In a December 2, 2020 rulemaking (2020 Final Rule), the Centers for Medicare & Medicaid Services (CMS) finalized a set of sweeping and significant revisions to the regulations implementing the federal physician self-referral statute (Stark Law). Among the many changes introduced by the 2020 Final Rule, two of the more consequential modifications related to (1) the definition of the term, “indirect compensation arrangement” (ICA), one of the four types of “financial relationships” between a referring physician and an entity that furnishes designated health services (DHS entity) that implicate the Stark Law, and (ii) the treatment of unit-based compensation (e.g., $100 per hour of service, $125 patient encounter, and so forth). The bulk of the new regulations took effect on January 19, 2021.

A short six months later, CMS was back at the editing desk, proposing to further amend the regulations with respect to the definition of an ICA (ICA Definition) and unit-based compensation, and soliciting public comment in that regard. (This 2021 Proposed Rule, which was published in the Federal Register on July 23, 2021, also included proposed changes to the Stark Law exception for preventive screening tests, immunizations, and vaccines to ensure that COVID-19 vaccines would be covered under this exception.)

On November 2, 2021, CMS finalized the proposed modifications with certain adjustments made in response to industry comments (2021 Final Rule). A redline highlighting the 2021 Final Rule modifications to the regulatory text of the ICA Definition adopted earlier this year (pursuant to the 2020 Final Rule) is available here. The modified regulations are scheduled to be published in the Federal Register on November 19, 2021, and will take effect on January 1, 2022.

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In promulgating the revised ICA Definition in the 2020 Final Rule, CMS set out to reduce the overall number of non-direct compensation arrangements between a referring physician and a DHS entity that would implicate the Stark Law in the first instance. This objective was achieved by adding more requirements to the ICA Definition, making the three-prong definition decidedly more difficult to satisfy.

Specifically, the 2020 Final Rule broke out the second condition of the ICA Definition into two parts, both of which must be met (in addition to the first and third conditions) for an ICA to exist. The first part of the second condition (Part One Test) focuses on the compensation arrangement closest to the referring physician in the unbroken chain of financial relationships between the physician and the DHS entity, and asks whether the “aggregate compensation” received by the referring physician under that compensation arrangement “varies” with the volume or value of the physician’s referrals to or other business generated for the DHS entity. The second part of the second condition (Part Two Test), by contrast, focuses on the “individual unit of compensation” in the compensation arrangement at issue. In order for the Part Two Test to be met, the individual unit of compensation must:

1. not be “fair market value for items or services actually provided,”
2. include the physician's “referrals” to the DHS entity as a variable, such that there is a positive correlation between the amount of compensation and the volume or value of the physician’s referrals to the DHS entity, or
3. include “other business generated” by the physician for the DHS entity as a variable, such that there is a positive correlation between the amount of compensation and the volume or value of other business generated by the physician for the DHS entity.

The 2021 Proposed Rule purported to add a fourth option pursuant to which the Part Two Test could be met. It proposed that the Test would also be met if the individual unit of compensation was payment for “anything other” than the referring physician’s personally performed services — a sweeping change that would greatly increase the overall number of ICAs, an outcome that the 2020 Final Rule intended to avoid.

Faced with material industry pushback, however, CMS appears to have relented, at least in part. Although the 2021 Final Rule does not eliminate the fourth option for the Part Two Test, as some had advocated, it does narrow its reach significantly. Under the revised (and to be finalized) option four, option four of the Part Two Test will be satisfied only if the unit of compensation under the relevant compensation arrangement is payment for the lease or use of office space or equipment. If the unit of compensation is payment for anything else (e.g., services or a combination of space, equipment, and services), the Part Two Test will not be met unless, of course, one of the three original Part Two Test options listed above is satisfied.

The 2021 Final Rule also finalized the definition of an “individual unit” for purposes of determining whether the individual unit of compensation under the relevant compensation arrangement satisfies the Part Two Test. Under the new definition, an individual unit is (1) an item, if the physician is compensated solely per item provided, (2) a service, if the physician is compensated solely per service provided (including where the “service” provided includes both items and services), or (3) in all other instances, a unit of time.

We intend to keep analyzing the 2021 Final Rule and its anticipated impact on the health care industry. In line with our Stark Law Overhaul series of earlier this year, the Dentons Health Care Group will prepare a white paper further detailing the changes and summarizing our thoughts and observations in the upcoming week, and looks forward to sharing it with clients and other interested parties.