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DHS profit distribution compliance may require modification of physician contracts, compensation policies, and other documentation within the practice
On December 2, 2020, some newly finalized changes to the Stark law took effect. As many physicians are aware, the Stark law generally prohibits physicians from referring a Medicare or Medicaid patient to an entity in which the referring physician (or an immediate family member) has a compensation arrangement or ownership interest for a “designated health service” (DHS). The list of DHS is lengthy, and includes categories of services such as imaging, physical therapy, laboratory tests, DME, and similar items.
Under the Stark law, a referral by a physician to the physician’s own practice can implicate Stark. In order to assure compliance, physicians rely on an exception to Stark known as the “In-Office Ancillary Services Exception”, which focuses on the location, supervision and billing of DHS by the physician practice. However, this exception can only be used by practices that qualify as a “group practice” under Stark. Among the many requirements of being a “group practice” is that physicians distribute the “overall profits” from DHS within the group practice in a particular way.
One important provision of the new Stark rule clarifies that if there are fewer than 5 physicians in a group practice, the “overall profits” means the profits derived from the entire group’s DHS. This means that a group of fewer than 5 physicians will simply share the “overall profits” from DHS in a manner which does not take into account who generated the DHS. Typically, these amounts are shared equally, based on shareholder percentage or some other objective approach. The same approach must be used for all the profit, regardless of the type of DHS.
Additionally, under the new rule “overall profits” means profits derived from all DHS of any component of the group practice which has at least 5 physicians in it. This means that for groups which are large enough, they can elect to either aggregate the entire profits from DHS of the entire group or they can instead allocate the profits from DHS among a component of the group consisting of at least 5 physicians. Similarly, when there are multiple groupings of 5 physicians within a group practice, each such grouping can distribute profits within the grouping based on a legitimate approach.
A good example of this might be a multispecialty group of 21 physicians, composed of 3 divisions: internal medicine has 5 physicians, cardiology has 7 physicians and gastroenterology has 9 physicians. Within each specialty group, all profit from DHS furnished by the group and referred by the physicians within the specialty group must be aggregated. Each specialty group may then distribute the DHS attributable to the specialty group using a methodology approved by that particular group. However, within the specialty group, the same approach must be used for every physician and the methodology cannot vary based on the type of DHS. This means that within the cardiology specialty group, for example, they must choose a single approach for how they wish to distribute all the DHS profits (i.e., they can’t use one approach for income derived from imaging services and one for laboratory services). It does not, however, need to be the same overall approach chosen by the internal medicine doctors or the gastroenterology doctors.
An important factor to keep in mind is that as physicians come and go from a group practice, the approach selected by the group practice may be impacted. For example, if the internal medicine specialty group slips below 5 physicians, it no longer will have the right to distribute the DHS profits generated by the internal medicine specialty group among the specialty physicians. For this reason, group practices need to be sure that they review their compensation approach carefully and regularly to ensure ongoing compliance. A group practice that fails to meet this component of the “group practice” definition will not be able to satisfy the In-Office Ancillary Services Exception and will be in violation of the Stark law for any self- referrals that are made during a period of non-compliance.
It's important to keep in mind that Stark applies only to DHS and only applies to services payable by Medicare and/or Medicaid. While many groups find it simpler to treat all revenue from ancillary services in the same manner, physician practices are free to allocate revenue or profits from non-Medicare/Medicaid covered services in any manner they wish (subject to any other laws that might apply).
The effective date of this “overall profits” definition in the Stark final rule is being delayed until January 1, 2022. This means that group practices should use this time to review how they are currently handling profit from DHS and to come up with an approach that is fully compliant. This may require modification of physician contracts, compensation policies, and other documentation within the practice.
Ericka L. Adler, JD, LLM has practiced in the area of regulatory and transactional healthcare law for more than 20 years. She represents physicians and other healthcare providers across the country in their day-to-day legal needs, including contract negotiations, sale transactions, and complex joint ventures. She also works with providers on a wide variety of compliance issues such as Stark Law, Anti-Kickback Statute, and HIPAA. Ericka has been writing for Physicians Practice since 2011.