The Executive Suite: Review your medical practice’s compensation methodology before the end of the year

As the end of the year approaches, physician practices need to start planning for 2022. From a legal perspective, this planning should include a review of the practice’s compensation methodology to assure compliance with Stark regulation clarifications, which will take effect January 1, 2022.

The Stark law generally prohibits a physician from referring a Medicare patient for a designated health service (DHS) to an entity with which the physician has a financial relationship, unless there is an applicable exception. DHS includes many ancillaries which are used in physician practices, such as DME, laboratory, and radiology services. Referrals within the physician practice implicate the Stark law since physicians have a financial relationship with their own practice.

Physician practices that qualify as “group practice” under Stark’s definition can take advantage of an exception to Stark known as the in-office ancillary services (IOAS) exception. Under this exception, physician practices can self-refer Medicare patients for DHS by generally meeting certain location, billing, and supervision requirements.

A key component of being a “group practice” under Stark is making sure that the group practice is allocating revenue for DHS profit in a compliant manner. This means that a physician practice must have a methodology that at all times allocates the revenue from DHS in a manner that does not reward physicians directly for their referrals. Although Stark’s DHS allocation rules have been in place for years, CMS felt that clarification of the requirement was appropriate. Among the key points CMS clarified about the profit allocation rules were the following:

1. A group practice cannot distribute profits from DHS on a service-by-service basis (also known as "split pooling"). This means, for example, that dividing up MRI DHS equally, but dividing up lab DHS based on overall profits, is not acceptable. Instead, CMS wants group practices to aggregate all revenue and expenses from all DHS service lines and then distribute that revenue using the same methodology. Popular approaches to allocate revenue and expenses within a group practice included equal distribution, based on ownership percentage, or based on overall productivity (not including the DHS).

2. A group practice can also segregate and allocate DHS profits generated by "pods" of at least five physicians and within those pods, the group is permitted to use different profit allocation methodologies. However, within each pod, groups must use the same one methodology for all DHS.

To start the process of evaluating a practice’s compensation approach, consider the following:

Draw a diagram of the practice so you can clearly see which physicians are rendering services in the practice and how they are organized (i.e., location, specialty, etc.)
Identify any groupings of five (5) or more physicians.
Identify the DHS being offered by the practice. This should include Medicare ancillary services only. Confirm the current DHS codes at https://www.cms.gov/license/ama?file=/files/zip/list-codes-effective-january-1-2021-issued-december-1-2020.zip. Note that some DHS are not listed based on CPT Code, but the category of the service is considered DHS, such as drugs, pathology and durable medical equipment.
Identify how revenue and expenses of the DHS are being allocated to physicians in the group practice. If all DHS is being allocated in a permissible manner among all physicians in the practice, the analysis is complete.
If DHS is being allocated in multiple different ways among the practice physician, the practice must choose a single methodology to put in place starting January 2022. If the group has identified pods of five or more physicians, a single methodology must be chosen to allocate the DHS generated by the pod. It need not be the same methodology as the remainder of the group practice as long as it is compliant.
If the group determines that it has been allocating DHS in a manner that is based on physician referrals, the group should take steps to bring the practice compensation approach into compliance by January 2022. The practice should then talk with counsel for guidance about reporting any Stark non-compliance. CMS has a specific Self-Referral Self-Disclosure Protocol to report identified Stark compliance issues.
Put in place a plan to review the group practice’s compensation approach annually. Because group “pods” can change in size over time as physicians join and leave a practice, and DHS covered by Stark changes annually, it is advisable to conduct an annual audit of the group practice’s compensation methodology.

Compliance with Stark is essential for physician practices that see Medicare patients and self-refer for DHS. The consequences of non-compliance are financially and legally significant. Talk to your health law counsel and financial advisors so that a plan can be in place before the end of the year.