CMS Proposes New Limitations to the Isolated Transactions Exception to the Stark Law
The Situation: The isolated transactions exception under the Stark Law has been used by some providers and entities to retroactively protect services arrangements that do not qualify for personal services or market value compensation exceptions because, for example, the arrangements were not reduced to writing before services were rendered.
The Action: The Centers for Medicare & Medicaid Services ("CMS") proposes to expressly exclude from protection under the isolated transactions exception those arrangements whereby a single payment is made for repeated services already performed. To provide protection to certain lower risk arrangements that may have otherwise relied on the isolated transactions exception for repeated periodic or part-time physician services, CMS has also proposed a new exception for limited remuneration.
Looking Ahead: Although CMS has not indicated that the proposed revisions to the isolated transactions exception would apply retroactively, government agencies and relators may try to use CMS' proposed revisions and preamble language now to challenge parties purporting to rely on the isolated transactions exception for settlement payments involving a dispute over payment for prior services or rental of space/equipment. As such, entities and individuals should consider other exceptions or the applicable 90-day cure period under the temporary noncompliance exceptions to protect non-compliant transactions.
In October 2019, the Centers for Medicare & Medicaid Services ("CMS") proposed a variety of modifications to "modernize and clarify" the regulations that interpret the Physician Self-Referral Law ("Stark Law"). Included are a set of proposed revisions to the isolated transactions exception to the Stark Law that, if adopted, would restrict an entity's options for remedying certain instances of noncompliance. In that regard, CMS proposes to explicitly exclude from protection under the isolated transactions exception single payment transactions for multiple or repeated services that were already performed but not yet paid.
The Isolated Transactions Exception to the Stark Law
The isolated transactions exception shields certain one-time financial transactions from liability under the Stark law. Isolated financial transactions are presently defined as those transactions "involving a single payment between two or more persons or entities or a transaction that involves integrally related installment payments" provided that the total aggregate payment: (i) is fixed before payment is made; (ii) does not consider the volume or value of referrals generated by the physician; and (iii) is immediately negotiable or guaranteed by a third party, secured by a promissory note, or subject to a similar mechanism.
In addition, the statute and the current version of the regulations require that the transaction is consistent with fair market value and commercially reasonable. The current regulations also require that there are no other payments relying on the isolated transactions exception within six months (before or after the transaction) other than commercially reasonable post-closing adjustments that do not take into account (directly or indirectly) the volume or value of referrals. Unlike other Stark law exceptions, such transactions need not be in writing to qualify for protection under the exception.
CMS' Proposed Revisions to the Isolated Transactions Exception
CMS explains in its preamble to the proposed revisions that there are relatively few requirements to qualify for the isolated transactions exception because the one-time nature of transactions contemplated to qualify for protection under the exception generally present a lower risk of fraud and abuse. According to CMS, Congress intended the exception to protect the one time sale of property or a physician practice.
CMS then notes, however, that it has identified certain industry practices that it believes conflict with the exception's purpose and intent. Specifically, CMS highlights arrangements whereby the parties discover, after services have already been provided, that certain personal services arrangements were not set forth in writing and services have been performed over an extended period of time (e.g., multiple days in a month). In those circumstances, parties sometimes exploit the isolated transactions exception because the parties can no longer rely on the personal services or market value compensation exceptions. As such, CMS proposes to revise the definition of isolated financial transactions to explicitly exclude "payments for multiple services provided over an extended period, even if there is only one payment for such services," stating, "it is our policy that the exception for isolated transactions is not available to except [such payments.]" CMS also stated its view that "[t]he exception for isolated transactions is not available to retroactively cure noncompliance with the physician self-referral law." This would also have the effect of excluding application of the exception to settlement payments between parties intended to resolve a dispute over services or space/equipment rental payments.
Consistent with its position on repeated services arrangements, CMS is proposing deleting the requirement that the transaction be isolated in time such that an entity can rely on the exception currently only once in any rolling 12-month period. In the preamble, CMS explains that it is not possible for the same entity "to repeatedly offer and sell the same property or medical practice to another party," as opposed to contracting for repeated services. CMS did not address syndication transactions (where a percentage interests may be sold over time to different purchasers), nor did it mention settlement of pending or threatened litigation. CMS did not expressly explain why it proposed deleting the fair market value and commercially reasonable requirements from the regulatory text, though it did note it was proposing other revisions to align with the statutory text, and the statute already includes those requirements.
Proposed Exception for Limited Remuneration
CMS also proposed a new exception for limited remuneration (up to $3,500 per calendar year adjusted for inflation) paid to a physician (but not family members) for providing items or services if (i) the compensation is not determined in any manner that takes into account the volume or value of referrals; (ii) does not exceed fair market value; (iii) is commercially reasonable; and (iv) with respect to space and equipment leases, is not based on a percentage of revenues or non-time based per unit of service fees (i.e., per click instead of per hour). In applying the $3,500 cap, CMS would only include remuneration not protected by another exception. The dollar limit also would apply on an aggregate basis only to the first $3,500 paid to a physician in a calendar year if an entity and a physician have multiple undocumented, unsigned arrangements in effect during the same year.
The preamble indicates CMS intends this exception to address situations where services may have been provided on a sporadic or short-term basis, for a low rate of pay, or for a limited time. In those instances, the services may be needed and the compensation may be consistent with fair market value not taking into account the value or volume of referrals, but no exception applied because the amount was not set in advance or there is no signed writing. CMS believes such situations pose no risk of program or patient abuse (e.g., overutilization or rewarding referrals). CMS also solicited comments on whether the $3,500 cap was the appropriate amount to accommodate nonabusive compensation arrangements and whether it is necessary to limit the exception to the physician's personally performed services and items provided by the physician in order to protect against program or patient abuse.
Implications & Conclusion
Proposed revisions to the isolated transactions exception to the Stark Law would foreclose use of the exception to retrospectively cover personal services arrangements where the parties failed to prospectively abide by personal services or market value compensation exception requirements. Although CMS has not indicated that the revision would apply retrospectively, the proposal does signal CMS' position that the exception does not apply to retroactively protect arrangements for repeated services that were already provided over an "extended period of time" (e.g. multiple call shifts provided over the course of one or more months). CMS makes no distinction for arrangements that are still ongoing. Given CMS' stated position, government agencies and relators in False Claims Act cases may also look to leverage the proposed revision and preamble language against parties purporting to qualify for the exception under such circumstances whether or not the revisions are adopted.
If the proposed changes are finalized as is, providers may gain additional flexibility for syndication transactions. For other compliance purposes, however, providers would need to consider whether the noncompliance is covered by another provision of the regulations, such as the employment exception (which has no set in-advance or written-agreement requirement), or changes proposed by CMS to facilitate compliance with the signed written agreement requirement, the 90-day grace period under the applicable temporary noncompliance exception to reduce otherwise compliance arrangements to a signed writing, and the proposed exception for limited remuneration. If there is an effort to settle pending or threatened litigation, providers should consider whether the exposure relates to potential liability other than payment for services, and whether in light of CMS' position, additional remedial action is necessary to address any related prior noncompliance if one of the parties had provided repeated services that were not already paid for.
Three Key Takeaways
- CMS proposes to expressly exclude from protection under the isolated transactions exception those arrangements whereby a single payment is made for repeated services already performed. The revision would have the effect of excluding application of the exception to settlement payments between parties intended to resolve a dispute over services or space/equipment rental payments.
- To provide protection to certain lower risk arrangements that may have otherwise relied on the isolated transactions exception for repeated periodic or part-time physician services, CMS has also proposed a new exception for limited remuneration.
- Even if not adopted, government agencies and relators in False Claims Act cases may look to leverage the proposed revision and CMS's strong preamble language against parties purporting to qualify for the exception under such circumstances. As such, entities and individuals should consider other exceptions or the applicable 90-day cure period under the temporary noncompliance exceptions to shelter non-compliant transactions.
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