Changes to the Stark Law: Part III

Health Care Law Update

Date: March 02, 2016

Key Notes:

  • CMS recently modified and clarified several compensation exceptions under the Stark Law.
  • Writing requirement can be satisfied with a collection of documents.
  • Term provision does not need to be explicitly stated in documents as long as the arrangement lasts at least one year.
  • Indefinite holdover provisions in leases and personal services arrangements are permitted.
  • Parties have 90 days to obtain signatures on leases and personal services agreements.

The Centers for Medicare and Medicaid Services (CMS) recently finalized[1] several modifications and clarifications to existing compensation exceptions under the Stark Law, including the office rental, equipment rental and personal services exceptions. The changes resulted from trends in disclosures under the self-referral disclosure protocol.

This Health Care Law Update is the third and final installment in a series describing the recent changes to the Stark Law.

Writing Requirement

In the final rule, CMS clarified that parties to a compensation arrangement do not need to reduce the key terms of the arrangement (such as lease or personal services arrangements) to a single formal contract to satisfy the compensation exceptions’ writing requirement. Instead, a collection of documents, including contemporaneous documents showing the course of conduct between the parties, may satisfy the writing requirement. Examples of individual documents that the parties might consider as part of a collection of documents when determining whether a compensation arrangement complies with the writing requirement of an applicable exception include:

  • Board meeting minutes or other documents authorizing payments for specified services.
  • Written communications between the parties, including hard copy and electronic communications.
  • Fee schedules for specified services.
  • Check requests or invoices identifying items or services provided, relevant dates and/or rate of compensation.
  • Time sheets documenting services performed.
  • Call coverage schedules or similar documents providing dates of services to be provided.
  • Accounts payable or receivable records documenting the date and rate of payment and the reason for the payment.
  • Checks issued for items, services or rent.

While this is not an exhaustive list, the documents must clearly relate to one another and evidence one and the same arrangement between the parties.

CMS declined to adopt a grace period for satisfying the writing requirement, noting that a grace period would not incent parties to document the terms and conditions of the arrangement promptly, potentially posing a risk of patient and program abuse. For example, if the rate of compensation is not documented before a physician provides services to a designated health services (DHS) entity, the entity could adjust the rate of compensation during the grace period in a manner that takes into account the volume or value of the physician’s referrals. Therefore, all requirements of a compensation exception must be met at the time a referral is made. If an arrangement with a physician fails to comply with the writing requirement when the arrangement commences, then the DHS entity is not permitted to bill for DHS furnished as a result of the physician’s referrals unless and until the arrangement is sufficiently documented.

Despite CMS’s flexibility with respect to the writing requirement, the surest and most straightforward means of complying with Stark’s writing requirement and ensuring an enforceable contract, is to reduce an arrangement’s key terms to a single signed writing before either party provides items, services, space or compensation to the other party. CMS’s clarification, however, provides assurance that an inadvertent failure to have a formal contract in place will not subject the parties to the substantial penalties associated with a failure to satisfy the elements of the compensation exceptions, as long as the parties can provide evidence that the underlying financial arrangement complies with all of the exception’s requirements at the commencement of the arrangement.

Term Requirement

The compensation exceptions for office space rental, equipment rental and personal services arrangements require that the compensation arrangement between the entity furnishing DHS and a referring physician have a term of at least one year. CMS clarified that the written arrangement between the parties does not need to have an explicit term provision. Instead, any arrangement that lasts as a matter of fact for at least one year satisfies the one-year term requirement. However, parties must have contemporaneous writings establishing that the arrangement lasted for at least one year, or be able to demonstrate that the arrangement was terminated during the first year, with or without cause, and that the parties did not enter into a new arrangement for the same space, equipment or services during the first year.

Holdover Arrangements

The compensation exceptions for office space rental, equipment rental and personal services arrangements previously permitted a holdover arrangement for up to six months. CMS recognized through the self-referral disclosure protocol that numerous rental and personal service arrangements failed to satisfy the requirements of the applicable exception solely because the arrangement expired by its terms and the parties continued the arrangement on the same compliant terms and conditions after the six-month holdover period ended. Upon review, CMS did not believe that an arrangement that continues beyond the six-month period poses a risk of program or patient abuse, provided that the arrangement continues to satisfy the specific requirements of the applicable exception.

To prevent frequent renegotiation of short-term arrangements that could take into account a physician’s referrals, the holdover must continue on the same terms and conditions as the original arrangement. If the parties change the terms and conditions of the arrangement, CMS would consider it a new arrangement that would be subject to the one-year term requirement.

The compensation must continue to be fair market value during the holdover. Thus, if office space rental payments are fair market value when the lease arrangement expires, but the rental amount falls below fair market value at some point during the holdover, the lease arrangement would fail to satisfy the office rental exception as soon as the fair market value requirement is no longer satisfied, and DHS referrals by the physician to the DHS entity that is party to the compensation arrangement would no longer be permissible. In addition, the DHS entity could not bill Medicare for DHS furnished as a result of a referral made by the physician after the rental charges are no longer consistent with fair market value.

The requirement that the arrangement be set out in writing continues to apply during the holdover. To satisfy this requirement, the parties must have documentary evidence that the arrangement continued on the same terms and conditions. The expired written agreement and a collection of documents, including contemporaneous documents showing the course of conduct between the parties, could satisfy the writing requirement for the holdover.

CMS cautioned, however, that if a written contract with an explicit term provision expires on its own terms (without a holdover provision), but the parties continue the arrangement past the expiration, the expired written contract by its own terms does not apply to the continued arrangement. Therefore, written agreements should either include a holdover provision or provide for automatic renewals. The best means of ensuring ongoing compliance is to enter into a new agreement in a timely manner after a contract expires, and to reassess fair market value to the extent necessary at the time of renewal.

Signature Requirement

Several compensation exceptions require that an arrangement be signed by the parties. The Stark Law includes a special rule that permits DHS entities to submit a claim for DHS if an arrangement temporarily does not satisfy the signature requirement but otherwise fully complies with the compensation exception. Under the previous rule, if the failure to obtain a signature was inadvertent, the parties had 90 days to obtain the signature, but if the failure was not inadvertent, the parties were required to obtain the signature within 30 days.

Recognizing that it can take up to 90 days to obtain all required signatures, and believing that it would not pose a risk of program or patient abuse, CMS finalized a rule allowing parties 90 days to obtain missing signatures, regardless of whether the failure to obtain signatures at the commencement of the arrangement was inadvertent or not.

DHS entities may only use the temporary noncompliance rule once every three years for the same referring physician. The “stand in the shoes” rules determine whether a party may use the temporary noncompliance rule more than once in three years for physicians associated with a physician organization. For example, if a DHS entity enters into a compensation arrangement with a physician organization, the compensation arrangement is deemed to be between the DHS entity and each of the physicians who stand in the shoes of the physician organization. Thus, the DHS entity could only use the temporary noncompliance rule once every three years with respect to any physician who stands in the shoes of the physician organization.

CMS allowed that parties may look to state law and other bodies of relevant law, including federal and state law pertaining to electronic signatures, to determine whether a writing is signed for the purposes of the Stark Law exceptions.

Our Services

We advise hospitals and physicians on the Stark Law’s applicability to various transactions and develop agreements to utilize its exceptions. We also offer complimentary webinar training on the Stark Law to clients and friends of the firm.


For more information, please contact:

Cori R. Haper

John L. Green

or any member of our Health Care group.

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[1] Calendar Year 2016 Medicare Physician Fee Schedule Final Rule, 80 Fed. Reg. 70885-71386 (Nov. 16, 2015).