In October 2019, CMS proposed changes to the Stark Law, which was enacted in 1988 to prevent physicians from prioritizing financial concerns over patient care. Now, CMS says that changing the Stark Law can help accelerate the shift to value-based care.

By Nan Sloan, Vice President of Compliance, Medecision

In 1988, when Congress passed the Ethics in Patient Referrals Act, also known as the Stark Law, there was widespread concern about physicians prioritizing financial concerns over patient care. The Stark Law prohibits physicians from referring Medicare patients to entities with whom they or their family members have a financial relationship.

Because the law allows prosecution for unintentional violations, including errors in documentation, many physicians have erred on the side of caution. Worried about the possibility of unintentionally breaking the law, doctors may avoid making the referrals that make the most sense for their patients.

As the industry continues to move away from volume-based to value-based healthcare, doctors’ ability to make the right referral at the right time to improve patient outcomes is more important than worrying about an unintentional or misperceived slight. In fact, in a survey of healthcare CEOs and executives, 36.2% said fraud and abuse laws that don’t support new models of care stand in the way of improving healthcare.

That’s why the Centers for Medicare and Medicaid Services (CMS) introduced proposed changes to the Stark Law this past October. These changes are intended to clarify and update the Stark Law to acknowledge and accelerate the shift to value-based care. That shift includes care coordination and the ability to participate in alternative payment models, so it’s crucial to balance genuine concerns about integrity with the burden of the Stark Law’s prohibitions regarding billing and claims submission.

Understanding the Proposed Changes

The changes are currently available for review and will be finalized later this year. Here’s a look at what they include.

> Exceptions for Value-Based Arrangements. These exceptions make it easier for physicians and other providers to partner in order to coordinate care, without worrying about violating the limitations on “volume or value of referrals.” They also allow providers to pay physicians for items or services provided on an infrequent or short-term basis, in an amount of $3,500 or less per year. These exceptions also clarify standards and definitions related to group practice requirements and financial relationships.

> Clarified Definitions of the “Big Three” Requirements. Most Stark Law exceptions for compensation agreements are based on three requirements: fair market value, commercial reasonableness, and the volume or value of referrals standard. But historically, the definitions of these standards have been general and nonspecific, leading to confusion and physicians’ fear of unintentionally violating the law.

The new rules revise these definitions as follows:

  • Fair market value. The new rule provides three separate definitions of this term, one for general use, one related to equipment rental and one related to office space rental. The CMS also provided guidance on the difference between fair market value and general market value and noted that there are scenarios in which a physician may be paid higher than the industry mean. For instance, if a hospital wants to hire a surgeon who is in high demand by professional athletes and is recognized to have a unique skill set, the hospital could justifiably pay the surgeon more than the general market value.
  • Commercial reasonableness. The proposed rules include two alternative definitions for the reasonableness standard. The first requires that an arrangement further a legitimate business purpose for the parties and be on similar terms and conditions as like arrangements. The second requires that an arrangement make commercial sense and be entered into by a reasonable entity of similar type and size and a reasonable physician of similar scope and specialty. The CMS also noted that arrangements may be commercially reasonable even if they do not result in profit for one or more of the parties. For instance, some hospital service lines often operate at a loss, but they are still reasonable ventures because they provide a necessary service for patients.

This change may improve the chances of hospitals showing interest in acquiring physician practices. While some physician practices that do not operate at a high profit margin may not have been able to attract a buyer because of previous Stark Law restrictions, hospital systems may now be able to purchase those practices. Systems could add these practices to their lines of service and help physicians continue to practice and help patients, such as psychiatric patients, who don’t represent a high profit margin.

  • Volume or value of referrals standard. The new rules clarify this standard by providing four objectives for determining whether a compensation arrangement considers the volume or value of referrals or other business generated between the parties. The proposed change includes mathematical calculations that will objectively determine whether a given compensation methodology violates this standard.

Reactions to the Proposed Changes

Most of the proposed changes to the Stark Law have been well received; however, there is, not surprisingly, some disagreement among various governmental agencies. For years, Health and Human Services (HHS) and the CMS have pushed for value-based care initiatives that require more alignment and collaboration among providers, while the Office of Inspector General (OIG) and the Department of Justice (DOJ) have intensely scrutinized such initiatives, as they are the agencies responsible for enforcing the Stark Law and the federal Anti-Kickback Statute and related legislation. As a result, these agencies have varying views of the proposed changes and are releasing comments that sometimes differ.

However, the Affordable Care Act and other healthcare reforms make it clear that value-based care is the way of the future. By adopting updates to the Stark Law, the industry can speed up reimbursement and get money into the hands of providers and payers so they can move forward with improvements. If they can get their money faster, they can then pursue telehealth and other opportunities to fill gaps in care.

The scare tactics of the original Stark Law did what they were intended to do, but now, allowing for care coordination and information sharing is more important. The patient could be hurt by doctors’ focus on avoiding any appearance of connections to comply with the original Stark Law. Today, the goal is an improved health outcome for each patient. And ultimately, the changes to the Stark Law will likely work to reduce regulatory barriers and speed the transformation of the healthcare system into one that does a better job of paying for value and promoting care coordination.


Read Nan’s January 2021 blog post with updates on the new rules.

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