On July 13, 2021, the Centers for Medicare and Medicaid Services (“CMS”) released a Proposed Rule that proposes to amend certain regulations implementing the Physician Self-Referral Law, otherwise known as the “Stark Law”. The Proposed Rule proposes to revise once again the definition of “indirect compensation arrangement” (ICA), effectively to revert the meaning of the definition back – for the vast majority of indirect financial relationships between DHS entities and referring physicians – to the definition of that term as it was in place prior to the latest Stark Law rulemaking, “Modernizing and Clarifying the Physician Self-Referral Regulations” (the “MCR Final Rule”), published on December 2, 2020.[1]  The Proposed Rule also proposes to define the term “unit” and the phrase “services that are personally performed”, both for purposes of the ICA definition.


Prior to the MCR Final Rule, an unbroken chain of financial relationships between a referring physician (or immediate family member) and the entity furnishing designated health services (DHS) effectuated an ICA only if, among other things, the referring physician received aggregate compensation that varied with, or took into account, the volume or value of referrals or other business generated by the referring physician for the entity furnishing the DHS.  To the extent that an ICA was effectuated, a Stark Law exception needed to be satisfied in order for referrals and related claims to be permitted.

In the MCR Final Rule, CMS added a definitional requirement to the definition of ICA, such that – in addition to aggregate compensation needing to vary with referral volume – the “individual unit of compensation” received by the physician must either (i) not be fair market value for items or services actually provided; or (ii) include the physician’s referrals to (or business generated for) the entity furnishing DHS as a variable, resulting in an increase or decrease in the physician’s compensation that positively correlates with the number or value of the physician’s referrals to (or business generated for) the entity.

By adding this definitional requirement, the MCR Final Rule further narrowed an already narrow regulatory definition of ICA, such that few unbroken chains of financial relationships can actually effectuate an ICA.  To the extent an ICA exists, it must satisfy the exception for ICAs (42 CFR 411.357(p)).

Proposed Revisions to Definition of ‘Indirect Compensation Arrangement’

In the Proposed Rule, CMS stated that the MCR Final Rule ‘inadvertently omitted’ from the revised definition of ICA a clause of regulatory text that would have ensured that a subset of unbroken chains of potentially abusive financial relationships – including but not limited to arrangements involving unit of service-based payments for the rental of office space or equipment – would have continued to satisfy the definition of ICA. Thus, CMS now proposes to once again revise the definition of ICA such that the MCR Final Rule’s added clause (as described above) would be effective only if the compensation arrangement closest to the physician involves compensation for that physician’s personally performed services.

Effectively, for the vast majority of potential ICAs, CMS proposes to revert the definition of ICA back to the meaning it once had (in substance, if not in form) prior to the MCR Final Rule.  Specifically, if the compensation received by the physician is for anything other than his or her personally performed services, the ‘old’ definition of ICA (as it was in effect until 2021) would be effective again.  Accordingly, the ‘old’ definition of ICA would apply again to unbroken chains of financial relationships where the physician receives compensation for office space, for equipment, for items and supplies, and/or for the services of others (such as an employed nurse practitioner), etc.  Similarly, the ‘old’ definition of ICA would very likely apply again to any arrangement with a physician organization, including for the services of its physicians (since the organization’s physician-owners would stand in its shoes and ‘receive’ compensation for the services of others, i.e., for the services of the other physicians in the organization).

Under the Proposed Rule, the ICA definitional clause added by the MCR Final Rule, i.e., requiring inquiry into the nature of the ‘individual unit of compensation’ received by the physician, would be effective only if the compensation received by the physician would be for his or her own personally performed services.  Effectively, the further narrowing of the definition of ICA (as narrowed by the MCR Final Rule) would now only be achieved when the referring physician receives compensation for his or her personally performed services.

Proposed Definition of ‘Unit’

After the publication of the MCR Final Rule, many in the regulated industry questioned the scope, meaning, and practical application of the phrase ‘individual unit of compensation’, particularly when a physician receives various forms of compensation (e.g., a salary, an RVU-based productivity bonus, and a bonus for achieving quality incentive benchmarks).  The Proposed Rule seeks to clarify this phrase by defining it.  Effectively, CMS proposes to define the ‘individual unit’ as either (i) ‘service’, where all compensation is based solely on the service provided, or (ii) ‘time’, in all other cases, including cases where any one of many bases of the physician’s compensation is time-based.  For instance, if a physician only receives compensation for each RVU performed, or for providing a training session, or is paid only on a fee schedule for particular services (e.g., 95% of the Medicare fee schedule), then the ‘unit’, for purposes of the ICA definition, is ‘service’.  However, if the physician receives a salary, or is paid a percentage of collections, or receives compensation for each RVU in excess of a monthly or quarterly threshold, then the ‘unit’ is ‘time’.  When more than one unit of the same type is used to calculate the physician’s compensation (e.g., $50 for service A, $75 for service B, and $100 for service C), then each unit must be analyzed separately (including for FMV) to determine whether an ICA has been effectuated.  Thus, and for example, to the extent any one fee schedule rate exceeds the FMV of the according service, that payment rate would effectuate an ICA and the entirety of that ICA would need to satisfy an exception – very likely the exception for ICAs (42 CFR 411.357(p)).

Proposed Definition of ‘Personally Performed Services’

To aid in the application of the ICA definition when the physician receives compensation for personally performed services, CMS proposes to add regulatory text stating that “[s]ervices that are personally performed by a physician… do not include services that are performed by any person other than the physician…, including, but not limited to, the referring physician’s… employees, independent contractors, group practice members, or persons supervised by the physician….”  It is not clear whether this proposed regulatory text would include services performed by an employee but provided ‘incident to’ the physician’s personally performed service.

Additional Proposed Revisions

CMS is also proposing certain Current Procedural Terminology (CPT) and Healthcare Common Procedure Coding System (HCPCS) coding changes. It is proposing to update the Code List each calendar quarter (instead of annually) and provide 30 days’ advance notification of Code List updates.  CMS also proposes to publish the Code List solely on the CMS website and revise the definition of List of CPT/HCPCS Codes at § 411.351 to update the URL that indicates where the Code List is published on the CMS website. CMS seeks comment on whether more or less frequent Code List updates would be appropriate.

*Sheela Ranganathan is a law clerk in the firm’s Washington, D.C. office.


[1] Sheppard Mullin’s critical analysis of this rulemaking may be found here.