Physician Compensation Models in Light of Recent Stark Law Changes

by Kelli C. Fleming, Burr Forman

On December 2, 2020, the Centers for Medicare and Medicaid Services (“CMS”) finalized sweeping changes to the federal Physician Self-Referral Law, commonly known as the Stark Law. At least one such change may materially impact how physician group practices allocate profits from Stark Law designated health services (“DHS”).

Under the Stark Law, a medical practice with at least two physicians must qualify as a “group practice” in order to take advantage of the Stark Law in-office ancillary services exception, which is the exception often used to allow a physician owner or physician employee to order DHS from his or her own medical practice. As part of the group practice requirements, DHS profits must be distributed to all physicians in the group, or to a pool of five or more physicians in the group, in a manner that does not directly take into account the volume or value of a physician’s referrals for DHS.

Currently, many physician group practices, especially large or multi-specialty practices, allocate DHS profits to its physicians based on DHS categories. For example, profits from one DHS category (e.g., imaging services) may be allocated to certain physicians in the group practice while profits from a second DHS category (e.g., physical therapy) may be allocated to a different (or possibly overlapping) subset of physicians in the group practice.

However, under the new Stark Law rules, CMS has clarified that DHS profits can no longer be allocated based on DHS category. Instead, profits from all DHS categories for all physicians in the group practice (or a component of at least five physicians in the group practice) must be aggregated and then distributed to all physicians in the group practice (or a component of at least five physicians in the group practice) in a manner that does not directly take into account the volume or value of referrals. Using the example above, under this new clarification, DHS profits from both imaging services and physical therapy services ordered by physicians in the group practice (or a component of at least five physicians in the group practice) must be aggregated and then the total aggregated profits distributed to such physicians in a manner that does not take into account the volume or value of referrals.

CMS also clarified that if a physician practice has more than one pool of five physicians, each pool does not have to be treated in an identical manner. For example, one pool may utilize one distribution methodology and a second pool may utilize another distribution methodology, as long as the methodologies used are Stark Law compliant (i.e., not based on the volume or value of referrals).

CMS recognizes that its prior regulatory guidance on the distribution of DHS profits has led to confusion by industry participants. While the other recent changes to the Stark Law take effect on January 19, 2021, the changes with regard to the distribution of DHS profits take effect on January 1, 2022.

Kelli Fleming is a Partner at Burr & Forman LLP and practices exclusively in the firm’s Health Care Practice Group.