At the end of 2019, the government amended the federal physician self-referral law (Stark Law). This amendment brought significant changes to how compensation is reported under the group practice definition. This blog discusses the Stark regulation updates and how the changes will affect your physician compensation models.

What is the Stark Law? Why is it Important?

The Stark Law prohibits physicians from referring patients for certain Designated Health Service (DHS) paid for by Medicare to any entity in which the physician has a financial relationship.  This is a strict liability statute – meaning, the physician’s intent to influence referrals does not matter.  If in violation, the monetary penalties can be significant.  Exceptions apply, but arrangements must meet every element of an exception.

Under the Stark law, a referral by a physician to the physician’s own practice can implicate Stark. Thus, many physicians rely on an exception to assure compliance. Certain exceptions (Physician Services; In-Office Ancillary Services) rely on the practice meeting the definition of a “Group Practice.” Thus, to qualify for the Stark exception(s) and allow partners/employees of a physician practice to “refer” DHS to their own practice, the practice must meet the definition of “Group Practice” – and every element within.

To meet the definition of a group practice, you must:

• Be a single legal entity.
• Have at least two physicians.
• All physicians must provide a full range of patient care services.
• Substantially all the physicians’ services must be furnished through the group/Substantially all the group’s services must be provided by the physician members.
• Be a unified business.
• Distributions of expenses and income must be pre-determined.
• Compensation cannot be based on the volume or value of referrals (for DHS.)

Notable Rule Changes/Clarifications

There are a few notable changes and added clarification to the Stark Law. These include:

• Restructuring the regulation
• Removal of the Medicaid reference related to DHS
• Update and clarification to the definition of “Overall Profits;” end of “split pooling;” robust discussion of pod pooling/distributions

Timeline

On November 19, 2020, the Centers for Medicare & Medicaid Services (CMS) and the Department of Health and Human Services Office of Inspector General issued a final rule modernizing the Stark Law. Many of the revisions to the Stark regulations became effective January 19, 2021; however, revisions to the physician group practice regulations will become effective January 1, 2022.

As of that date, there are several implications for group practices from these changes, but most notably, these changes revise the rule related to the distribution of overall profits and productivity bonuses.

Profits from all the DHS of the practice, or a component of the practice that consists of at least five physicians (a “5+ physician pod”), must be aggregated before distribution. Group practices that use split pooling need to modify their compensation methodologies to account for this change by January 1. 

Physician practices also need to be aware of important commentary from CMS on the special rule that clarifies CMS’s intentions regarding permissible DHS profit sharing and additional revisions to the regulation text that impact profit sharing, which may also necessitate (or, in some cases, permit) changes to certain group practice compensation methodologies. Changes to the group practice definition will not become effective until January 1, 2022.

Solutions for Group Practices That Do Not Meet Revised Stark Regulations

There are several possible solutions for group practices that do not currently meet the Stark revisions for the group practice compensation formula.

For some larger group practices where certain pods or subsets of at least five physicians exist, multiple revenue distribution models can be adopted. As an example, Pod 1 can be distributed one way, while Pod 2 can be distributed another, as long as the same method for distributing overall profits for every physician in the pod is the same.

Practices with less than five physicians may identify other models.  If there are fewer than five physicians in a group, “overall profits” mean the profits derived from all the DHS of the entire group and they may aggregate DHS profits among less than five physicians (because the entire group is less than five physicians.)

CMS confirmed that any physician in the practice may be paid a share of the overall profits of the group practice; the share does not have to be just among owners.

What is Changing in Physician Compensation?

The reality is that physician compensation is changing. From provider mix, reimbursement models, workforce demographics, and the ever-changing regulations and compliance, it is important now more than ever to remain current with rules and regulations to ensure agreements are in line with the current statutes.

Value-Based Participation

The Stark rule update adds another exception that allows physicians to be paid profits from DHS that relate directly to a physician’s participation in a value-based enterprise.

“Profits from designated health services that are directly attributable to a physician’s participation in a value-based enterprise may be distributed to the participating physician.” It is important to note that value-based enterprises must meet the Stark definition.

Value-based enterprise (VBE) means two or more VBE participants:

1. Collaborating to achieve at least one value-based purpose,
2. Each of which is a party to a value-based arrangement with the other or at least one other VBE participant in the value-based enterprise,
3. That have an accountable body or person responsible for the financial and operational oversight of the value-based enterprise, and
4. That have a governing document that describes the value-based enterprise and how the VBE participants intend to achieve its value-based purpose(s). Arrangements will have to be reviewed for compliance. 

Now is the time for physician group practices to examine their current compensation plans with these technical payment rules. It is not too early for group practices to evaluate whether any changes are necessary to their physician compensation methodologies in order to comply. This is also a good opportunity to update compensation plans for reasons other than compliance. Physician groups should also examine new methods of payment they are participating in or contemplating participating in so that they can assess now whether they can modify physician compensation in 2021 both to be compliant and to further attract and incentivize excellent health care providers.

If you have any questions or would like to learn more about this topic, please contact us.

• Did your business suffer a revenue decline in 2020?
• Do you expect a revenue decline in 2021 compared to 2019?
• Did your business experience a shutdown in 2020?
• Did your business experience a “full or partial suspension of operation due to a government order in 2020?”
  • Were you affected by any directed health measure order (I.e., being forced to halt any procedures/surgeries)?
    • If yes, and more than a nominal portion (more than 10%) of the business was affected during any of the shutdown periods in 2020, please contact us for further consideration as the credits available under this program are significant.
• Did your business continue paying employees during these times of disruption?

If so, there may be significant opportunities to claim refundable tax credits on wages paid in 2020 and 2021.

OVERVIEW

The Consolidated Appropriations Act (CAA), signed by President Trump in late-December 2020, extended and expanded the Employee Retention Credit (ERC), a refundable payroll tax credit.

The CAA repealed a provision under the CARES Act signed in March 2020 that made Paycheck Protection Program (PPP) borrowers disallowed from using the ERC. Now both programs can be used by eligible employers retroactively and prospectively, although double-dipping the same wages is not allowed. Many employers may now qualify for significant benefits in 2020 and/or 2021.

2020 ERC (WAGES PAID 3/13/2020 – 12/31/2020)

To be eligible for the 2020 ERC, employers (including affiliated entities) must demonstrate one of the below:

• Full or partial suspension of operation due to a government order in 2020 (refer to IRS guidance), OR
• At least 50 percent decline in a 2020 calendar quarter’s gross receipts compared to the same quarter in 2019.

If the business meets one of the qualifying requirements, it must consider the average number of full-time employees in 2019. Employers (including affiliated entities) with fewer than 100 full-time employees are likely qualified.

The credit is 50 percent of up to $10,000 in wages (including health care expenses) per employee for calendar year 2020 (maximum $5,000 credit per employee). There may be limitations for owner and family members of owners.

The credits must be claimed on amended payroll tax returns (Form 941-X). Calculations can be complicated when considering interplay with Paycheck Protection Program (PPP) first draw, FFCRA credits (expanded paid sick leave/emergency FMLA leave), and the Provider Relief Funds.

2021 ERC (WAGES PAID 1/1/2021 – 12/31/2021)

To be eligible for the 2021 ERC, employers (including affiliated entities) must demonstrate one of the below:

• Full or partial suspension of operation due to a government order in 2021, OR
• At least 20 percent decline in a 2021 calendar quarter’s gross receipts compared to the same quarter in 2019.
  • An election is available to use the immediately preceding calendar quarter for eligibility testing (e.g., 4th quarter 2020 gross receipts for Q1 2021 eligibility).

Should a business meet one of the requirements and have fewer than 500 average full-time employees (including affiliated entities) in 2019, it is likely eligible for the 2021 ERC.

The credit is 70 percent of up to $10,000 in wages (including health care expenses) per employee for each 2021 calendar quarter (maximum $28,000 credit per employee since program was extended through the end of 2021). There may be limitations for owners and family members of owners.

The credits must be claimed on payroll tax returns (Form 941). An advance refund can be claimed by filing Form 7200. This process and the calculations involved are complicated, especially when considering the interplay with Paycheck Protection Program (PPP) second draw, FFCRA credits, and the Provider Relief Funds.

The American Rescue Plan Act of 2021 extended this program through December 31, 2021.

NEXT STEPS

If you believe your business may qualify for the Employee Retention Credit, please contact your Lutz Representative or give us a call at 402.496.8800.

Updated on 7.13.2021