CMS Income Sharing Changes Creating Confusion

Physician groups are now permitted to subdivide into groups of at least five physicians apiece – and that’s the root of the problem.

One of the provisions in the changes to the federal physician self-referral prohibition, better known as the Stark Law, announced in December 2020 imposes new limits on physician group practices. In particular, the Centers for Medicare & Medicaid Services (CMS) is requiring groups to distribute the profits from all designated health services exactly the same way. 

Historically, it has been possible to allocate Disproportionate Share Hospital (DSH) income for each type of DSH differently. For example, you could split income from imaging evenly, while basing physical therapy income on productivity and lab on seniority. CMS claims that they never intended to allow that level of flexibility, although over the last 25 years, I think there’s been near-universal agreement that that approach was legal. As of Jan. 1, CMS is insisting that if you are using “profit sharing” as a means to distribute income, you have to take all the profit from all designated health services, aggregate it, and split it in one consistent fashion.

CMS is permitting physician groups to subdivide into smaller units that contain at least five physicians. CMS takes the position that you can take the profit generated from designated health services within that subgroup and divide it among the subgroup. 

There are several things about this change that bother me, but most of them come down to this: I don’t believe that whoever wrote the change understands how physician compensation typically works, and they haven’t considered the unjust result. CMS fully recognizes that there are clinics with fewer than five physicians. Those clinics can share the profits from their ancillary income despite the fact that there are fewer than five of them. That creates the following perverse result. If three rheumatologists are in practice on their own, they can split the profit from their infusion business among themselves. However, should those same three physicians choose to join a multi-specialty group, their previously perfectly permissible compensation formula suddenly becomes improper. They would need to include at least two other physicians, or run afoul of the Stark Law. That’s utterly irrational. In fact, I would argue that it is arbitrary and capricious. For that reason, I’m hoping someone will choose to challenge CMS’s interpretation of the law.

Unfortunately, that challenge might run into a barrier in the form of the Illinois Counsel Supreme Court case. As we’ve discussed in past articles, that case stands for the principle that in many situations, one must wait for CMS to enforce their rule (in legal parlance, “exhaust your administrative remedies”) before you can ask a court to overturn a rule. Fortunately, there are some exceptions, and courts have heard some challenges to Stark, so there is reason for some optimism the rule can be challenged prospectively. 

The key point is that if you are either a physician group or a hospital that employs physicians, but chooses to use the group practice exception because it allows you to credit physicians for designated health services that are performed incident to the physician’s work, you need to understand the impact of these Stark changes. (For hospitals seeking to compensate employed physicians for infusions or physical therapy that they supervise, the in-office ancillary can be useful.)

Before Jan. 1, you will want to make sure your compensation formula satisfies the new criteria.

Programming Note: Listen to healthcare attorney David Glaser’s “Risky Business” report every Monday on Monitor Monday, 10 Eastern.