For more information about this blog post, please contact Khaled J. Klele, Ryan M. Magee, Labinot Alexander Berlajolli, or Connor Breza.

Final Changes Regarding Distribution of Profits

The Centers for Medicare & Medicaid Services (“CMS”) and Department of Health and Human Services (“HHS”) announced a Final Rule, effective January 1, 2022, modifying the requirements under the Stark Law with respect to distribution of profits among physicians in a group practice.

Under the new rule, § 411.352(i) will be modified to clarify the permissible methods for distributing profit shares derived from the referral of designated health services (“DHS”) among the physicians of a group practice (as defined under the Stark Law). Of note, this regulation would modify references to “profits” and “revenues” to more accurately be reflected by the term “overall profits,” which is defined under the rule as “the profits derived from all the designated health services.”

In doing so, this change will require that group practices utilize the same methodology for distributing such income across the group, whereas in the past it was not uncommon for profits derived from different types of DHS to be distributed differently. Specifically, the proposed final rule states that “a physician practice that wishes to qualify as a group practice may not distribute profits from designated health services on a service-by-service basis.” As an example, the rule proceeds to elaborate that, “[i]f the practice wishes to qualify as a group practice, it may not distribute the profits from clinical laboratory services to one subset of its physicians and distribute the profits from diagnostic imaging to a different subset of its physicians.”

This change will have a wide-reaching effect on the ways group practices can allocate and distribute profits derived from DHS, most significantly as it pertains to ancillary services provided throughout the group. In anticipation of potential disruptions to group practices, and potential difficulty with becoming compliant with the modified regulations, CMS delayed the effective date beyond that of the remainder of the Final Rule’s changes to provide group practices with ample time to adjust.

Changes to Indirect Compensation Arrangement

CMS released a proposed rule amending the federal Stark law’s definition of “indirect compensation arrangement.” The federal Stark Law, also known as the Physician Self-Referral Law, (1) prohibits a physician from making referrals for certain designated health services payable by Medicare to an entity with which he or she (or an immediate family member) has a financial relationship, unless an exception applies, and (2) prohibits the entity from filing claims with Medicare (or billing another individual, entity, or third party payer) for those referred services.

This prohibition applies to direct as well as indirect compensation arrangements. CMS’s proposed rule seeks to revise the regulation at § 411.354(c)(2) that sets forth the conditions for the existence of an indirect compensation arrangement. As the regulations now stand under § 411.354(c)(2)(ii)(A), an indirect compensation arrangement is identified when there is an unbroken chain of financial relationships between an entity and a physician, and the physician (or immediate family member of the physician) receives aggregate compensation from the person or entity in the chain, with which the physician (or immediate family member) has a direct financial relationship, that varies with the volume or value of referrals or other business generated by the physician for the entity furnishing the designated health services, and one of the following criteria is implicated:

1. The individual unit of compensation received by the physician (or immediate family member) is not fair market value for items or services actually provided;
2. The individual unit of compensation received by the physician (or immediate family member) is calculated using a formula that includes the physician's referrals to the entity furnishing designated health services as a variable, resulting in an increase or decrease in the physician's (or immediate family member's) compensation that positively correlates with the number or value of the physician's referrals to the entity; or
3. The individual unit of compensation received by the physician (or immediate family member) is calculated using a formula that includes other business generated by the physician for the entity furnishing designated health services as a variable, resulting in an increase or decrease in the physician's (or immediate family member's) compensation that positively correlates with the physician's generation of other business for the entity.

The new regulation proposed by CMS would modify the definition for an indirect compensation arrangement to require that the unit of compensation received by the physician (or immediate family member) be identified as payment for anything other than services personally performed by the physician (or immediate family member). Furthermore, the proposed rule seeks to expressly identify the units to consider under § 411.354(c)(2)(ii)(A) and to determine whether an indirect compensation arrangement satisfies the requirements of an applicable exception under a new regulation at § 411.354(c)(2)(ii)(B)(2).

Under the proposed regulation, CMS specifies that the specific units will be:

1. Time, where the compensation paid to the physician (or immediate family member) is based solely on the period of time during which the services are provided;
2. Service, where the compensation paid to the physician (or immediate family member) is based solely on the service provided; and
3. Time, where the compensation paid to the physician (or immediate family member) is not based solely on the period of time during which a service is provided or based solely on the service provided.

CMS’s aim in proposing the change is to facilitate compliance with the federal Stark Law as it applies to indirect compensation arrangements. It is also intended to cover arrangements that were not previously included in the rule, such as payments for space, equipment and services performed by a family member, or company the family member has an ownership interest in.