New Limited Remuneration Exception and Additional Tools to Ensure Compliance with the Stark Law

Introduction

On November 20, 2020, the Centers for Medicare & Medicaid Services ("CMS") issued a final rule making a variety of modifications to "modernize and clarify" the regulations that interpret the Physician Self-Referral Law ("Stark Law"). The provisions discussed in this Commentary are effective January 19, 2021. Included in the final rule are new exceptions and special rules that provide additional flexibility for parties to cure certain instances of noncompliance, including (i) an exception for limited remuneration for items or services actually provided by the physician; (ii) removal of bright-line rules concerning the "period of disallowance"; and (iii) allowance of timely reconciliation of payment discrepancies. 

The Final Rule

Limited Remuneration: Codified at 42 C.F.R. § 411.352(z), the limited remuneration exception allows for payments to physicians for items and services up to "an aggregate of $5,000 per calendar year, as adjusted [annually] for inflation…" The exception applies only to items or services actually provided, and includes arrangements involving the lease of office space or equipment from a physician or the use of premises or equipment provided by a physician. A number of other conditions must be met for the exception to apply: 

• Compensation must not be determined in any manner that takes into account the volume or value of referrals; 
• Compensation must not exceed fair market value; 
• Compensation must be commercially reasonable, even if no referrals were made between the parties; 
• For leases of office space or equipment or timeshare arrangements for the use of premises or equipment, compensation must not be based on a percentage of revenues or non-time based per unit of service fees (i.e., per click instead of per hour); and
• If remuneration is conditioned on the physician’s referrals, the arrangement must also satisfy the conditions of §411.354(d)(4), including, among others, that the compensation is set in advance and includes the exceptions to mandated referrals in §411.354(d)(4)(iv). 

Importantly, the exception does not include a writing or signature requirement, nor does it require that compensation is set in advance absent a directed referrals covenant. The exception can be used with other applicable exceptions to protect an arrangement or limit the period of disallowance of a noncompliant arrangement.

CMS clarified that, in applying the $5,000 cap (increased from $3,500 as proposed), it will only include remuneration not protected by another exception. However, if an entity and a physician have multiple undocumented, unsigned arrangements in effect during the same year, CMS considers the parties to have a single arrangement for purposes of the exception. Only the first $5,000 paid to a physician in a calendar year is excepted, and the limit resets each calendar year.

The new exception permits a physician to provide items or services through an employee, a wholly owned entity, or a locum tenens physician, but not through an independent contractor. For purposes of the $5,000 limit, there are not separate limits for physicians and their employees. Rather, payments for items provided through a physician’s employee are counted toward the $5,000 limit of the physician. 

Additionally, the exception is not applicable to payments to a physician’s immediate family member (unless that family member is an employee). The exception permits payments to a physician organization only for "deemed" direct compensation agreements between an entity and a physician who stands in the shoes of the physician organization. As with employees, any compensation received by the organization counts toward the $5,000 cap for each physician who stands in the shoes of the organization.

Period of Disallowance: The "period of disallowance" is the period of time during which a physician may not make referrals for designated health services to an entity and the entity may not bill Medicare for the referred designated health services due to a Stark violation. Problematically, the end date of the disallowance is not always clear, making a bight-line rule a burden rather than a benefit. 

CMS decided less is more. The final rule deletes provisions defining the period of disallowance at §411.353(c)(1). Though the rules in essence were meant to establish a bright line for an outside time limit, in practice they "appear to be overly prescriptive and impractical." CMS noted this action does not undermine the Stark Law, but simply removes the bright-line shackles in favor of case-by-case analysis. CMS stressed that the analysis to determine when a financial relationship has ended depends on the unique facts and circumstances of the financial relationship, including the operation of the financial relationship as negotiated between the parties.

Despite this change, the general principle that the period of disallowance under the physician self-referral law begins on the date when a financial relationship violates Stark Law and ends on the date that the financial relationship ends or complies with Stark Law remains true. CMS stated that removing the regulations is the best way to ensure that an intended elective "safe harbor" is not mistaken for a compulsory action required to ensure that the period of disallowance has ended. 

As for unintended payment errors, if a party identifies such an error during the course of an arrangement, the parties do not fall out of compliance with Stark Law if the payment discrepancy is remedied within 90 calendar days after the end of the arrangement (see below). CMS emphasized that parties cannot simply "unring the bell" by correcting an error after termination of the arrangement. If a payment error is not timely discovered and rectified, to properly ascertain potential noncompliance CMS would analyze the actual compensation arrangement between the parties rather than the amount stipulated in a written agreement. 

Where an error is not timely rectified, the actions of parties may differ from their documented arrangement such that they create a separate compensation arrangement that must be analyzed for compliance. CMS described how parties might use multiple exceptions, including the limited remuneration exception discussed above, as a means of limiting the scope of potential noncompliance where a documented arrangement differs from actual compensation. 

Finally, one-time payments that are above or below fair market value and the provision of nonmonetary compensation in excess of the annual limit in §411.357(k)(1) also complicate the calculation of end dates. Rejecting a request for a bright line rule, CMS found the period of disallowance for noncompliant one-time payments should be assessed on a case-by-case basis. However, CMS did say that for nonmonetary compensation overages not repaid in accordance with §411.357(k)(1), there is a rebuttable presumption that the period of disallowance ends no later than December 31st of the year in which the excess nonmonetary compensation is provided.

Reconciliation of Payment Discrepancies: CMS uses the final rule to advance its position that entities are responsible for monitoring their compensation arrangements with physicians and that effective compliance programs enable parties to identify administrative and operational errors that result in payment discrepancies. In line with this policy, CMS implemented a new special rule in §411.353(h) to codify its understanding that payment discrepancies "identified and rectified in a timely manner" do not cause a compensation arrangement to be out of compliance with the requirements of an applicable exception. CMS declined to extend the special rule to any identified noncompliance other than payment discrepancies.

Under this special rule, parties to an arrangement may submit claims for health services even where the arrangement as operated varies from the intended financial terms if: (i) the parties reconcile all discrepancies in payments such that the entire amount of remuneration has been paid consistent with the terms and conditions of the arrangement within 90 calendar days after the expiration or termination of the arrangement; and (ii) except for the payment discrepancy, the arrangement fully complies with an applicable exception. CMS emphasizes this special rule is a deeming provision only and not intended to be interpreted as a universal requirement to recoup payment discrepancies within 90 days.

CMS further emphasizes that while the special rule provides a 90-day grace period, parties to an arrangement should seek to cure discrepancies as soon as they are known. Parties that fail to cure a known payment discrepancy risk establishing a second financial relationship (e.g., the forgiveness of debt or provision of an interest-free loan) that must meet an applicable exception in order to comply with the Stark Law. CMS indicates that it will assess the specific facts and circumstances, such as the amount of the discrepancy or length of time such discrepancy was known, to assess whether a secondary financial relationship was formed. Further, if such secondary relationship does not meet an applicable exception, the entity is prohibited from submitting a claim for designated health services referred by a physician, even if the underlying discrepancy is ultimately cured. Given the lack of clear standards related to when a secondary relationship is formed, this special rule may become an area of increased focus for regulators or relators. An entity seeking to rely on this special rule to cure payment discrepancies should carefully document the facts and circumstances surrounding the discovery and reconciliation of payment discrepancies to highlight strong compliance functions and to demonstrate compliance with all applicable requirements.

It should be noted that if there is no bona fide dispute as to the amount that should have been paid under the terms of the arrangement, then the parties must reconcile the amounts owed under the arrangement during the term of the arrangement or within 90 days after the arrangement ends to avoid creating a second financial relationship (e.g., an interest-free loan) that must satisfy an exception once it exists. Whether a separate financial relationship is created depends on the facts and circumstances including the amount of the payment differential, how long it continues and whether a party is aware of the payment error. The parties also may not use the isolated transactions exception to cure payment discrepancies where there is no bona fide dispute as to the amounts owed. (The isolated transactions exception is addressed in a companion Commentary.)

Likewise, as noted above, the parties must seek to cure the payment discrepancy as soon as it is discovered. On a positive note, CMS noted that the payment discrepancy may be recovered through an offset against future compensation, but stated that the entire discrepancy would need to be recovered with 90 calendar days following the expiration or termination of the arrangement. While no other specific guidance was provided regarding the permitted time period for the recoupment, in the preamble CMS stated that the discrepancy should be "rectified in a timely manner." Unreasonably long repayment terms may lead to creation of a period of disallowance.

Implications & Conclusion

The limited remuneration exception, eliminated period of disallowance, and special rules related to payment discrepancies provide additional tools and flexibility for entities to promote compliance with applicable exceptions and mitigate certain risks by allowing grace periods for entities that monitor, identify, and correct payment discrepancies. However, entities must remain vigilant when using the tools provided under this final rule to cure potential noncompliance, as CMS has introduced additional fact-specific analyses that may prove an area for targeted review, enforcement action, or potential litigation.