In its CY 2016 physician fee schedule proposed rule, the Centers for Medicare and Medicaid Services (“CMS”) proposes significant amendments and clarifications to the federal physician self-referral regulations, commonly known as the “Stark” rules.1 In response to CMS’ experience reviewing several hundred self-disclosures made under the Voluntary Self-Referral Disclosure Protocol, many of the proposed changes are intended to reduce perceived or actual technical noncompliance with the Stark rules so that hospitals and other entities that bill the Medicare program for Stark “designated health services” can avoid violations based on certain contracting miscues that do not create significant risk of program abuse. In addition, the proposed rule includes clarification and changes to the rules applicable to physician-owned hospitals.

I. “In Writing,” Term, Holdover, and Signature Proposals

The Stark rule proposals with broadest applicability involve the requirement that written lease, services, and other arrangements be “in writing.” CMS proposes throughout the Stark rules to change most references to a written “agreement” or “contract” to a written “arrangement.” This change is meant to signify that “there is no requirement under the physician self-referral law that an arrangement be documented in a single formal contract.” Rather, CMS states that:

[d]epending on the facts and circumstances of the arrangement and the available documentation, a collection of documents, including contemporaneous documents evidencing the course of conduct between the parties may satisfy the written requirement of the leasing exception and other exceptions that require that an arrangement be set out in writing.

To be clear, CMS points out that a written arrangement is still required; for example, in order for compensation to be “set in advance” as required under many Stark exceptions, the compensation rate must be documented in writing before the services, lease, or other arrangement begins.

If adopted in final form this change could help hospitals and other providers avoid Stark violations when contracting practices do not keep pace with operational changes. For instance, if a hospital has a written and Stark-compliant space lease with a physician practice, and the parties expand or alter the amount or location of leased space without amending or modifying the formal contract, this change could allow the parties to determine they are in compliance with Stark based on an examination of e-mails, records of modified fair market value lease payments, and other documentation indicating an agreement to the modification.

Certainly the proposals indicate CMS’ willingness to emphasize the amount (i.e., fair market value) and nature (i.e., not taking into account the volume or value of referrals or other business generated between the parties) of compensation between referral sources, rather than contracting formalities.

CMS also proposes to allow parties to satisfy the one year term requirement found in lease and services exceptions with documentation indicating that the arrangement in fact lasted for at least one year, rather than relying on a written contract with a stated term of at least one year. For example, documentation that a physician group leased equipment from, and made lease payments to, a hospital for 18 months would satisfy the term requirement in the equipment lease exception, even if there is no term provision in the written contract between the parties.

Another proposal would significantly lengthen the current 6-month holdover period that allows parties to continue their compliance with a lease or services exception under Stark even when the term of a written contract has expired as long as certain conditions are met (including that the arrangement satisfies the requirements of an exception when it expires and continues on the same terms and conditions after its stated expiration). CMS proposes to permit indefinite holdovers, or alternatively, to permit holdovers for a definite period greater than 6 months. While any change lengthening the holdover period would be a positive development for providers struggling to comply with the technical nature of the Stark rules, CMS notes that rental amounts must remain consistent with fair market value during the entire holdover period, or the arrangement will fail to meet the exception.

Under another proposal, parties could obtain signatures on a written arrangement within 90 days, so long as the arrangement otherwise complies with a Stark exception, no matter whether the failure to obtain the signature prior to the beginning of the arrangement was inadvertent (currently, the regulations only offer a 30-day window to obtain signatures if the failure to comply was not inadvertent) and the allowance is used only once every 3 years with respect to the same referring physician.

If adopted in final form these proposals would add much needed flexibility to Stark’s strict liability regulatory structure. However, it would be important that providers not rely on any such changes to relax too much when contracting with referral sources. CMS is clear in its comments that although they are proposing added flexibility, they will continue to require that basic terms of the various exceptions be satisfied. For example, if parties begin an arrangement for professional services without documenting the compensation rate and methodology before services begin, the parties can create Stark liability even under the recent proposals because the basic requirement that compensation terms to be set out in writing prior to commencing the services remains. Similarly, if the compensation rate under a long-term lease arrangement is not reviewed periodically and falls out of fair market value, then there is a Stark violation based on the lack of fair market value compensation even if contemporaneous documentation could help meet other elements of the Stark lease exception.

II. New Timeshare Exception

CMS proposes to add a Stark exception for timeshare arrangements, in which a hospital licenses office space, equipment, and personnel to a physician or physician organization. In addition to exception requirements found in the office space lease exception, the proposed timeshare exception includes unique safeguards, including a requirement that the licensed premises, equipment, and personnel are used predominantly to furnish physician evaluation and management (“E&M”) services (rather than ancillary services), any equipment covered by the timeshare arrangement must be located in the office suite where the physician performs the E&M services and used only to furnish designated health services incidental to the physician’s E&M services at the time of such E&M services, and may not include advanced imaging, radiation therapy, or laboratory equipment (other than equipment used to perform CLIA-waived tests). Additionally, while CMS is proposing that parties to the time share arrangement be allowed to determine the license fees on an hourly, daily, or other time-based basis, they would not be permitted to use a compensation methodology based on the number of patients seen or revenue billed.

III. New Exception for the Recruitment of Nonphysician Practitioners

To update the Stark rules to facilitate greater access to primary care services and acknowledge the greater role of nonphysician practitioners in the delivery of primary care services, CMS proposes to add a new Stark exception to protect remuneration provided by a hospital, federally qualified health center, or rural health clinic to a physician or the physician’s practice to assist in the employment of certain nonphysician practitioners. Structured with safeguards much like the physician recruitment exception, the nonphysician practitioner recruitment exception would apply only to recruitment of a physician assistant, nurse practitioner, clinical nurse specialist, or certified nurse-midwife that becomes a bona fide employee of the physician to provide primary care services. CMS considers “primary care services” to include general family practice, general internal medicine, pediatrics, geriatrics, and obstetrics and gynecology services. Notably, CMS states that the proposed exception would not apply to the recruitment of certified registered nurse anesthetists.

The proposed exception would not protect arrangements for assistance to a physician to employ a nonphysician practitioner who furnishes specialty care such as cardiology or surgical services. In addition, the recruitment assistance would be limited to the lower of: (a) 50% of the actual salary, signing bonus, and benefits paid to the nonphysician practitioner during no more than the first 2 years of employment; or (b) the actual salary, signing bonus, and benefits paid to the nonphysician practitioner during no more than the first 2 years of employment minus the amount of all receipts attributable to the nonphysician practitioner’s services.

IV. Physician-Owned Hospital Exception

The Proposed Rule also includes changes and clarifications to the Stark rules governing physician-owned hospitals. The Patient Protection and Affordable Care Act (“ACA”), enacted in 2010, imposed additional requirements for physician-owned hospitals, including requiring that such hospitals disclose the fact that the hospital is partially owned or invested in by physicians on any public website or public advertising for the hospital. The ACA also provided that the percentage of the total value of the ownership or investment interests held in a hospital by physician owners or investors could not exceed such percentage as of March 23, 2010.

Since 2011, physician-owned hospitals have been required to disclose that the hospital has physician owners or investors on the hospital’s public websites and any public advertising. In response to numerous requests from industry stakeholders seeking clarification about these requirements, CMS has proposed to limit the categories of websites and the forms of advertising that would require physician ownership disclosure, and to clarify the types of disclosure statements that would be sufficient to comply with the disclosure requirements.

Specifically, in order to provide more clarity about when disclosures are required, CMS proposes to list the types of websites that would not be considered “a public site for the hospital.” Importantly, this list would include social media websites. CMS noted that communications (such as maintaining an individual page on a website, posting a video, or posting messages) via a social media website should not be construed as a website ‘‘for the hospital,’’ given that the website is operated and maintained by a social networking service generally available to other users. CMS also proposes that sites such as electronic patient payment portals, electronic patient care portals and electronic health information exchanges would ordinarily not be considered public websites, since these sites are typically only available to patients who have already been treated at the hospital. Note, though, that CMS did caution that a site that is not a “public website for the hospital” may still be considered “public advertising for the hospital” depending upon the facts and circumstances of the scenario and information provided.

CMS proposes to define “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. The proposed rule includes examples of communications that would not be considered public advertising for the hospital, including communications made for the purpose of recruiting hospital staff, public service announcements and community outreach. Still, CMS advised providers that whether a certain communication would constitute public advertising would depend on the specific facts and circumstances of the communication.

Investment Levels

CMS also proposes changes that address baseline percentage levels of physician ownership or investment interest. In a prior rulemaking, CMS took the position that ownership or investment interests of non-referring physicians did not need to be considered when calculating the baseline physician investment level or any subsequent physician investment level calculation (“physician investment level”).

CMS has proposed to revise prior policy to require that the physician investment level include direct and indirect ownership and investment interests, regardless of whether the physician refers to the hospital. Additionally, ownership or investment interests held by physicians who no longer practice medicine would be counted if the individual satisfies the Stark Law definition of “physician.” The proposed rule includes a definition of “ownership or investment interest” as a direct or indirect ownership or investment interest in a hospital.

Acknowledging that the proposed change could cause compliance issues for hospitals that relied on the previous guidance when calculating their baseline physician investment levels, CMS has proposed to delay the effective date of the new regulation so that physician-owned hospitals have enough time to come into compliance with the new rule.

V. Conclusion

The proposed amendments to the Stark rules in the CY 2016 physician fee schedule rule, if adopted, will likely reduce the number of Stark violations self-reported to CMS under the self-referral disclosure protocol based on technical contracting errors. However, hospitals and other providers should not use the proposals to discard or avoid efforts to implement strict written contracting standards and practices with physicians and other referral sources. The Stark rules (even if the proposals are adopted) and other federal and state fraud and abuse laws (such as the anti-kickback statute) still create daunting legal risks for providers that fail to implement, maintain, and update contracting processes with referral sources.

Comments on the proposed rules are due no later than September 8, 2015. Please contact the authors or any member of the Dorsey & Whitney health care practice group with any questions.

1   The full text of the proposed rule can be found here: