Print PDF



Significant New Stark Rules Finalized
November 11, 2015

A final new regulation (the Final Rule) interpreting the federal self-referral restrictions imposed by the “Stark Law” was issued October 30, 2015, by the Centers for Medicare and Medicaid Services (CMS) makes a number of significant changes and provides important clarifications.  The Stark Law prohibits physician referrals of Medicare patients for certain “designated health services” to entities with which the physician has a financial relationship unless an exception under the law applies to that relationship.

The Final Rule loosens some of CMS’ previous strict interpretations of the requirements under the Stark law’s exceptions, prompted at least in part by the agency’s review of the numerous disclosures of Stark law violations it has received in recent years under the Physician Self-Referral Disclosure Protocol (SRDP).  The Final Rule also adds new exceptions to the Stark law’s prohibition.

Among the most significant changes are: (1) clarification of how the writing and one-year term requirements for certain compensation exceptions can be met; (2) a new exception that allows hospitals to assist physicians in recruiting nonphysician providers; (3) a limited exception for certain so-called “timeshare” arrangements involving space, equipment and/or personnel; (4) the extension of permissible holdover arrangements under the rental of office space, rental of equipment and personal service arrangement exceptions; and (5) clarification of the definition of “remuneration” in response to a recent federal court case.

Other important changes include additional guidance for physician-owned hospitals regarding advertising requirements and determining the baseline bona fide investment level, and changes regarding recruitment and retention of physicians by federally qualified health clinics (FQHCs) and rural health clinics (RHCs).

Clarifying the Writing and Term Requirements

Prior to the Final Rule, the terminology used in certain exceptions under the Stark law that require a writing created uncertainty as to whether a single integrated agreement was required to meet the writing requirement.  For example, the rental of office space and rental of equipment exceptions required that the underlying agreement be set out in writing, whereas the exception for personal services required that the arrangement be set out in writing.  The Final Rule clarifies that under all of the exceptions requiring a writing, the arrangement does not need to be documented in a single formal contract. 

Rather, depending on the facts and circumstances of the arrangement, a collection of documents, including contemporaneous documents evidencing the course of conduct between the parties, can satisfy the writing requirement.  Thus, CMS has clarified that multiple writings, which could include such documents as governing board minutes, communications between the parties (including emails), invoices, cancelled checks and timesheets, may be aggregated together to demonstrate that an arrangement is in writing for purposes of the relevant exceptions.

CMS also clarified that when Stark law exceptions require a term of at least one year, it is not necessary to have a written agreement identifying a term of a year or more.  As long as the parties have contemporaneous writings demonstrating that an arrangement in fact lasted for at least a year, then the one year term requirement is met.  Importantly, CMS states that its interpretation of the writing and one-year term requirements are clarifications of existing law, meaning that these interpretations are equally effective retroactively as prospectively. 

New Exception for Recruitment of Nonphysician Providers

To help to alleviate the shortage of primary care doctors in many areas, CMS issued a new nonphysician practitioner (NPP) exception that permits remuneration from a hospital, federally qualified health clinic (FQHC), or rural health clinic (RHC) to a physician or medical group to assist in recruiting and employing a nonphysician practitioner in the geographic area served by the hospital, FQHC, or RHC.  CMS believes that encouraging the recruitment of NPPs may help to mitigate the shortage of primary care physicians.  In addition, CMS recognizes that NPPs can also play an important role in the delivery of mental health services. 

Accordingly, the new exception protects remuneration provided by a hospital, FQHC or RHC to a physician to assist with the compensation of an NPP engaged by the physician to provide primary care or mental health services to patients of the physician’s practice.  NPPs are defined to include physician assistants, nurse practitioners, clinical nurse specialists, certified nurse midwives, clinical social workers and clinical psychologists who furnish primary care services or mental health services to the practice’s patients.  Recruitment of a non-physician practitioner who provides specialty care services, such as cardiology or surgical services, is not protected by the exception.

The exception has a number of limitations, including:  a limit on the remuneration that may be provided to the physician of fifty percent of the compensation to be paid to the NPP; a three year limitation on the frequency of a hospital’s, FQHC’s or RHC’s use of the exception for the same physician; and a requirement that at least 75 percent of the NPP’s services to the physician’s patients be primary care or mental health services. 

The exception is limited to nonphysician practitioners who either become bona fide employees of the physician or group receiving remuneration from the hospital, or become independent contractors directly with the physician or group.  Tax-exempt providers wishing to use this new Stark exception can consider the extent to which existing IRS guidance on physician recruitment should be imported into nonphysician recruitment arrangements, at least until the IRS provides further guidance in this area. 

New Exception for Timeshare Arrangements

CMS created another new exception for “timeshare” arrangements, under which a provider is granted the use of the space, equipment and staff of another provider on a part-time basis.  CMS indicates that the exception is intended to ensure adequate access to needed specialty care, especially in rural and underserved areas.  The exception protects timeshare arrangements between a medical group or a physician and either a hospital or a physician organization where, among other requirements, (1) the space, equipment and other items provided are used predominantly to provide evaluation and management (E/M) services to patients on the same schedule; and (2)  any equipment provided is located in the same building where the E/M services are furnished, is not used to provide designated health services (DHS) for which referrals are prohibited under the Stark law except where they are incidental to, and provided at the time of, E/M services for the patient, and is not advanced imaging, radiation therapy, or laboratory equipment (other than equipment used to perform CLIA-waived laboratory tests).  CMS emphasized that this exception is not available in situations where the arrangement establishes a possessory leasehold interest in the space where professional services are provided.

Importantly, CMS explicitly excluded from the exception timeshare arrangements offered by diagnostic facilities and laboratories, noting that such arrangements pose a high risk because they may serve as a vehicle to lock in physician referrals. 

Extending Holdovers

The current exceptions for the rental of office space, rental of equipment and personal service arrangements allow “holdover” arrangements after the expiration of the term of the written agreement, when the parties continue to perform on the same terms and conditions, but only for up to six months.  CMS notes that in administering the SRDP, a large number of arrangements have been reviewed which failed to meet applicable exceptions under Stark solely because a holdover exceeded the six month cutoff.  CMS has now acknowledged that longer holdovers beyond six months do not pose a risk of abuse so long as certain safeguards are in place.   In the Final Rule, CMS eliminated any time limits on holdovers, meaning that a holdover may be of any duration, so as long as the terms and conditions of the arrangement remain the same the compensation or rent remains fair market value, and the parties can provide contemporaneous documentation of their continued performance under the pre-expiration terms during the holdover. 

CMS also similarly amended the fair market value compensation arrangement exception.  That exception currently does not specifically permit holdovers, but does include a similar provision which allows for arrangements of less than one year to be renewed any number of times on the same terms and compensation.  The change in the Final Rule permits arrangements of any duration, not just for less than a year, to be renewed any number of times, which effectively permits the unlimited continuance of an arrangement under this exception as long as there is no change in the terms and conditions of the arrangement.

Clarification of Remuneration for Hospital-Based Physicians

In a relatively recent case, U.S., ex. rel. Kosenske v. Carlisle HMA, the Third Circuit Court of Appeals held that a hospital-based physician’s use of a hospital’s resources (e.g., examination rooms, nursing personnel, and supplies), when treating hospital patients pursuant to an exclusive personal services arrangement, constituted remuneration from the hospital to the physician, even though the hospital billed third party payers for the facility component of the services and the physician billed payers for the physician’s professional fees only.  Contrary to a broad interpretation of the court’s holding in Kosenske, CMS takes the unusual step in the Final Rule of stating for the record that this type of “split billing” arrangement does not result in remuneration between the parties, and therefore such arrangements do not implicate the Stark law, provided that the hospital bills the appropriate payor for the resources and services it provides.  Notably, CMS declines to say whether the outcome would be the same if the physician(s) were granted an exclusive right to practice in the department. 

CMS further clarifies that when a hospital and a physician’s services are billed globally by one party, then there is remuneration between the parties that implicates the Stark law.  Again, because CMS characterizes this as a clarification and not a change, the interpretation is valid both retrospectively and prospectively. 

Stand In The Shoes

Current Stark regulations provide that physician owners of a physician organization “stand in the shoes” of the organization, and are deemed to have the same compensation arrangements, with the same parties and on the same terms, as the organization.  A physician who stands in the shoes of a physician organization is considered to be a party to arrangements between the organization and entities providing DHS.  CMS considers a physician who stands in the shoes of his or physician organization to have satisfied the signature requirement of an applicable exception when the authorized signatory of the physician organization has signed the writing evidencing the arrangement.  

The Final Rule provides that physicians in a group practice who are not owners and do not stand in the shoes of the group, are not “parties” to a physician organization’s arrangements for purposes of the signature requirement of the applicable exceptions.  The revision is intended to alleviate the burden on physician organizations related to the signature requirement that would otherwise require the signatures of physicians who do not stand in the shoes of their physician organizations.  

However, CMS clarified that for purposes of determining whether compensation between a provider of DHS and a physician organization takes into account the volume or value of referrals or other business generated between the parties, referrals of physicians who do not stand in the shoes of the physician organization also must be included.  Thus, parties are required to consider the referrals of all physicians in a physician organization—regardless of whether they stand in the shoes of the physician organization—when analyzing whether the compensation under a particular compensation arrangement takes into account the volume or value of referrals or other business generated “between the parties.”

Non-Compliance With Signature Requirements

Current regulations include an exception for temporary non-compliance with the requirement in several compensation exceptions that the arrangement must be signed by the parties.  The parties have 90 days to obtain signatures when the non-compliance was inadvertent, and 30 days to obtain signatures when the non-compliance was not inadvertent.  The Final Rule allows 90 days to obtain signatures regardless of whether or not the non-compliance was inadvertent, although the grace period may still only be used by an entity once every three years for the same referring physician.

Additional Guidance for Physician-Owned Hospitals

The Final Rule amends current disclosure requirements for physician-owned hospitals, clarifies the definition of “public advertising,” and changes existing regulations for determining the baseline bona fide investment level.

Current regulations require physician-owned hospitals to disclose on any public website for the hospital and in any public advertising, that the hospital is owned or invested in by physicians.  CMS revised those regulations to specify that a “public website for the hospital” does not include certain types of websites that may display limited information about the hospital but are generally unavailable to the public, such as social media websites, electronic patient payment or patient care portals, or electronic health information exchanges.

Additionally, the Final Rule defines “public advertising for the hospital” as any public communication paid for by the hospital that is primarily intended to persuade individuals to seek care at the hospital, but does not include communications made for the primary purpose of recruiting hospital staff, public service announcements, and community outreach. 

CMS also clarified the types of statements that constitute a sufficient statement of physician ownership.  Such advertising may include any language that would put a reasonable person on notice that the hospital may be physician owned.  CMS further notes that a hospital’s name alone may be sufficient, such as, for example, “Doctors Hospital at Main Street, USA,” as the name would put a reasonable person on notice that the hospital may be physician-owned.

Finally, the Final Rule addresses the physician investment level requirement for physician –owned hospitals.  Current regulations require that the percentage of total ownership held by physicians cannot exceed in aggregate the percentage of physician ownership as of March 23, 2010.  CMS had previously taken the position that ownership interests of non-referring physicians need not be considered in this calculation.  In the Final Rule CMS is changing this position, and now is requiring that ownership interests of all physicians be included, whether or not they make referrals.

Recruitment and Retention for FQHCs, RHCs

Current regulations allow FQHCs and RHCs to utilize the exception that permits remuneration for the purpose of recruiting physicians.  Those regulations define the “geographic area served by the hospital”, which is the area into which the recruited physician must relocate, as the area from which a hospital draws inpatients, but do not provide guidance as to the geographic area into which FQHCs and RHCs may recruit a physician.  The Final Rule corrects this oversight by providing that the geographic area served by an FQHC or RHC is the lowest number of contiguous or noncontiguous zip codes from which the FQHC or RHC draws at least ninety percent of its patients.


The new exceptions and clarifications are, broadly speaking, helpful to providers in that more arrangements will be compliant and there is greater latitude to structure arrangements.  One interesting result of several “clarifications” is that because CMS states it is simply clarifying existing law, this means the clarifications have both retrospective and prospective effect.  Accordingly, some providers who have SRDP submissions pending with CMS may have an opportunity to reconsider their submission and either withdraw or modify and scale back their prior submissions, based on the more liberal interpretations recently issued that “clarify” existing regulations. 

For Additional information, please contact David Henninger,  Brad Tully, or Charles Oppenheim in Los Angeles at 310.551.8111;  Ben Durie in San Francisco at 415.875.8500; or William Eck in Washington, D.C. at 202.580.7700.

For media assistance, please contact Maura Fisher at 202-580-7714.