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  • November 14, 2019

    Modernizing Stark: Centers for Medicare & Medicaid Service’s Proposal

    Health care entities have faced uncertainty when conforming physician compensation arrangements to federal requirements involving fair market value, commercial reasonableness, and potential tie-ins to physician referrals. Madeline Schmid and David Edquist review new rules proposed by the Centers for Medicare & Medicaid Services that offer clarity, and relief, on these issues.

    David J. Edquist, Madeline Schmid

    The Centers for Medicare & Medicaid Services (CMS) recently published its Proposed Rule, 84 Fed. Reg. 55766 (Oct. 17, 2019), for modernizing the Physician Self-Referral Regulations (Stark).

    In this article, we focus on the portion of the Proposed Rule in which CMS addresses attacks on compensation practices that until recently have been considered to be perfectly permissible.

    CMS provides guidance on fundamental terminology regarding compensation arrangements, specifically the definition of "commercial reasonableness," the "volume or value" standard pertaining to physician referrals, and the definition of "fair market value" (FMV).

    Here are three key takeaways:

    • Commercial reasonableness of an arrangement does not turn on its profitability.

    • Productivity bonuses will not take into account the volume or value of a physician’s referrals solely because corresponding hospital services are billed each time the physician performs a service.

    • Compensation can deviate from survey results and still be FMV if supported by general market value.

    History: Tuomey and UPMC

    The past five years have witnessed a progression of prosecutions and settlements calling into question standard physician compensation methodologies.

    For example:

    • Physician compensation might be consistent with salary surveys, but nevertheless exceed revenues derived from the physicians' services. This is a common practice among nonprofit hospitals and systems that subsidize service lines in support of their charitable mission. Qui tam relators have nevertheless argued that these arrangements are not FMV or "commercially reasonable" under Stark.

    • Bonus compensation is often based on a physician's personally performed services, such as per-unit bonuses for work relative value units (wRVUs) above a particular threshold. This model gained favor due to its perceived low level of risk under Stark. Relators have asserted that a correlation exists between those personally performed services and corresponding referrals for facility fees and inpatient/outpatient services, and that this correlation is proof that compensation "varies with" the volume or value of referrals in violation of Stark.

    One of the most well-known examples of this trend is the 2015 Fourth Circuit Tuomey decision, U.S. ex rel. Drakeford v. Tuomey.1 Tuomey Healthcare System entered into a series of part-time employment agreements with physicians with total compensation in excess of physician collections, allegedly violating Stark's FMV requirements.

    David Edquist David Edquist, Virginia 1980, is with von Briesen & Roper, Milwaukee, where he practices in transactional regulatory compliance for the firm’s healthcare and business clients.

    Madeline Schmid Madeline Schmid, U.W. 2017, is with von Briesen & Roper, Milwaukee. Her practice focuses on health care and general corporate matters.

    The government also claimed that compensation improperly varied with the volume or value of referrals given that "the more procedures the physicians performed at the hospital, the more facility fees Tuomey collected, and the more compensation the physicians received in the form of increased base salaries and productivity bonuses."2 After a $237 million jury verdict and appeal, Tuomey settled with the government for $72.4 million.

    A flood of similar cases followed Tuomey, most recently the September 2019 Third Circuit opinion in U.S. ex rel. Bookwalter v. UPMC.3 Whistleblowers asserted a correlation between physicians’ compensation and the referrals that they made, since every time they performed a surgery or other procedure at a UPMC hospital, they also made a referral for hospital and ancillary services.

    In denying UPMC's motion to dismiss, the court concluded that the mere existence of this correlation was sufficient to meet the whistleblower's obligation to allege that compensation "varied with" the volume or value of referrals to UPMC. The court was also skeptical of the compensation from a FMV perspective, calling it "suspicious" that some neurosurgeons were paid more than the Medical Center collected for their services.4

    In both Tuomey and UPMC, concurring judges felt constrained to follow the majority, but expressed their reservations when doing so. In Tuomey, Judge Wynn lamented that Stark’s provisions are known for “producing results that defy common sense, and sometimes elevating form over substance."5

    In UPMC, Judge Ambro worried that “we are sending signals to hospitals throughout the Third Circuit, and the nation, that their routine business practices are somehow shady or suspicious and could leave them vulnerable to significant litigation, with all the trouble and expense that brings."6

    CMS has now taken a fresh look at these fundamental concepts and aims to provide bright line rules for the determination of commercial reasonableness, the volume or value of referrals standard and FMV.

    Commercially Reasonable

    CMS states that the commercial reasonableness of an arrangement does not turn on its profitability, thereby rejecting a key premise of Tuomey.

    CMS acknowledges that it might not only be reasonable, but indeed necessary, for parties to enter into an arrangement that may result in losses to one or more parties, citing examples involving community need, timely access to health care services, charity care, and improvement of quality outcomes. CMS re-focuses the analysis from whether the arrangement operates at a loss to whether the "arrangement makes sense as a means to accomplish the parties' goal."7

    The Stark regulations currently do not define "commercially reasonable." CMS now proposes two alternative definitions:

    1) "that the particular arrangement furthers a legitimate business purpose of the parties and is on similar terms and conditions as like arrangements;" or
    2) "the arrangement makes commercial sense and is entered into by a reasonable entity of similar type and size and a reasonable physician of similar scope and specialty."8

    CMS seeks comment on which of the two definitions more clearly accomplishes its stated goal.

    Volume or Value of Referrals

    The "volume or value" standard has vexed the health care community, going back to when CMS proposed its first set of regulations in 1998. CMS now proposes a more objective approach that analyzes the mathematical formula used to calculate compensation to see if the volume or value of referrals was taken into consideration.

    Under the proposal, compensation from an entity to a physician takes into account the volume or value of referrals only if the formula used to calculate the physician's compensation "includes the physician's referrals to the entity as a variable," resulting in an increase or decrease in the physician's compensation that correlates with the physician's referrals to the entity.

    CMS directly addresses Tuomey in the Proposed Rule. Affirming the position that it laid out in the Phase II regulations prior to Tuomey, CMS states that productivity bonuses will not take into account the volume or value of a physician's referrals solely because corresponding hospital services are billed each time the physician performs a service. This guidance applies both to employed physicians and to personal service arrangements.

    The Proposed Rule may also impact some of the analysis in UPMC. Relators there alleged that physician compensation exceeded collections in some instances, which the court found sufficient to state a claim that compensation “takes into account” referrals. That portion of the opinion is now suspect.

    The Proposed Rule also provides guidance on when fixed-rate compensation might take into account the volume or value of referrals: the standard is implicated when the parties "utilize a predetermined tiered approach to compensation under which the volume or value of a physician's prior referrals is the basis for determining the unvarying rate of compensation from an entity to a physician."9

    For example, if a physician's wRVU conversion rate were adjusted based on the number of diagnostic tests ordered in the previous year, the compensation structure would be taking into account the volume of referrals.

    Fair Market Value

    In its Proposed Rule, CMS emphasizes that the commercial reasonableness, volume or value, and FMV standards are separate and distinct tests. CMS acknowledges that the volume or value and commercial reasonableness standards have been used in the past to prove that an arrangement was not FMV. Under the Proposed Rule, FMV now stands alone.

    The key change in the proposed new FMV definition involves the definition of "general market value" that is embedded in the definition of FMV.

    Under the revised definition, general market value relates specifically to the actual parties and the actual transaction in that particular moment in time, while FMV involves a hypothetical transaction between similar parties for similar assets in a similar market.

    This distinction can be significant, insofar as CMS recognizes that there may be circumstances where parties to an arm’s length transaction might appropriately "veer" from salary surveys or other valuation data.

    For example, salary surveys might indicate market compensation for an orthopedic surgeon of $450,000. However, the actual market where the hospital operates could require the hospital to offer more than $450,000 due to scarcity, reputation, or urgent community need. The higher compensation rate would be consistent with the general market value for that transaction at that moment in time, and therefore not violate the new Proposed Rule.

    Shedding Light

    The Proposed Rule sheds some light on the murky standards of commercial reasonableness, the volume or value of referrals, and FMV, and would make these standards clearer, distinct, and more user friendly.

    Note that these proposed rules are subject to comment period ending Dec. 31, 2019.

    Note: This article was first published Oct. 28, 2019, in von Briesen & Roper's Legal News. It is used here with permission.


    1U.S. ex rel. Drakeford v. Tuomey, 792 F.3d 364 (2015).

    2Id. at 379.

    3U.S. ex rel. Bookwalter v. UPMC, 938 F. 3d 397 (2019).

    4Id. at 411.

    5Tuomey, 792 F.3d at 418

    6UPMC, 938 F.3d at 418.

    784 Fed. Reg. 55790.


    984 Fed. Reg. 55794.


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