The physician self-referral law, known as the Stark law, was enacted in 1989 when healthcare was primarily paid for on a fee-for-service basis. At the time, it was recognized that physicians might have a profit motive for self-referral, so the Stark law prohibits physicians from making referrals for certain services to entities in which the physician or immediate family members had a financial interest.

These services included specific lab, physical and occupational therapy, radiology, and other “designated health services.” In addition, the Stark law prohibits billing Medicare or Medicaid for such services as the result of a self-referral.

Since passage of the Stark bill, healthcare models have changed considerably and now include many value-based healthcare delivery and payment systems based on the quality of patient care instead of the volume of services provided. While the regulations that interpret the Stark law have been updated several times, none of the updates fully address the move from a fee-for-service model to models designed to enhance care, improve quality, and reduce waste.

Because the regulations were so rigid, and the consequences of noncompliance so dire, physician groups may have been “discouraged from entering into innovative arrangements that would improve outcomes, produce efficiencies and lower costs,” according to the Centers for Medicare & Medicaid Services (CMS).

New Reforms Modernize Regulations

To remedy this situation, last year CMS implemented a final rule creating permanent exceptions to the Stark law, clarifying what is allowable for physician referral arrangements.

In terms of valuation, the final rule clarifies three key concepts that previously caused uncertainty: the arrangements must be commercially reasonable; physician compensation generally cannot be based on “volume or value of referrals or other business generated for a party,” and transactions must be consistent with fair market value.

Commercially reasonable: The new rule states that to be considered “commercially reasonable,” the referral arrangement must further a legitimate business purpose and be sensible relative to the “characteristics of the parties, including their size, scope and specialty.” The arrangement doesn’t have to be profitable, as illustrated by providing charity care or referring to unprofitable but legitimate services such as psychiatric units.

Volume or value of referrals: The new rule requires that the compensation paid under the referral arrangement not depend on the volume or value of the referrals by physicians who are parties to the arrangement.

However, the rule also includes language regarding exceptions to this concept when the physician compensation calculation “includes referrals as a variable …” in the compensation amount.

Fair market value: As with other references to fair market value, the new CMS rule clarifies that fair market value is the value in an arm’s-length transaction but, in this setting, must also be “consistent with general market value of the subsequent transaction.” General market value includes definitions relative to assets, compensation, and office space and equipment rental.

Complexity Rules

While the final Stark regulations clarify some of the uncertainties that healthcare providers and valuation professionals have experienced over the years, the law is still complex. For this reason, it is imperative to work with valuation professionals who are familiar with physician referral arrangements, compensation, and Stark law compliance.

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Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.




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