In our fourth article within our five-part Fair Market Value content series, we discussed the initial rules and regulations around Group Practices. To round out the series in the fifth article below, we’ll explain the latest amendments to the Stark Law and how they have impacted Group Practices – specifically in the areas of group allocation of profit and the various bonuses available to practices.
The Stark Law amendments were published on December 2, 2020 in 85 Federal Register (FR 77682), with an effective date of January 1, 2022.
Since the amendments went into effect, we have heard frequent questions around how they are to be implemented to ensure physician compensation models are revised accordingly to comply with the new rules.
In summary, the amendments cover the following areas:
(1) Profit shares - A physician who is part of a group practice may be paid a share of overall profits that is not directly related to the volume or value of the physician's direct referrals.
(ii) Overall profits relate to the profits derived from all the designated health services of any component of the group that consists of at least five physicians, which may include all physicians in the group. If there are fewer than five physicians in the group, overall profits means the profits derived from all the designated health services of the group.
(iii) Overall profits must be divided in a reasonable and verifiable manner. The share of overall profits will be deemed not to directly relate to the volume or value of referrals if one of the following conditions is met:
(A) Overall profits are divided per capita (for example, per member of the group or per physician in the group).
(B) Overall profits are distributed based on the distribution of the group's revenues attributed to services that are not designated health services and would not be considered designated health services if they were payable by Medicare.
(C) Revenues derived from designated health services constitute less than 5 percent of the group's total revenues, and the portion of those revenues distributed to each physician in the group constitutes 5 percent or less of his or her total compensation from the group.
(2) Productivity bonuses - A physician in the group may be paid a productivity bonus based on services that he or she has personally performed, or services “incident to” such personally performed services, that is not directly related to the volume or value of the physician's referrals (except that the bonus may directly relate to the volume or value of the physician's referrals if the referrals are for services “incident to” the physician's personally performed services).
A productivity bonus must be calculated in a reasonable and verifiable manner. A productivity bonus will be deemed not to relate directly to the volume or value of referrals if one of the following conditions is met:
- The productivity bonus is based on the physician's total patient encounters or the relative value units (RVUs) personally performed by the physician.
- The services on which the productivity bonus is based are not designated health services and would not be considered designated health services if they were payable by Medicare.
- Revenues derived from designated health services constitute less than 5 percent of the group's total revenues, and the portion of those revenues distributed to each physician in the group constitutes 5 percent or less of his or her total compensation from the group.
(3) Value-based enterprise participation - Profits from designated health services that are directly attributable to a physician's participation in a value-based enterprise, as defined at Federal Reister §411.351, may be distributed to the participating physician.
Click here to read the full amendments.
So what does this actually mean? In general, the regulations allow a group practice to pay a physician:
a. A share of the profits so long as not directly related to the volume or value of referrals of DHS by the physician, or
b. A productivity bonus based on services the physician has personally performed, or services “incident to” such personally performed services, or
c. Both, provided that the bonus is not determined in any manner that is directly related to the volume or value of referrals of DHS by the physician
As discussed in our previous article on Group Practices, overall profits are defined as DHS profits from the entire group or from a subgroup of five or more physicians. However, in the amended rules, we gain some additional clarification. In each case, there are safe harbors such that a distribution or payment on a per capita basis or based on revenues from services that are not DHS payable by Medicare or any other payer are deemed not to directly relate to the volume or value of DHS. There is also a safe harbor related to instances where DHS revenues of the group and the amount paid to the physician are considered de minimis.
The Centers for Medicare and Medicaid Services (CMS) has emphasized that, in order to qualify as a Group Practice and thus distribute profits from DHS or pay productivity bonuses, the income and overhead expense of a practice must be distributed according to methods that are determined before the receipt of payment for the services giving rise to the income or the expense. Thus, the group’s compensation methodology must be established prospectively. CMS has also emphasized that profits must be distributed in a reasonable and verifiable manner. A purely discretionary allocation would not meet this test.
The safe harbor for profit distributions was clarified so that it applies only if the allocation based on revenues does not include any DHS, whether payable by Medicare or other payers. Therefore, a group will not meet the safe harbor if revenues are allocated in a way that includes DHS from private payers, even though it excludes Medicare DHS.
Having a good grasp of the Group Practice requirements is imperative for any hospital or health system that has some amount of employed provider groups within its medical entity. While the Stark Law amendments have provided a bit of additional flexibility to systems with Group Practices, they have also made it necessary for organizations to amend their compensation models and plans to meet the updated requirements.
If you have any questions around The Stark Law amendments for Group Practices – or any other topic within our Fair Market Value series – please contact Ronnen Isakov.
Ronnen Isakov is Managing Director Advisory Service of Medic Management Group. His background includes extensive work in areas including business advisory, valuation, network optimization, transaction support, and project management.