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The 2018 Stark Law RFI: A Stark Overhaul May be in the Making

By Douglas Schoeneman

October 17, 2018

On June 25th, the Center for Medicare and Medicaid Services (CMS) published a Request for Information (RFI) regarding the Physician Self-Referral Law (Stark Law). The Stark Law[1] prohibits a physician from making referrals for designated health services (DHS) payable by Medicare to an entity with which he or she has a financial relationship unless an exception applies. This request comes on the heel of President Trump’s FY 2019 budget which includes a proposal to establish a new Stark Law exception for participants in alternative payment models (APMs).

Nearly 400 organizations, associations, and individuals responded to CMS’s call, among them the American Hospital Association (AHA), the American Medical Association (AMA), AARP, and members of Congress. In its request, CMS stated that it was:

“…particularly interested in [stakeholders’] thoughts on issues that include the structure of arrangements between parties that participate in alternate payment models (APMs), the need for revisions or additions to exceptions to the [Stark Law], and terminology related to [APMs] and the [Stark Law].” [2]

In total, CMS requested comments relating to 20 areas, including, but not limited to:

  • What additional exceptions to the Stark Law are necessary to protect financial arrangements between participants in an APM;
  • The utility of the special rule for compensation under a physician incentive plan (PIP) found at 42 CFR 411.357(d) (the personal services exception);
  • Stakeholders’ thoughts on how to define “commercial reasonableness,” “fair market value,” and “volume or value;”
  • Compliance costs for regulated entities; and
  • Any provisions, definitions or exceptions for which additional clarification would be useful (the catch-all).

It was the catch-all request that the majority of commenters used to provide CMS with feedback on issues of importance to their respective industries. All comments can be found at (reference CMS-1720-NC).

The Stark Law is an Unnecessary Burden

The most prolific commenters came from within the sleep disorder industry, with over 70 unique comments, most of them using the boilerplate language of this section’s title provided by an association representing sleep specialists. The association forcefully argued that sleep specialists should be allowed to provide their patients with an item of durable medical equipment (DME) called CPAP (continuous positive airway pressure). As CPAP equipment is not currently on the list of DME that may be provided by physicians to their patients under the Stark Law’s in-office ancillary services exception (IOASE)[3], patients must be referred to DME providers who, the association claims, may provide inferior equipment, improperly fit the equipment to the patients’ faces, and provide patients poor guidance and training for the equipment’s most effective use.

While many of the comments from sleep specialists were heartfelt, the restriction placed on their providing patients with CPAP and other sleep-related items is largely statutory:  1395nn(b)(2) restricts the IOASE to services other than DME. CMS did carve out a regulatory exception for DME that a patient may require in order to depart the physician’s office, such as canes and walkers.[4] CPAP equipment, while necessary for a patient’s treatment, does not meet this requirement. Moreover CMS, on the subject of physicians providing CPAP or other DME to their patients as a personally performed service, said:

“We believe that it is highly unlikely that a referring physician would meet the criteria for personally performed services when dispensing CPAP…[T]he dispensing of CPAP by a physician would almost always constitute a “referral” for purposes of the [Stark Law].[5]

The association pointed to the regulatory exceptions that CMS promulgated for the ESRD treatment drug, erythropoietin (EPO), and eye glasses and contact lenses following cataract surgery arguing that these were targeted exceptions for situations in which patients required a timely solution. While that may be true, CMS also said these exceptions posed a limited risk of abuse (emphasis added) and, in the case of EPO, was necessary to avoid needless disruption of patient care.[6] While most sleep specialists will provide their patients only with the equipment that best suits their needs and as part of the patients’ plan of care, CMS may be wary of unscrupulous providers who would provide more expensive yet medically unnecessary equipment to their patients.

A Decades Long Campaign

The bulk of the rest of the comments relating to the IOASE came from independent physical therapists who want to restrict or exclude physical therapy from the list of excepted DHS and orthopaedics groups who wish for it to remain excepted. Many orthopaedics groups employ physical therapists (this section’s title is from a form letter several groups submitted to CMS) and are thus able to offer physical therapy services to their patients. Such activities are protected under the IOASE. This practice, naturally, reduces the number of referrals to independent physical therapists.

For independent physical therapists, however, they have the opposite problem from sleep specialists to contend with: their services are statutorily excepted under the IOASE. Additionally, CMS concluded in Phase II of its Stark Law implementing regulations that the Stark Law did not subject physicians (e.g., an orthopaedic surgeon ordering physical therapy services for his patient, to be provided by the physical therapist employed by the orthopedic surgeon’s group) to supervision standards that differed from the standards for Medicare payment and coverage for services billed ‘incident to.[7]’ Lastly, CMS has stated that, while it is sympathetic to the plight of independent physical therapists, it has no discretion to eliminate the IOASE or to remove physical therapy from the list of designated health services.[8]

Other Skirmishes Over the IOASE

A smaller battle took place between radiation oncologists and radiologists over keeping advanced diagnostic imaging (ADI) on the list of excepted services, with the oncologists favoring and radiologists opposing. Radiation oncologists use radiation in the treatment of cancer and should not be confused with radiologists who supervise ADI testing, interpret results, and prepare treatment plans accordingly. The association representing radiation oncologists stated that keeping ADI in-office allows “[us] to have ready access to imaging necessary for treatment planning but also to control the variables that influence the acceptability of the image.” The radiologists retorted by referring to a General Accountability Office report from September 2012 that included a finding that self-referral of ADI results in higher costs to Medicare.[9] Nevertheless, the radiologists’ association understands that the provision of ADI under the IOASE is permissible due to the statute itself and not due to a regulatory carve-out by CMS, so has requested CMS to work with Congress to enact legislation that removes it. The association generously states that standard imaging, such as x-rays, should remain excepted.

An association representing pathologists also wants to exclude clinical laboratory services from the list of excepted services, a request that will, presumably, receive a similar response from CMS.

Physician-Owned Hospitals: A Carefully Developed Policy

The AHA stated (twice) in its comment that there should be no change to the ban on new physician-owned hospitals (POHs) that was part of the Affordable Care Act (ACA), as did almost every other commenting hospital or health system. An organization representing physician-owned hospitals, the AMA, and several physician groups all stated that the ban should be lifted, or, in the alternative, the restriction on expansion of physician-owned hospitals be loosened. The POH association asserted that the restriction on expansion limited POHs ability to participate in APMs and, if they had more patients, they could help CMS achieve its goals of reducing costs and improving care. The association also noted that a POH has been the top performer in the Medicare Hospital Value-Based Purchasing Program for every year of the program’s existence.

Additionally, several Texas congressmen wrote to CMS requesting a change in the definition of ‘main campus,’ found at 42 CFR 413.65(a)(2). They wrote that the definition of main campus was too restrictive and that “…updating the definition of main campus to be inclusive of any inpatient location of an excepted hospital will better align the definition with our intent in enacting the ACA.”

A New Exception for Value-based Payments

After the IOASE, the next most commented upon area was a possible new exception for value-based payment arrangements between participants in APMs. According to CMS, APMs provide additional compensation as an incentive to deliver better and cheaper healthcare to patients. The proposed value-based exception was the primary issue for the AHA, representing over 5,000 hospitals and health systems. The AMA, the AARP, major health coverage providers, associations representing neurologists, ob-gyns, gastroenterologists, cardiologists, and ESRD services providers also requested that CMS promulgate a new value-based exception.

The AHA took the position that a value-based exception should protect arrangements that have as a declared objective one or more of the following:

  • Promoting accountability for the quality, cost, and overall care for patients;
  • Managing care for patients across and among other providers, and;
  • Encouraging investment in infrastructure and redesigned care processes for high-quality and efficient care delivery for patients.[10]

While the various proposals differed in some details, there was broad agreement that the proposed exception should protect remuneration including incentive payments, shared savings payments, and infrastructure payments.

While some commenters did make a distinction between APMs that had two-sided risk (upside and downside – receive a share of savings or pay a share of costs) and those that only had upside risk, most comments felt the proposed exception should apply to all APMs, regardless of how much risk a participant was willing to take on. While CMS appears to be interested in creating a new exception for value-based payments – a new exception was the main focus of the RFI – it will probably offer protection only to APM participants (and possibly other value-based schemes outside of CMS’s auspices) when the participants have agreed to accept two-sided risk. An APM with one-sided risk is still, essentially, fee-for-service (i.e., participants are not subject to a penalty for increasing costs to Medicare).

Electronic Health Record/Cybersecurity Exception

Along with the AHA, several associations representing electronic health records service providers and medical device manufacturers recommended that the donation exemption for EHR interoperable technology[11] be extended past its sunset in 2021 and for CMS to create a new cybersecurity exception using the same guidelines as the existing Stark Law EHR exception. The new exception would permit donations of training, software, and technology.

Physician Incentive Plans under the Personal Services Exception

The Stark Law’s personal services exception[12] protects payments to physicians made under physician incentive plans (PIPs) that meet certain requirements. Many commenters correctly noted that CMS has refused to expand the scope of excepted incentive plans beyond services provided to enrollees of commercial or self-insured plans, which does not include Medicare fee-for-service patients, and that the usefulness of the exceptions is, therefore, limited. The most common suggestion was for the exception to be modified to include Medicare plans, along with a similar change to the Stark Law’s risk-sharing exception.[13] Some organizations also proposed that an exception for PIPs be written into the bona-fide employment exception[14] but CMS stated in Phase II that it believes “…Congress intended to limit these kinds of incentives consistent with the [gainsharing civil monetary penalty].[15]

Fair Market Value, Commercial Reasonableness, & Volume or Value

Fair market value (FMV) is defined at 42 CFR 411.351 as “…the value in arm’s length transactions, consistent with the general market value.” The single largest number of complaints about FMV related to the definition of ‘general market value’ that was inserted into the FMV definition in 2001 and that this definition should be removed, returning the definition of FMV to what it was after the original rulemaking in 1995. Alternatively, some commenters suggested re-wording the definition of general market value to be the price of an asset or compensation for services that would result from bona fide bargaining between well-informed parties to the agreement. Most comments also suggested that ‘volume or value of anticipated referrals’ and the requirement that parties may ‘not otherwise be in a position to generate business’ be removed from the definition of FMV. Almost every commenter wanted CMS to clarify that the determinations of FMV, commercial reasonableness and whether compensation takes into account the volume or value of anticipated referrals should be treated as distinct concepts.

Commercial reasonableness is defined by CMS as a “…sensible, prudent business arrangement, from the perspective of the particular parties involved, even in the absence of any potential referrals.[16]” While this definition can be simply put as ‘aside from fair market value, does the arrangement make sense right now?’, many commenters stated that loss-making arrangements that serve patient care needs will not meet the commercial reasonableness requirement. The AHA proposed to define commercial reasonableness separately from FMV, requiring items and services contracted for to be of the “amount, kind and type of items and services purchased or contracted for by similarly situated entities.”

Volume or Value of Referrals. The vast majority of comments on the volume or value test want CMS to make clear that it is a bright line and should not take into account the subjective intent of the parties. Most commenters also requested that CMS make a determination that a fixed payment under an arrangement is deemed to not vary or take into account the volume or value of referrals as long as the payment did not initially take into account referrals and did not change during the term of the arrangement. One health consultancy took issue with the “circularity” of the volume or value test, in that to comply with the FMV standard, an arrangement must not take into account the volume or value of referrals but that an arrangement will not take into account volume or value of referrals if the compensation is FMV.

Referrals, Compliance Costs, & Advisory Opinions

Comments on referrals recommended that CMS modify the definition to state that a referral must result in either an additional payment or an increase in payment. A common example used was when a physician ordered a consultation for an already admitted inpatient that may result in additional testing but would not affect the diagnosis related group (DRG) payment.

On the subject of compliance costs, and how to bring them down, multiple commenters suggested that CMS establish a rebuttable presumption of fair market value when the provider has received a valuation from a qualified valuator (person with appropriate education and experience to provide an opinion). A valuator wrote in opposition to the proposed presumption, arguing that it would result in expert shopping and pressure to get the valuation the client wants.

Several commenters correctly noted that CMS has only issued 15 advisory opinions in the last 20 years and proposed that, going forward, CMS also answer questions of interpretation as well as hypotheticals. The AHA provided CMS with a proposed regulatory change in an addendum to its comment.


A brief survey of the comments stakeholders provided to CMS makes clear the competing interests that are trying to get regulators’ attention, and a change, or changes, to the Stark Law, and its implementing regulations. The issue that excites the most passion amongst the stakeholders is the IOASE, with independent providers arguing that their particular specialty cannot be done justice by physician groups, while those groups argue the opposite. It also appears that there is overwhelming support for a new value-based exception, with hospitals, physicians and insurance companies – and the AARP – all favoring its creation. The relevance of the entire law makes less sense to providers working outside of fee-for-service and the possibility of true over-haul of the Stark Law is real.

[1] 42 U.S. Code § 1395nn
[2] 83 Fed. Reg. 29524 (June 25, 2018)
[3] 1395nn(b)
[4] 42 CFR 411.355(b)(4)
[5] 72 Fed. Reg. 51020 (Sept. 5, 2007)
[6] 66 Fed. Reg. 923 (Jan. 4, 2001)
[7] 69 Fed. Reg. 16072 (March 26, 2004)
[8] 72 Fed. Reg. 51032 (Sept. 5, 2007)
[9] US Government Accountability Office. “Medicare: Higher use of advanced imaging services by providers who self-refer costing Medicare millions,” September 2012
[10] American Hospital Association. “Request for Information Regarding the Physician Self-Referral Law,” August 2018
[11] 42 CFR 411.357(w)
[12] 42 CFR 411.357(d)
[13] 42 CFR 411.357(n)
[14]42 CFR 411.357(c)
[15] 69 Fed. Reg. 16088 (March 26, 2004)
[16] 63 Fed. Reg. (Jan. 9, 1998)