Six Things Healthcare Execs Should Know About Proposed Stark Rule


Although commenting on the Proposed Rule is closed, if finalized, the Proposed Rule would have a significant impact on the way hospitals and physicians structure future compensation arrangements.


In October 2019 the Centers for Medicare & Medicaid Services (CMS) released a much-anticipated proposed rule aimed at modernizing the federal Stark Law and its accompanying regulations.

The “Proposed Rule” is one component of the “Regulatory Sprint to Coordinated Care” initiative launched by the Department of Health and Human Services (HHS) and is intended to provide additional flexibility to health care providers as they continue to face the transition from volume to value. If finalized, the Proposed Rule would have a significant impact on the way hospitals and physicians structure future compensation arrangements. 

Related: Stark, Anti-Kickback Statute Reform: 5 Things Healthcare Execs Need to Know

Here are a few things healthcare executives should know about the Proposed Rule:

  • Proposed Changes to Key Terms

CMS proposed changes to the definitions of fair market value and commercial reasonableness. It also provided a “bright-line” test under what is commonly referred to as the “volume or value” standard and broadened the scope of what is considered an electronic health record (EHR) under Stark.

  • Fair Market Value – CMS proposed to reorganize the definition of fair market value (FMV) into three distinct components such as general application, equipment rentals, and office space rentals to achieve greater clarity. It also provided guidance on the FMV standard, including insight into general market value and market value in the context of two hypothetical physician recruitment scenarios. Under the recruitment scenarios, CMS made it clear that FMV is dependent on the individual circumstances of an arrangement. Specifically, CMS describes factors including the physician’s level of stature, the geographic location’s cost of living, the hospital’s reimbursement rates and payer mix, and the hospital’s economic position, that may substantiate paying more or less than what market salary surveys indicate.

  • Commercial Reasonableness – Several of the Stark exceptions require that the financial arrangement at issue must be “commercially reasonable” even if no referrals were made between the parties. However, the Stark regulations do not define commercial reasonableness.

    CMS proposed the following definition of commercial reasonableness in the Proposed Rule: Commercially reasonable means that the particular arrangement furthers a legitimate business purpose of the parties and is on similar terms and conditions as like arrangements. An arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.

    The final sentence in the proposed definition was included in an effort to dispel what CMS described as a widespread misconception about its position on the nexus between the commercial reasonableness of an arrangement and its profitability. CMS noted commercial reasonableness does not turn on whether an arrangement is profitable. 

  • The Volume or Value Standard – CMS proposed a bright-line test for determining when compensation will be considered to “take into account” the volume or value of referrals. First, the standard would be violated if a compensation formula included a physician’s referrals to an entity as a variable, resulting in an increase or decrease of compensation that positively correlated with the number or value of the physician’s referrals to the entity. Second, the standard would be violated if there is a predetermined, direct correlation between a physician’s prior referrals to an entity and the prospective rate of compensation to be paid over the entire duration of the arrangement for which compensation is determined.

  • Electronic Health Record – CMS proposed to broaden the definition of EHR for purposes of the current EHR donation exception. The proposed definition required the donated items and services related to technology to be used for clinical diagnosis and treatment. The proposed EHR Donation Rules modify the definition to include any repository of electronic health information. In fact, the language proposed essentially paraphrases the definition of Protected Health Information found in HIPAA. Whether intended or not by the proposed EHR Donation Rules, this new definition would seemingly include any system that is a repository from which protected health information is transmitted or maintained. 

  • Proposed Stark Exceptions

CMS proposed the following new exceptions:

  • Value-Based Care Exceptions – CMS proposed three new exceptions intended to encourage physicians and health care providers to enter into innovative arrangements that facilitate a “value-based purpose” for health care delivery and payment.

  • Arrangements Where Compensation is Less Than $3,500 per Calendar Year – This proposed exception would not have a writing, signature, or set-in-advance requirement but would require that compensation be consistent with FMV and that the terms of the arrangement be commercially reasonable. CMS developed this exception in response to numerous non-abusive self-disclosures involving nominal remuneration.

  • Cybersecurity Technology and Related Services – CMS proposed a new exception to protect donations of cybersecurity technology and related services. Under the proposed exception, “technology” means any software or other types of information technology other than hardware.

  • Proposed Expansion of Which Exceptions May Protect Space Leases

In prior commentary, CMS was reluctant to allow parties to structure space leasing arrangements outside of the Rental of Office Space Exception. However, the Proposed Rule posited an expansion of which exceptions may be available to protect space leasing arrangements to the following three exceptions.

  • FMV Exception – In light of several self-disclosures that failed to meet the Rental of Office Space Exception, but that CMS determined were legitimate and non-abusive, CMS proposed extending the Fair Market Value Exception to apply to leasing arrangements but with an express prohibition on percentage-based rent and per-unit based service compensation.

  • Certain Arrangements with Hospitals Exception – CMS suggested that rental arrangements may be covered by the Certain Arrangements with Hospitals Exception, which protects remuneration provided by a hospital to a physician if the remuneration is unrelated to designated health services, such as rental payments made by a teaching hospital to a physician to rent the physician’s residence for a visiting faculty member. CMS stopped short of allowing other types of rental arrangements to be covered by this exception.

  • Payments by Physicians Exception – CMS proposed allowing the Payments by a Physician Exception to protect payments by a physician for the lease of space other than office space, such as storage space or residential real estate.

  • Proposed Change to the Exclusive Use Requirements

CMS proposed changes to the exclusive use requirement in the Rental of Office Space Exception. The updated exception would allow a tenant (and any other tenants operating in the same office space) to use the same office space so long as the landlord is excluded from the space.

  • Proposed Expansion of the 90-Day Grace Period Provision

CMS proposed expanding the current 90-day grace period for obtaining late signatures on written arrangements to also include a 90-day grace period for finalizing the written document itself. Note that the parties would still be required to comply with all other elements of the applicable exception, including any set in advance requirements.

  • The Proposed Rule Is Not Final and Should Not Be Relied Upon 

Although the Proposed Rule is not final, solicited comments by the CMS are no longer being accepted.

This article is educational in nature and is not intended as legal advice. Always consult your legal counsel with specific legal matters.

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