Stark Law Updates

The Stark Law was part of the Omnibus Budget Reconciliation Act of 1990. Referred to as Stark I, this prohibited a physician referring a Medicare patient to a clinical laboratory if the physician or his/her family member has a financial interest in that laboratory (self-referral). It was codified in the United States Code, Title 42, Section 1395nn, “Limitation on certain physician referrals”.  The Omnibus Budget Reconciliation Act of 1993 contained what is known as “Stark II” amendments to the original law. “Stark II” extended the “Stark I” provisions to Medicaid patients and to designated health services (DHS) other than clinical laboratory services. The Centers for Medicare and Medicaid Services has issued rules in the Federal Register to implement Stark Law, including a 2001 “Phase I” final rule, a 2004 “Phase II” interim final rule, and a 2007 “Phase III” final rule.

2020 Updates

In 2020, additional enforcement changes for Stark were addressed, including:

  • Creating new, permanent exceptions to the Stark Law for value-based arrangements
  • Applying Stark exceptions to arrangements for all patients, including those outside Medicare
  • Seeking comments on requiring provision of cost-of-care information at the point of a referral
  • Providing additional guidance on several key Stark compliance requirements
  • Providing guidance on how to determine whether compensation meets the “fair market value” requirement
  • Providing new flexibility for certain arrangements, such as cybersecurity technology donations, that do not qualify as value-based payment arrangements

Ten rule changes of the anti-kickback statute include:

  • Creating new safe harbors for certain payments between eligible participants in certain, mainly two-sided, value-based arrangements
  • Offering a new safe harbor for patient tools that improve quality, health outcomes and efficiency
  • Offering a new safe harbor for some payments in connection with CMS-sponsored models
  • Creating a new safe harbor for donations of cybersecurity technology and services
  • Modifying the existing safe harbor for electronic health record items and services to add cybersecurity technology and interoperability and to remove the sunset date
  • Adding flexibility to outcomes-based payments and part-time arrangements
  • Revising the definition of warranty and providing protection for bundled warranties
  • Expanding and modifying mileage limits for rural areas and for transportation of patients discharged from inpatient facilities
  • Codifying an exception to the definition of remuneration related to accountable care organization (ACO) beneficiary payments
  • Modifying the prohibition on beneficiary inducements for telehealth technologies furnished to certain in-home dialysis patients

Changes to Definitions

CMS proposed several changes to the definitions applicable to existing exceptions, including changes to the definitions of (1) fair market value and (2) commercial reasonableness.

Fair Market Value:

  • Definition – CMS advanced a general definition of fair market value as well as more specific definitions applicable to the rental of office space and rental of equipment. CMS also proposed structural changes to the definition of “general market value” to contemplate a modernized general definition, along with components specific to the rental of office space and equipment.
  • Principles of Market Value – The Proposed Rule modifies the definition of “general market value” to align with valuation principles of market value more closely.
  • Volume or Value Standard – CMS proposed removing references to the volume or value of referrals in the fair market value definition, as CMS believes the fair market value requirement is separate and distinct from the volume or value standard.
  • Intended Use in Rental Arrangements – CMS also proposed removing from the fair market value definition the statement that “a rental payment does not take into account intended use if it takes into account costs incurred by the lessor in developing or upgrading the property or maintaining the property or its improvements.” CMS originally added this language to the Stark Regulations to clarify that rental payments may reflect the value of improvements or amenities provided by a landlord.

Commercial Reasonableness:

  • Several Stark exceptions, including those for the rental of office space and equipment, require the arrangement at issue to be “commercially reasonable” even if no referrals were made between the parties. Yet, the existing Stark Regulations neglect to define commercial reasonableness. Therefore, CMS proposed the following definition:
    • Commercially reasonable means that the 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.

Changes to Exclusive Use Requirements

In another proposal affecting office leases, the change to the exclusive use requirement in the Rental of Office Space Exception that allows 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. Through the CMS Self-Referral Disclosure Protocol (SRDP) for potential Stark Law violations, CMS reviewed several leasing arrangements where multiple tenants used the same office space contemporaneously or in close succession to one another. For example, in one case, two tenants used the same office space to provide care to a single patient, which, rather than resulting in abuse to the system, enhanced patient care and convenience.

Expanding Which Exceptions May Apply to Space Leases

Under current guidance, space lease arrangements are required to fit within the Rental of Office Space Exception. CMS stated in the Proposed Rule, however, that other exceptions may apply depending on the circumstances of the lease.

Fair Market Value Exception

CMS reviewed several SRDP submissions regarding legitimate, non-abusive space leasing arrangements that could not satisfy either (a) the Rental of Office Space Exception (because the term was less than one year) or (b) the Timeshare Exception because the arrangement conveyed a possessory leasehold interest.  Considering those submissions, CMS has 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

According to CMS, rental payments 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 (“DHS”).  CMS proposed that the rental of office space (where patient care services are provided) is remuneration related to the provision of DHS and therefore would not be covered by this exception.

Payments by a Physician Exception

CMS recognized the Payments by a Physician Exception historically has not been available for office leases because CMS viewed the exception as covering only items and services, not leases. However, in the Proposed Rule, CMS points out it originally designed this exception as a “catch-all” for legitimate arrangements not covered by another exception (such as office leases, which could be structured to fit within the rental of office space exception). CMS proposed, therefore, allowing the Payments by a Physician Exception to protect payments by a physician for the lease or use of space other than office space, such as for leases of storage space or residential real estate. CMS made clear; however, it is not proposing that this exception be available to protect office leases, including short-term leases.

The updates include key definitions and clarifications in areas such as fair market value, commercial reasonableness, and the volume and value of referrals. These are considered “the big 3” by CMS and will garner much industry attention leading up to the final rule.  Notably, regulators have also acknowledged the shift toward value-based care within the healthcare industry and have offered new definitions and exceptions for value-based enterprises (VBE). Under the proposed rules changes, a VBE exception will be created, opening the door for innovative compensation structure designs. The purposes of a VBE include providing better coordination of care for a target population, improving the quality of care, reducing costs, and transitioning to value-based models.  The changes were expected to be enacted by October 2020, but this may be placed on hold as Covid-19 disrupts many regulatory activities.

For more details, follow us as changes to the Stark Law take effect and advance toward value-based enterprises.  We will send out updates as they occur and you may also find them posted on our website at:


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