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Health Care Compliance Developments (Part 1): The Stark Law’s New VBA Exceptions and Changes to the “Volume or Value” Standard


Benjamin M. Fiechter
Counsel to the Firm, Stoll Keenon Ogden PLLC
(859) 231-3019

In 2018, the United States Department for Health & Human Services (“HHS”) began the “Regulatory Sprint to Coordinated Care,” an effort to “remove potential regulatory barriers to care coordination and value-based care” purportedly caused by several federal regulatory schemes, including the Ethics in Patient Referrals Act, more commonly known as the Stark Law (“Stark”).[1] As part of that initiative, the Centers for Medicare & Medicaid Services (“CMS”) recently issued a Final Rule that, among other things, created new exceptions to Stark’s general prohibition and “re-defined” existing Stark concepts.[2] These new regulations will have an impact on health care providers of all shapes and sizes; this update is intended to help health care providers understand the basics of the new exceptions and changes so they can consider new, potentially advantageous arrangements and review existing physician arrangements for continued compliance.

Part 2 will focus on other aspects of the Final Rule, including a revised “directed referral” rule and changes to the definition of “indirect compensation arrangement.” Part 3 will review a related final rule promulgated by HHS’ Office of Inspector General that affects the “safe harbor” provisions of the Anti-Kickback Statute and consider the interplay between those provisions and the Final Rule.

I.     The Stark Law – A Brief Introduction.

Nicknamed for Pete Stark, the congressman who drafted the bill and shepherded it through Congress, Stark is aimed at improper “physician self-referrals”—the practice of referring a patient for a test or service for which the physician will receive compensation. Imagine a cardiologist who operates an office practice and has an ownership interest in a medical imaging facility—her referral of patients from the office practice to the medical imaging facility is a self-referral because she will ultimately receive some amount of compensation for the performance of the imaging study.

This example illustrates the twofold rationale underlying Stark. First, there is the potential for conflict between the cardiologist’s clinical and ethical obligations to the patient on one hand and her financial interest on the other. Second, since a high proportion of health care reimbursement to health care providers comes from Medicare and Medicaid, the taxpayer ends up footing the bill for these potentially conflicted transactions.  

As such, Stark aims to limit opportunities for self-referral by generally prohibiting a physician from making referrals for designated health services for which payment may be made under a federal health care program to an entity with which he or she (or an immediate family member) has a financial relationship.[3] It further prohibits such an entity from seeking reimbursement under federal health care programs for such referrals.[4] The term “financial relationship” is very broad and includes both compensation arrangements and ownership interests.[5] In other words, our cardiologist’s referrals to the medical imaging facility in which she has an ownership interest may violate federal law.

Fortunately, however, Stark contains numerous statutory and regulatory exceptions that exempt certain activities and arrangements from its broad prohibitions.[6] For example, payments made by an employer to a physician pursuant to a bona fide employment relationship are expressly excluded from Stark’s definition of “financial relationship” and thus may be made without violating the law.[7] 

Each Stark exception contains requirements that must be met for the exception to apply, many of which recur in multiple exceptions. To meet the bona fide employment relationship exception, for example, the compensation paid to the employee may not be “determined in any manner that takes into account the volume or value of referrals by the referring physician,” among other requirements.[8] The “volume or value” standard is present in many other Stark exceptions, including the space lease exception, the equipment lease exception, the physician recruitment exception, and the academic medical center exception.

Stark is a strict liability statute; providers can be penalized for a violation regardless of intent.[9] 

As a result, once the government demonstrates that each element of a Stark violation exists, the provider must demonstrate that its conduct fits within each and every prong of a particular exception.[10] Stark is a civil statute, but the penalties for violation can be significant—in addition to denial of reimbursement and recoupment of reimbursement already paid, Stark violations may give rise to civil monetary penalties (and treble damages if the violation also violates the False Claims Act). Since each referral resulting from a prohibited relationship is a separate violation, those penalties can become significant in very little time. Violations can also result in exclusion and debarment from participation in federal health care programs.

II.     “Value-Based” ArrangementsA longtime goal of federal health care policy is to “shift from volume-driven to value drive payment models.”[11] One of CMS’ goals in promulgating the Final Rule was to incentivize “better care coordination—including more efficient transitions for patients moving between and across care settings and providers, reduction of orders for duplicative items and services, and open sharing of medical records and other important health data across care settings and among a patient’s providers.”[12] To that end, the Final Rule created three new exceptions for “value-based” compensation arrangements.[13] Each of these exceptions is jargon-heavy, focusing on the interplay between several key concepts that are defined in the final 42 C.F.R. § 411.351. Each requires the existence of a value-based enterprise (“VBE”), a collaboration between two or more individuals and entities to achieve at least one value-based purpose (“VBP”).[14] The participating individuals and entities are known as VBE Participants.[15] The VBE must take actions which are “reasonably designed to achieve at least one” VBP, including coordinating and managing the care of a target patient population, improving the quality of care for a target patient population, appropriately reducing costs to or growth in expenditures of payors without reducing quality of care for a target patient population, or transitioning from health care delivery and payment mechanisms based on the volume of items and services provided to mechanisms based on quality of care and control of costs for a target patient population.[16] The VBE itself must meet certain formalities, including the existence of a value-based arrangement by and between the VBE Participants, the appointment of an accountable body or person responsible for the financial and operational oversight of the VBE, and the use of a governing document describing the VBE and how the VBE Participants intend to achieve the VBP.[17]

The value-based arrangement exceptions do not contain references to several Stark concepts that are present in many other exceptions. CMS “considered including provisions in the exceptions for value-based arrangements that would require compensation to be set in advance, fair market value, and not determined in any manner that takes into account the volume or value of a physician’s referrals or other business generated between the parties.”[18] It did not do so, though, because of a “concern[]…that the inclusion of such requirements would conflict with our goal of dismantling and addressing regulatory barriers to value-based care transformation,” and because “the disincentives for overutilization, stinting on patient care, and other harms [Stark] was intended to address that are built into the value-based definitions will operate in tandem with the requirements included in the exceptions and be sufficient to protect against program and patient abuse.”[19] Even so, providers must be aware that “the making of a referral [from one VBE Participant to another] is not a value-based activity,” and “the exceptions would not protect…direct payment for referrals.”[20] Thus, if the VBE’s VBP is to reduce payor costs while improving or maintaining quality of care, “providing patient care services…without monitoring their utilization would not appear to be reasonably designed to achieve that purpose.”[21]

Two of the new value-based exceptions require the VBE or one or more of the VBE Participants to face some form of risk. The first requires the VBE to assume full financial risk “for the cost of all patient care items and services covered by the applicable payor for each patient in the target patient population.”[22] Examples of full financial risk include capitation payments, global budgets, and “percent of premium” arrangements.[23] The remuneration paid must be for or resulting from “value-based activities undertaken by the recipient of the remuneration for patients in the target population.”[24] 

The second risk-based exception requires “meaningful downside financial risk to the physician” involved in the value-based arrangement.[25] Such risk means that “the physician is responsible to repay or forgo no less than 10 percent of the total value of the remuneration the physician receives under the value-based arrangement” if the VBP is not achieved during the duration of the value-based arrangement.[26] The nature and extent of the downside financial risk must be set forth in writing, and the methodology used to determine the remuneration must be set in advance of the undertaking of value-based activities for which it is paid.[27] 

The final risk-based exception is more general and is applicable to any value-based arrangement whether any of the participants is at financial risk. It requires a written agreement between the parties describing the value-based activities to be undertaken, how those activities will further the VBP, the target patient population, the type or nature of remuneration to be paid, the methodology used to determine same, and the outcome measures against which the recipient of remuneration is to be assessed, if any.[28] To the extent there are outcome measures, they must be “objective, measurable, and selected based on clinical evidence or credible medical support,” and changes to same must be “made prospectively and set forth in writing.”[29] The VBE or one of the VBE Participants must monitor, at least annually, whether the parties have furnished the value-based activities required, whether and how continuation of same will further the VBP, and progress toward attainment of the outcome measures, if any.[30] The results of the monitoring may require the VBE to terminate or modify its activities.[31] The arrangement must also be commercially reasonable.[32] 

All three value-based exceptions share several criteria. First, any remuneration paid must be “for or result[ing] from value-based activities undertaken by the recipient of the remuneration for patients in the target patient population,” may not be “an inducement to reduce or limit medically necessary items or services to any patient” and may not be “conditioned on referrals of patients who are not part of the target patient population or business not covered under the value-based arrangement.”[33] Second, the VBE must maintain for at least six years “[r]ecords of the methodology for determining the actual amount of remuneration paid under the value-based arrangement” and must be “made available to the Secretary [of HHS] upon request.”[34] Finally, each exception permits the conditioning of remuneration to the involved physician upon the physician’s referrals to a particular provider, but only if the condition is set out in writing and signed by the parties and does not apply if the patient expresses a preference for a different provider, if the patient’s insurer determines the provider, or the physician determines that the referral is not in the patient’s best medical interest.[35]

III.    “Objective Tests” for Volume or Value

In addition to creating new exceptions, the Final Rule also clarifies Stark’s “volume or value” standard. While present in numerous exceptions, this standard has not been explicitly defined in the statutory or regulatory text, leading to some uncertainty among providers regarding whether a particular arrangement is permissible. Through the Final Rule, CMS seeks to rectify this by “establish[ing] objective tests for whether compensation takes into account the volume or value of a physician’s referrals to an entity, or the volume or value of other business generated by a physician for an entity.”[36] 

Where the compensation in question is being paid to the physician, it takes into account the volume or value of referrals “only if the formula used to calculate the physician’s…compensation includes the physician’s referrals to the entity as a variable, resulting in an increase or decrease in the physician’s…compensation that positively correlates with the number or value of the physician’s referrals to the entity.”[37] Where the compensation is being paid by the physician, it takes into account the volume or value of referrals “only if the formula used to calculate the compensation paid by the physician includes the physician’s referrals to the entity as a variable, resulting in an increase or decrease in the compensation that negatively correlates with the number or value of the physician’s referrals to the entity.”[38] A “negative correlation” exists when one variable increases as the other variable increases, and vice versa.[39]

While this seems straightforward, in practice whether the physician’s referrals are a variable may not be obvious on first blush. In the Final Rule, CMS used the example of a physician who leases medical office space from a hospital for $5,000 per month, less $5 “for each diagnostic test ordered by the physician and furnished in one of the hospital’s outpatient departments” to illustrate.[40] In that situation, referrals from the physician to the hospital are clearly a variable in the ultimate compensation payable by the physician. However, in other scenarios the relationship between the physician’s referrals and compensation is more attenuated and abstract. For example, what if the physician’s lease payment decreases by a certain amount or percentage based on the hospital’s collections from each diagnostic test the physician orders and are performed at a hospital outpatient department? In that situation, the physician’s referrals do not appear to be an express variable, but the pool of potential reimbursements that the hospital will seek to collect is based upon the value of the physician’s referrals to the entity.

Further complicating matters, the new “volume or value” standards do not apply to certain Stark exceptions, including those applicable to:

  • Medical staff incidental benefits;
  • Professional courtesy;
  • Community-wide health information systems;
  • Electronic prescribing items and services;
  • Electronic health records items and services; and
  • Cybersecurity technology and related services.[41]

IV.    Conclusion

CMS is hopeful that the new Stark exceptions will improve quality of care and reduce health care costs, and in turn benefit health care consumers. However, they are also untested and may be complicated to implement in practice. As a result, health care providers should scrutinize their existing operations to determine whether the value-based arrangement exceptions could benefit them (and their patients) and should review existing arrangements to ensure compliance with the new “volume or value” standards present in the Final Rule. It is important to note that due to the Final Rule’s recent implementation, there is little guidance from CMS beyond its text and the new regulatory language. For that reason, providers should carefully monitor CMS’ guidance and enforcement activity going forward to ensure continued compliance.


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[1]              85 Fed. Reg. 77492, 77493 (Dec. 2, 2020) (hereinafter referred to as the Final Rule); Stark is codified at 42 U.S.C. § 1395nn, and the regulations promulgated under Stark are found at 42 C.F.R. § 411.351 et seq.

[2]              Final Rule, at 77492. The Final Rule was published in the Federal Register on December 2, 2020, and went into effect on January 19, 2021. While promulgated by the Trump administration, the Biden administration has not taken steps to delay the effective date of the Final Rule.

[3]              42 U.S.C. § 1395nn(a)(1)(A).

[4]              Id. at (a)(1)(B).

[5]              Id. at (a)(2)(A)-(B).  

[6]              See generally 42 U.S.C. § 1395nn(b)-(e) and 42 C.F.R. § 411.355 – 411.357.  

[7]              See 42 C.F.R. § 1395nn(e)(2) and 42 C.F.R. § 411.357(c).

[8]              42 C.F.R. § 411.357(c)(2)(ii). Many Stark exceptions also contain “sub-exceptions”—here, a bona fide employee may be paid “a productivity bonus based on services personally performed by the physician,” even though this technically takes into account the volume of referrals the physician makes to his or her employer. See id. at (c)(4).

[9]              See 66 Fed. Reg. 856, 859 (Jan. 4, 2001) (“Significantly, no wrongful intent or culpable conduct is required” to prove a violation of Stark); see also U.S. ex rel. Vilafane v. Solinger, 543 F.Supp.2d 678, 685-86 (W.D. Ky. 2008).

[10]             See U.S. v. Rogan, 459 F.Supp.2d 692, 715-16 (N.D. Ill. 2006).

[11]             Final Rule, at 77498.

[12]             Id.  

[13]             See Final Rule, at 77498 (“[T]he value-based arrangement must be a compensation arrangement and not another type of financial relationship to which [Stark] applies.”).

[14]             Final Rule, at 77662.

[15]             See id. CMS considered excluding certain entities, like clinical laboratories and durable medical equipment suppliers, from the definition of VBE Participants based on their purported lack of “direct patient contacts,” but ultimately chose to permit all entities to participate. HHS’ Office of Inspector General promulgated a final rule creating safe harbors to the Anti-Kickback Statute for value-based arrangements, OIG excluded these entities from participation, thus potentially limiting the impact of the Final Rule for them.

[16]             Final Rule, at 77497 and 77662. A “target patient population” is a patient population that is selected based on legitimate and verifiable criteria that are set out in writing in advance off the commencement of the arrangement and further the VBP. See id. at 77499.

[17]             Id.

[18]             Final Rule, at 77655.

[19]            Id., at 77655-56.

[20]             Id. at 77497.

[21]             Id.          

[22]             Id. at 77510; see also final 42 C.F.R. 411.357(aa)(1)(i).

[23]             Final Rule, at 77510, 77646.

[24]            Final 42 C.F.R. § 411.357(aa)(1)(ii).

[25]             See id. at (aa)(2).

[26]             Id. at (aa)(2)(i), (ix).

[27]             Id. at (aa)(2)(ii)-(iii).

[28]             Id. at (aa)(3)(i)(A)-(F).

[29]             Id. at (aa)(3)(ii)-(iii).

[30]             Id. at (aa)(3)(vii)(A).         

[31]             Id. at (aa)(3)(vii)(B).

[32]             Id. at (aa)(3)(vi).

[33]             Id. at (aa)(1)(iii)-(iv), (2)(v)-(vi), and (3)(viii)-(ix).

[34]             Final 42 C.F.R. § 411.357(aa)(1)(vi), (2)(viii), and (3)(xi).

[35]             See id. at (aa)(1)(v), (2)(viii), and (3)(x).

[36]             Final Rule, at 77540.

[37]            Id. at 77543; see also final 42 C.F.R. § 411.354(d)(5)(i)-(ii).

[38]             Final Rule, at 77538; see also final 42 C.F.R. § 411.354(d)(6)(i)-(ii).  

[39]             Final Rule, at 77492; see also final 42 C.F.R. § 411.354(d)(6)(iii).

[40]             Final Rule, at 77538.

[41]             See id. at 77677.