Changes to Stark Law Definitions Impact Innovative Relationships and “Commercially Reasonable” Considerations

*This is the third article in a series analyzing recent updates to the Stark Law and Anti-Kickback Statute and their effects on health care providers. To request a copy of the entire series, click here.

Introduction

On November 20, 2020, the Centers for Medicare & Medicaid Services (CMS) published a final rule titled “Medicare Program; Modernizing and Clarifying the Physician Self-Referral Regulations” (the Final Rule) which follows the proposed rules issued on October 9, 2019 (Proposed Rule). The Final Rule modifies the regulations for the Physician Self-Referral Law (Stark Law) in the Social Security Act (the Act). The Stark Law is a strict liability statute, and strict adherence to the elements of the applicable exception is required to be in compliance. CMS included changes to the Final Rule that revise existing definitions as well as added definitions to enable providers to comply more easily with the applicable exception requirements.

Many of the definitions contained in the Final Rule are terms that have also historically been utilized in other contexts, such as the Anti-Kickback Statute and in IRS guidance. As CMS has noted in prior commentary, as well as in the commentary to the Final Rule, the revisions and additions to the definitions in the Final Rule are only applicable to the Stark Law.

The three requirements applicable to many of the Stark Law exceptions are: compensation for the applicable arrangement must be at fair market value, the arrangements must be commercially reasonable, and no arrangement may take into account the volume or value of referrals (or other business generated) between the parties. One or more of each of these requirements is included in many of the Stark Law exceptions, and each of these requirements is an independent factor that, if applicable to the relevant exception, must be analyzed when the Stark Law is implicated. The revisions to the definitions, and the addition of new definitions, help clarify these different required elements.

Fair Market Value

The relationships contemplated by Stark and those that are included in the Stark exceptions contain a requirement that the payments or compensation for space, equipment, or services be at “fair market value.” Fair market value is defined in the Act as “the value in arms-length transactions, consistent with the general market value.” There are additional requirements for rentals or leases that “the value of rental property for general commercial purposes (not taking into account its intended use) and, in the case of a lease of space, not adjusted to reflect the additional value the prospective lessee or lessor would attribute to the proximity or convenience to the lessor where the lessor is a potential source of patient referrals to the lessee.” The Final Rule modifies the definition of “fair market value” generally, and more specifically, modifies the definition of fair market value applicable to the rental of equipment and rental of office space. This modification provides clarity to the statutory language.

The Final Rule defines fair market value as:

• Fair market value is generally defined as “the value in an arms-length transaction, consistent with the general market value of the subject transaction.”
• Fair market value for rental of equipment is defined as “the value in an arms-length transaction of rental property for general commercial purposes (not taking into account its intended use), consistent with the general market value of the subject transaction.”
• Fair market value for rental of office space is defined as “the value in an arm’s-length transaction of rental property for general commercial purposes (not taking into account its intended use), without adjustment to reflect the additional value the prospective lessee or lessor would attribute to the proximity or convenience to the lessor where the lessor is a potential source of patient referrals to the lessee, and consistent with the general market value of the subject transaction.”

In the commentary to the Final Rule, CMS provided additional insight noting that a determination of fair market value is usually the fair market price for completed bona fide sales of “assets of like type, quality and quantity in a particular market at the time of the acquisition” or compensation in bona fide service agreements with comparable terms at the time of the agreement,” without taking into account any actual or anticipated volume or value of referrals. This explanation is consistent with prior commentary by CMS addressing fair market value.

It is important to note that when evaluating a potential relationship in which the Stark Law is a factor, the dollar amount of the fair market value is one of two components that must be reviewed. The compensation to be paid must be at fair market value (as defined in the Final Rule) and must also not take into account the volume or value of referrals (or volume or value of other business generated by the physician, if applicable). If either of those two components cannot be met, then the relationship would not be permissible under the Stark Law.

Many commenters to the Proposed Rule requested that CMS provide certain rebuttable presumptions or safe harbors for compensation as to what would be considered fair market value. In the Final Rule, CMS declined to include any such guidance, and noted that in all phases of the Stark Law, CMS has been consistent in its description of the determination of what would constitute the establishment of “fair market value” and “general market value.” CMS has stated that it would “intend to accept any method that is commercially reasonable and provides [us] with evidence that the compensation is comparable to what is ordinarily paid for an item or service in the location at issue, by parties in arm’s-length transactions that are not in a position to refer to one another.”

General Market Value

Prior to the issuance of the Final Rule, the term “general market value” was included in the definition of “fair market value” of the Stark Law and was not separately defined. In the Proposed Rule, the definition of “general market value” was equated to “market value,” a term utilized in valuation principles. However, based on numerous comments received to the Proposed Rule, CMS acknowledged that the use of the term “market value” did not achieve the objective in defining “general market value,” and, therefore, the concept and term relating to “market value” is not included in the Final Rule. It is important to keep in mind that even though the concept of “market value” has been eliminated, the parties are obligated to consider the general market value of the transaction entered into by the parties without taking into account any other business arrangements between the parties.

Similar to the revised definitions of “fair market value,” the Final Rule provides a general definition of “general market value,” as well as general market value definitions applicable to specific types of arrangements.

The new definitions of general market value are:

• For Assets: With respect to the purchase of an asset, the price that an asset would bring on the date of acquisition of the asset as the result of bona fide bargaining between a well-informed buyer and seller that are not otherwise in a position to generate business for each other.
• For Compensation: With respect to compensation for services, the compensation that would be paid at the time the parties enter into the service arrangement as the result of bona fide bargaining between well-informed parties that are not otherwise in a position to generate business for each other.
• For Rental of Equipment or Office Space: With respect to the rental of equipment or the rental of office space, the price that rental property would bring at the time the parties enter into the rental arrangement as the result of bona fide bargaining between a well- informed lessor and lessee that are not otherwise in a position to generate business for each other.

Commercially Reasonable

Many of the exceptions to the Stark Law, including the exceptions for employment, personal services arrangements, leases, and timeshare arrangements include the term or concept that the relationship must be “commercially reasonable.” However, prior to the issuance of the Final Rule, while the concept of an arrangement being “commercially reasonable” was addressed and discussed, the term “commercially reasonable” was not defined in the regulations. To provide clarification to the standard that an arrangement be “commercially reasonable,” CMS has included a new definition of the term “commercially reasonable.” An arrangement is considered to be “commercially reasonable” if “the particular arrangement furthers a legitimate business purpose of the parties to the arrangement and is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty. An arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.”

In its commentary to the Final Rule, CMS stated that the determination as to whether an arrangement is “commercially reasonable” will depend on “whether the arrangement makes sense to accomplish the parties’ goals,” and such determination does not depend only on the compensation terms. While compensation terms are an important component of the arrangement between the parties and the ability to accomplish the parties’ goals, CMS recognizes that an arrangement may meet the commercially reasonable standard even if one or more of the parties does not benefit financially from the arrangement. This standard represents a notable change from the government’s position in earlier Stark Law enforcement cases, including the Halifax case, where the government took the position that arrangements resulting in financial losses (i.e., arrangements where a party did not benefit financially) could not be commercially reasonable.

For value-based arrangements, the new exceptions contained in the Final Rule do not include a requirement that the value-based arrangement be commercially reasonable. For a comprehensive analysis of the new value-based arrangement requirements, please refer to the Arent Fox Alert, New Stark Law and Anti-Kickback Reforms Aimed at Value-Based Care.

Practical Takeaways

The intent of the revisions to the Final Rule is to ease the regulatory burden for parties entering into arrangements where the Stark Law is implicated.

• Parties should review existing arrangements for compliance with the new commercial reasonableness definition, and ensure that the compensation paid is consistent with fair market value and general market value.
• Parties should review their existing arrangements to ensure compliance with the specified requirements with respect to compensation for space, equipment, or services, including that the compensation must not to take into account other business arrangements between the parties or the generation of referrals between the parties. If the specific arrangement is for space or equipment, there are additional considerations and requirements that must be met.
• Any future relationships entered into where the Stark Law is implicated must be compliant with the newly defined requirements, and any existing arrangements that are determined not to be compliant with the relevant exception will need to be modified to meet all of the applicable elements for that particular exception.