Ronnen Isakov Feb 5, 2024 9:17:18 AM 6 min read

Designated Health Services: Rules and Exceptions

This article is part three of a five-part series on Fair Market Value in the healthcare industry. If you haven’t already read parts one and two, we encourage you to start there! 

In the first articles of our Fair Market Value series, we covered what Fair Market Value and Commercial Reasonableness are, as well as Stark Law and Anti-Kickback Statute (AKS). Now, we’re moving on to Designated Health Services (DHS): what are they, how do they coincide with Stark Law and how do they impact Fair Market Value? 

As we already learned, Stark Law prohibits physicians from referring patients for certain Designated Health Services to entities with which they have a financial relationship. So what qualifies as a DHS?  

Stark Law has a wide reach when it comes to classifying Designated Health Services. Under the law, DHS generally include the following categories:

•    Clinical laboratory services
•    Physical therapy services
•    Occupational therapy services
•    Radiology services
•    Radiation therapy services
•    Durable medical equipment and supplies
•    Parenteral and enteral nutrients, equipment, and supplies
•    Prosthetics, orthotics, and prosthetic devices and supplies
•    Home health services
•    Outpatient prescription drugs

These categories are broad and encompassing in and of themselves, and it’s important to note that specific regulations and exceptions apply to each category under the law.

Generally speaking, however, Stark Law covers any and all health services that may impact the delivery of care or the efficacy of patient outcomes. The goal is to give patients peace of mind that, when it comes to their health, there’s never any financial incentive for a physician to refer or recommend anything other than what is best for their needed care.

Hospitals and other providers of healthcare services risk violating the Stark Law unless their compensation agreements for employed physicians are based only on the services personally performed by those providers, unless they meet the exception standards. This is to ensure the provider is not making unnecessary referrals for a financial gain. 

The Stark Law prohibits Medicare payments to entities such as hospitals or health systems for designated health services (DHS), such as inpatient and outpatient services, which are referred by physicians who have some type of a financial relationship with the DHS entity, unless an exception applies. 

There’s a statutory and regulatory exception for “bona fide” employment relationships, and it has taken center stage as hospitals continue to employ physician practices to advance health reform, as well as to meet the requirements of other governmental programs advancing care, such as value-based arrangements. 

The regulatory employment exception states that “any amount paid by an employer to a physician (or immediate family member) who has a bona fide employment relationship with the employer for the provision of services” will not constitute remuneration if the following conditions are met:

  1. The employment is for identifiable services.
  2. The amount of the remuneration under the employment is (i) Consistent with the fair market value of the services; and (ii) Except as provided is not determined in a manner that takes into account (directly or indirectly) the volume or value of any referrals by the referring physician.
  3. The remuneration is provided under an arrangement that would be commercially reasonable even if no referrals were made to the employer.

It is important to ensure that hospitals and health systems are compliant with these DHS requirements as they relate to their medical groups’ compensation models.

If you have any questions around this topic within our Fair Market Value series, please contact Ronnen Isakov, Managing Director Advisory Service of Medic Management Group. And stay tuned for part four of our series, covering Stark Law and Employed Group Practices! 

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.