve patient choice, comply with insurer’s determinations, and protect the physician’s judgment as to the patient’s best medical interests. In an effort to ensure that patient choice and physicians’ professional medical judgment are protected, CMS finalized its proposal to add these requirements at § 411.354(d)(4) as an element of the exceptions for the following: § 411.355(e) for academic medical centers, § 411.357(c) for bona fide employment relationships, § 411.357(d)(1) for personal service arrangements, § 411.357(d)(2) for physician incentive plans, § 411.357(h) for group practice arrangements with a hospital, § 411.357(l) for fair market value compensation, and § 411.357(p) for indirect compensation arrangements. In addition, CMS added a condition to the special rule that neither the existence of a compensation arrangement nor the amount of compensation may be contingent on the volume or value of referrals to a particular provider, practitioner, or supplier. An arrangement may require that the physician refer an established percentage or ration of the physician’s referrals to a particular provider, practitioner, or supplier.

Documentation and Set in Advance    

In order to provide greater flexibility, CMS added the ability to document and sign agreements within 90 days of the beginning of the arrangement to the special rules on compensation arrangements. The arrangement must satisfy all requirements of an applicable exception except for the writing and signature. Further, CMS has included a new provision specifically allowing electronic signatures that are valid under federal or state law.

In addition, CMS modified the definition of “set in advance” to allow the modification of compensation during the term of an agreement where the modified compensation is not based on the volume or value of referrals. The modification can occur at any time, including the first year, as long as all of the requirements of an applicable exception are met as of the date of modification; the modified compensation (or formula) is set prior to the furnishing of the items, services, office space, or equipment; and the modified compensation (or formula) for the modified compensation is set forth in writing in sufficient detail so that it can be objectively verified. The special rule allowing 90 days to create a writing is not applicable to modifications. Importantly, the modified compensation need not remain in place for a year and there is no limit to the number of times that the compensation may be modified.

Modifications to the Group Practice Definition

CMS finalized its proposed changes to the special rules for profit shares and productivity bonuses. First, CMS finalized a deeming provision related to the distribution of profits from designated health services that are directly attributable to a physician’s participation in a value-based enterprise. This distribution would be deemed not to directly take into account the volume or value of the physician’s referrals and would enable physicians in a group practice who are participating in value-based arrangements to be rewarded for their participation in such models.

Second, CMS reiterated its view that the distribution of overall profits of all DHS for the whole group or any component of the group (pod) of five or more physicians must be aggregated before distribution. CMS rejected comments that DHS could be distributed to pods based on a service-by-service basis, such as lab or x-ray. Recognizing that group practices may need to modify their compensation arrangements, CMS delayed the effective date of this change until January 1, 2022.

Recalibrating the Scope and Application of the Regulations

Decoupling the Physician Self-Referral Law from the Anti-Kickback Statute and Billing Laws

CMS reconsidered its position and no longer believes that it is necessary or appropriate to include requirements pertaining to compliance with the AKS and federal and state laws or regulations governing billing or claims submission as requirements of the exceptions to the physician self-referral law. Accordingly, CMS removed this requirement from all physician self-referral law exceptions other than the fair market value exception (§ 411.357(l)). CMS also removed the requirement that arrangements do not violate any federal or state law governing billing or claims submission wherever such requirements appear.

Revisions to Definitions

CMS finalized revisions to several definitions including: designated health services (clarifying that a service provided by a hospital to an inpatient does not constitute a designated health service payable, in whole or in part, by Medicare, if the furnishing of the service does not affect the amount of Medicare’s payment to the hospital under: (i) Acute Care Hospital Inpatient Prospective Payment System (IPPS), (ii) Inpatient Rehabilitation Facility (IRF PPS), (iii) Inpatient Psychiatric Facility (IPF PPS), or (iv) Long-Term Care Hospital (LTCH PPS).

In addition, CMS finalized changes with some modifications to the definition of (i) physician, (ii) referral, (iii) remuneration, and (iv) transaction. Importantly, with respect to the definition of transaction and isolated transaction, CMS affirmed its view that an isolated transaction does not include a single payment for multiple services over an extended period of time. An isolated transaction continues to include, however, a payment made to forgo compensation in a bona fide dispute.

Compensation Exceptions

Fair Market Value Compensation Exception

CMS finalized its proposal to allow the exception for fair market value compensation arrangements to extend to office space leases. The prohibitions on per unit of service and percentage-based arrangements are incorporated into the fair market value exception for office space leases; however, there is no requirement for a one-year term.

Electronic Health Records (EHR) and Cybersecurity

CMS and OIG both finalized changes to the EHR exception and safe harbor, respectively. The final rules are similar and clarify that donations of certain cybersecurity software and services are permitted under the EHR exception, removes the sunset provision, and allows the physician to pay its portion of the EHR at reasonable intervals. Notably, it also removes the requirement that donors need to ensure they are not providing equivalent EHR technology.

CMS also finalized a new exception for the provision of Cybersecurity hardware and software. It permits the donation of cybersecurity technology and services that are necessary and predominantly used to implement, maintain, or reestablish cybersecurity. There is no requirement for physicians to share in the cost of cybersecurity.

Limited Remuneration to a Physician

CMS finalized its new exception for limited remuneration to a physician. The new exception permits the provision of limited remuneration to a physician if certain requirements are met, including instances when the amount of, or a formula for, calculating the remuneration is not set in advance of the provision of items or services and the remuneration does not exceed an aggregate of $5,000 per calendar year. This exception can be used in conjunction with the special rules that allow 90 days to document and sign an arrangement.


The final rules from CMS and OIG contain a great deal to consider. As they have done in the past, CMS and OIG worked cooperatively with each other in drafting the regulations and have produced thoughtful and far-reaching changes. The rules recognize the inherent overlap of the physician self-referral law with the AKS and highlight some of those areas where CMS and OIG align with each other in their proposals, and where, due to the focus and application of the different laws, the analysis differs. While protecting the integrity of the federal health care programs, these new rules appear to remove certain roadblocks to allow greater innovation in health care and reduce administrative burden where possible. While there is a lot to digest with these new rules, as the industry starts putting them into action, the impact will become apparent.


[1] 42 U.S.C. § 1320a-7b(b).

[2] For a discussion of the proposed rules, see Julie E. Kass and Kristin M. Bohl, Health Law Weekly, October 11, 2019,