Designated Health Services Profits: Rules and Regulations

Effective January 1, 2022, the Centers for Medicare and Medicaid Services (CMS) implemented major changes to the Stark Law regulations. The Stark Law generally prohibits physicians with a financial relationship with an entity from referring patients to their practice for designated health services (DHS) payable by Medicare or Medicaid unless the financial arrangement is structured to fit within a regulatory exception.¹ These services include clinical laboratory services, certain therapy services, imaging services, and more.

In order to make in-office referrals of DHS without violating Stark, physicians rely on Stark’s “in-office ancillary services” (IOAS) exception. To qualify for the in-office ancillary services exception, requestors must first meet the definition of a group practice as set forth in section 1877 of the Act. That is, a group of 2 or more physicians legally organized as a partnership in which each physician provides the full range of services, bill under a billing number assigned to the group, and personally conduct no less than 75 percent of the physician-patient encounters of the group practice.²

Under Stark’s “group practice” exception, physician groups that qualify as a “group practice” may pay physician group members based on services the physician personally performs, “incident to” services billed, or, subject to certain limits, a portion of the overall profits of the group, including profits from services derived from services performed by others.³

Physicians in a group practice may share in the overall profits from DHS so long as the profits are not divided and distributed in a manner that directly relates to the volume or value of DHS referrals. Stark offers several compliant compensation distribution methods, a few of which are listed below:

· If the profits are divided per capita (e.g., per physician in the group);

· If the revenue from DHS is divided according to the division of non-DHS revenue;

· If the revenues derived from DHS amount to less than 5% of the group’s total revenues, and the allocated portion of those revenues to each physician in the group constitutes 5% or less of the physician’s total compensation.

In this regulatory update, CMS made several clarifications to the special rule with particular consideration to the pooling and distribution of such profits.

1. CMS will not allow groups to establish distribution pools based on service lines.

Some physicians groups have historically referred to specialty pooling as “split-pooling”. Groups that have been conducting “split-pooling” will need to adjust their compensation methodologies to comply with the new regulations.

2. Physicians can only receive profits from a single distribution pool.

Physician groups must place all DHS profits referred by particular physicians into the distribution pool to which those physicians have been assigned.

3. Physician groups can segment groups of five or more physicians by specialty, location, practice experience, tenure, or other criteria.

There are an almost unlimited number of potential distribution factors provided that the share of overall profits is not directly related to the volume or value of referrals.

4. Physician practices do not have to distribute all DHS profits of a particular group.

Physician groups are not required to treat all components the same. A group may distribute all the DHS profits of one component and keep some or all DHS profits of another component.

5. Under specific circumstances and exceptions, a group may be able to distribute overall DHS profits to its physicians if the group has less than five physicians.

CMS has now clarified that a physician group of less than five physicians may also receive DHS profits, provided that it meets other special rule requirements, and all profits are aggregated beforehand.⁴

Groups may pay their physicians a portion of the fees received for designated health services performed so long as certain conditions are satisfied. The clarification by CMS is, in short, to create further disconnect between the referring party and the payout such that physicians are incentivized to refer patients only as it is deemed necessary or beneficial to the patient.

While this change is now two years past implementation, non-compliant models are still a concern in health systems across the country. Accordingly, hospitals and physician groups alike should carefully scrutinize any arrangement that would compensate physicians based on the volume or value of their referrals.

HORNE has experience assisting practices and health systems design compliant distribution methods. Should you or anyone in your department need assistance remaining compliant with Stark Law, analyzing group profits earned from DHS services, or developing a compensation plan to both incentivize and retain talented physicians, please feel free to reach out to Rud Blumentritt or Adam J. Yungmeyer.


² chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/

³ 42 CFR §§ 411.353 and 411.355(a)-(b).


Author: Adam Yungmeyer




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