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    The Medical Group Management Association’s most recent MGMA Stat poll asked healthcare leaders, “Do you generate revenue from Medicare ancillary services?” The majority (53%) said “no,” while 47% said “yes.” Among respondents whose practices generate Medicare ancillary service revenues:

    • 9% distribute the money via productivity bonus
    • 13% use the revenue for profit-sharing
    • 33% distribute the revenue to pay overhead
    • 33% report some combination of these distribution methods.
    • 12% said “other.”

    The poll was conducted Jan. 19, 2021, with 564 applicable responses.

    How the latest Stark Law update adds confusion to compensation test

    The Centers for Medicare & Medicaid Services (CMS) finalized its massive rulemaking, proposed in 2019 and published Dec. 2, 2020, to modernize and clarify the Social Security Act’s Physician Self-Referral Law, or “Stark Law.”

    As outlined in a recent member-exclusive article by Mollie Gelburd, JD, associate director, MGMA Government Affairs, and Robert Saner, JD, healthcare attorney, Powers Law Firm, Washington, D.C., there are numerous benefits in the Stark Law update, including “new exceptions for certain value-based payment arrangements and modest relaxation of certain terms that underlie the law’s existing exceptions for compensation relationships between physicians and outside entities to which they refer their patients.”

    But missing from the new rule, as Gelburd and Saner write, is simplicity. “The new Stark rule is mind-numbingly complex. No physician or group practice executive could begin tounderstand the full length and breadth of it.”

    MGMA previously commented on the Stark Law update and the varying benefits and remaining issues: “We support the new value-based arrangement exception to the Stark Law, which will provide some group practices with greater protection when entering into care coordination arrangements. While HHS endeavored to make improvements to key terms that impact physician compensation arrangements, the final rule could have gone further to reduce the overall complexity and regulatory intrusion into group practice operations.”

    Muddying the waters around “overall profits”

    As Gelburd and Saner outline, buried in the new final rule is one “clarification” that may complicate compensation planning for practice leaders, particularly large and mid-sized multispecialty groups using different compensation practices for different specialties or departments. Multi-site practices, whether single or multispecialty, also may be affected if differing compensation plans are used for different locations.

    Background: “Bona fide group practice” and the “compensation test”

    Almost all physician-owned practices rely on Stark’s in-office ancillary services (IOAS) exception to protect referrals for designated health services (“DHS”) — this is Stark parlance for clinical labs, most imaging and certain other ancillaries paid for by Medicare provided inside the group.

    To use the IOAS exception, which has certain detailed requirements of its own, the group first must qualify as a bona fide group practice as defined in the Stark Law and regulations. That qualification depends on several detailed requirements set forth in 42 CFR §411.352. Among those requirements are limitations on how group members are compensated in relation to their individual referrals of Medicare patients for DHS.

    Because the statute and regulations dictate permissible compensation structures within a group practice as a predicate requirement, groups must ensure compliance with the compensation provisions before an exception applicable to a group practice can be used. The changes around bona fide group practice compensation plans do not kick in until Jan. 1, 2022, as CMS recognizes groups may need time to make changes to comply with new standards.

    This “compensation test,” as it has come to be known, is relatively simple in theory. First, the statute and the rules prohibit a group member from receiving, directly or indirectly, compensation based on the volume or value of the physician’s referrals for DHS.

    But then the statute and rules provide an exception to this prohibition for profit sharing and productivity bonuses if the share or bonus is not determined in a manner directly related to the volume or value of those referrals. Unfortunately, complexity quickly arose. In permitting profit sharing not directly related to referrals, the statute uses the phrase “a share of overall profits of the group.”1 Congress did not further elaborate on how a “share” might be calculated, or what was intended by “overall” profits.

    What does “overall profits” mean? The “rule of five” revisited

    CMS long ago defined “overall” to mean the “entire profits” derived from the group’s DHS payable by Medicare and Medicaid, or such profits derived from DHS “of any component” of the group consisting of at least five physicians.2 Many commentators believed that this “rule of five” gave groups substantial flexibility in distributing profits by department, specialty or location, as long as the grouping was reasonable and any linkage between profits distributed and referrals remained indirect.

    Now CMS has muddied the waters considerably. In the December 2020 final version, CMS articulates that “overall profits” means that DHS income pools must include the profits from all the DHS of the physician practice (or a component of at least five physicians in the practice).

    Under this interpretation, the final rule dictates that a group practice first must aggregate all DHS profits from the entire group or a component of five before distribution. The practical effect of this change is that group practices large enough to maintain separate components of five or more physicians will no longer be permitted to distribute profits from DHS on a “split pool” basis, in which one component receives profits from one type of DHS (e.g., laboratory) and another component receives profits from a different type of DHS (e.g., physical therapy).

    To illustrate, CMS provides an example:

    A group practice comprised of 15 physicians furnishes three types of DHS: clinical laboratory services, diagnostic imaging services, and radiation oncology services. The group divides its physicians into three components of five physicians (A, B, and C). To comply with the “revised” special rule on profit shares, the group practice must aggregate the profits from all of the DHS furnished by the group and referred by any of the five physicians in the component before distribution.

    The group may then distribute the overall profits from all DHS to:

    • Component A using one method (e.g., per-capita)
    • Component B using a different method (e.g., personal productivity)
    • and Component C using a third method (or the methodology used for A or B).

    To reiterate, the final rule would not permit the group to distribute clinical laboratory services to Component A and imaging services to Component B. It would also not permit the group to use a per capita methodology for some physicians in Component A and personal productivity for other members of Component A.

    CMS believes that Stark Law preamble guidance has always articulated this position; namely, that “overall profits” means the profits from all DHS, not profits from one individual category of DHS. This policy shift reflected in the preamble is not readily apparent from the change to the regulatory text itself.


    The Stark Law was intended to regulate referrals, not physician compensation, except as necessary to minimize financial incentives to refer DHS to entities a physician has a financial relationship with. Its original intent was to implement controls against overutilization and conflicts of interest. To provide patients with swift access to necessary testing (such as imaging or laboratory work) within the practice, a group must meet eight separate tests to qualify as a bona fide group practice, then comply with three additional tests to satisfy the IOAS exception.

    The effect of running afoul of the compensation restrictions is not inconsequential: Failing to qualify as a bona fide group practice under Stark regulations limits the number of available exceptions for physicians and potentially exposes them to liability for referrals, even within the practice. Therefore, even minor changes to the group practice definition can have a significant impact.

    MGMA Stat

    Would you like to join our polling panel to voice your opinion on important practice management topics? MGMA Stat is a national poll that addresses practice management issues, the impact of new legislation and related topics. Participation is open to all healthcare leaders. Results of other polls and information on how to participate in MGMA Stat are available at:


    1. 42 USC 1395nn (h)(4)(B)(i).
    2. 42 CFR 411.352(i)(2).
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