CMS Finalizes New Limitations to the Isolated Transactions Exception to the Stark Law
This Commentary is part of a series of nine Commentaries on the newly finalized Stark Law and Anti-Kickback Statute exceptions and safe harbors seeking to remove regulatory barriers to care coordination.
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 fair 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") issued a final rule, effective January 19, 2021, expressly excluding 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 issued a new exception for limited remuneration and a special rule for reconciling compensation payments.
Looking Ahead: The final rule may require companies to look for other compensation exceptions to protect financial relationships with referring physicians to ensure compliance when the final rule becomes effective, or to consider the applicable 90-day cure period under the temporary noncompliance exceptions to shelter non-compliant transactions.
The Centers for Medicare & Medicaid Services ("CMS") issued a final rule making a variety of modifications to "modernize and clarify" the regulations that interpret the Physician Self-Referral Law ("Stark Law"). For the most part, the regulations are effective January 19, 2021 (except for Amendment number 3 regarding the definition of Group Practice), and include a set of revisions to the isolated transactions exception to the Stark Law that restrict an entity's options for remedying certain instances of noncompliance. CMS explicitly excludes from protection under the revised 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. Prior to the effective date of these regulations, isolated financial transactions are 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 effective until January 19, 2021, require that the transaction be 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's Revisions to the Isolated Transactions Exception
According to CMS, Congress intended the exception to protect the one-time sale of property or a physician practice. In the preamble to the final rule, CMS emphasized the singular nature of such transactions and that consideration is exchanged at the time of payment in that single event. CMS also explained in the preamble to the final rule 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. As a corollary, CMS views the provision of services as creating a compensation arrangement the moment the services are provided (and each time additional services are provided) and advises that the compensation arrangement must satisfy the requirements of an applicable exception at that time.
CMS confirmed its belief that certain industry practices conflict with the exception's purpose and intent. CMS highlighted, for example, an arrangement where parties discover, after services have been provided, that certain personal services arrangements were not set forth in writing and services were performed over an extended period (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 fair market value compensation exceptions. CMS also discussed the example of an expiring arrangement with an anesthesiology group where, despite good faith efforts to agree to terms of renewal, the parties disagree over the amount of compensation to be paid. CMS was not convinced that such arrangements should be excepted, noting that the "set in advance" requirement is important to safeguard against parties adjusting, including retrospectively adjusting, compensation under an arrangement in a manner that takes into account the volume or value of a physician's referrals.
To address these concerns, CMS revised the definition of isolated financial transactions to explicitly exclude "a single payment for multiple or repeated services (such as payment for services previously provided but not yet compensated,") stating, "it is our policy that the exception for isolated transactions is not available to except [such] payments." CMS also stated its view that "the exception for isolated transactions is not available to retroactively cure noncompliance."
CMS confirmed that not all service arrangements are per se excluded from protection under the exception for isolated transactions. With respect to an arrangement for services, the exception is available to protect a single payment (or installment payments, as permitted by the exception) for a one-time service arrangement. Whether a one-time service arrangement constitutes an isolated financial transaction depends on the facts and circumstances of the arrangement, including whether the service (or bundle of integrally related services) is provided in its entirety during a discrete time-period of short duration, such as a 24-hour or weekend shift. The parties would, however, still be restricted from using the isolated transactions exception for six months before or after the one-time service arrangement, regardless of the subject matter or consideration of the transaction.
The final rule also explicitly approves the common use of the isolated transaction exception to cover the forgiveness or payment of an amount owed in settlement of a bona fide dispute arising from a service arrangement where multiple, repeated or ongoing services have been provided over an extended period of time, if certain requirements are met, including that the amount is fair market value and not calculated in a manner that considers the volume or value of referrals or other business-generated settlement. However, the settlement of a payment discrepancies dispute that confers remuneration on the party that is relieved of some or all of its obligation to refund excess payments or pay amounts due under the original arrangement does not retroactively make the original, underlying arrangement compliant ("the exception is not applicable to the compensation arrangement that the parties dispute"). Although payment of additional amounts in settlement goes beyond mere "forgiveness," CMS noted in the preamble discussion that settlement of a bona fide dispute may include both a payment by one party and the compromise of additional amounts that may be owed for a good faith legal claim. In other words, a breach of contract, tortious interference or other good faith claim may constitutes a property right that may be paid for under the isolated transactions exception.
Implications & Conclusion
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 fair market value compensation exception requirements. However, CMS confirmed that these changes apply prospectively only, and that parties settling a bona fide dispute regarding a compensation arrangement may utilize the isolated transactions exception to protect the compensation arrangement that arises from the forgiveness of an obligation as part of a settlement.
Providers making additional payments as part of a settlement, or attempting to address noncompliance with the requirements of another exception for ongoing financial relationships (such as repeated instances of services from a physician) would need to consider whether the financial relationship or referrals are covered by another provision of the regulations. Possibilities include the employment exception (which has no set in advance or written-agreement requirement), the 90-day grace period under the applicable temporary noncompliance exception or special rule (to bring certain formerly compliant arrangements back into compliance, reduce otherwise compliant arrangements to a signed writing, or reconcile compensation), and the proposed exception for limited remuneration. These other strategies for addressing noncompliance are addressed in a companion client alert.
Three Key Takeaways
- CMS expressly excludes from protection under the isolated transactions exception those arrangements whereby a single payment is made for repeated services already performed.
- CMS permits the exception to apply to forgiveness of amounts owed in settlement arrangements between parties intended to resolve a bona fide dispute over services or space/equipment rental payments or other arrangements (such as accepting less in payment than may be owed under a good faith claim).
- Entities and individuals should consider other exceptions or the applicable 90-day cure period under the temporary noncompliance exceptions/special rules to shelter transactions that fall out of compliance.
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