Excerpted from What the Stark Law Changes Mean for Medtech, Market Pathways, March 3, 2021.

If your medtech enterprise provides products or services used by clinical laboratories or radiology centers, or technology-enhanced durable medical equipment, or other potential designated health services (DHS), you must consider the Stark Law when you are entering into, or reviewing existing financial relationships with physicians (or members of their families). Even though the Stark Law focuses on physician activities, it also bears directly on you—indeed, on your very prospects of Medicare and other federal healthcare program reimbursement. You cannot rely on physicians—regardless of their clinical skill or personal experience—to navigate this area on your behalf.

In 2019, CMS proposed the first large scale updates to Stark Law in many years. CMS finalized its proposed changes to the Stark Law in November 2020. Many of the proposed changes were for value-based arrangements as part of implementing HHS’s Regulatory Sprint Toward Coordinated Care. The Stark Law was enacted with volume-based reimbursement at the forefront rather than novel value-based reimbursement models. Value-based arrangements have the purpose of: (1) coordinating and managing the care of a target patient population; (2) improving the quality of care for a target patient population; (3) appropriately reducing the costs to, or growth in expenditures of, payors without reducing the quality of care for a target patient population; or (4) transitioning from healthcare delivery and payment mechanisms based on the volume of items and services provided to mechanisms based on the quality of care and control of costs of care for a target patient population. Value-based arrangements are intended to be risk-sharing arrangements between various types of healthcare providers. Updates to the Stark Law related to value-based arrangements are aimed at encouraging innovation in this area and eliminating barriers to engagement.

In the final rule, CMS defined the term “commercially reasonable,” which is used in many of the Stark Law exceptions. Commercially reasonable means “the particular arrangement furthers a legitimate business purpose of the parties to the arrangement and is sensible, considering the characteristics of the parties, including their size, type, scope, and specialty. An arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties.” CMS said in the final rule that the threshold for commercial reasonableness is whether an arrangement makes sense as a means to accomplish the parties’ goals. Commercial reasonableness is not a question of the value of the arrangement and an unprofitable arrangement could still be commercially reasonable.

CMS also revised the regulatory definition of “fair market value,” another term that is used in many of the Stark Law exceptions. The term fair market value now has distinctions for three separate applications: (1) general, (2) equipment rental, and (3) office space rental.

Fair market value means—

(1) General. The value in an arm’s length transaction, consistent with the general market value of the subject transaction.

(2) Rental of equipment. With respect to the rental of equipment, the value in an arm’s-length transaction of rental property for general commercial purposes (not taking into account its intended use), consistent with the general market value of the subject transaction.

(3) Rental of office space. With respect to the rental of office space, the value in an arm’s-length transaction of rental property for general commercial purposes (not taking into account its intended use), without adjustment to reflect the additional value the prospective lessee or lessor would attribute to the proximity or convenience to the lessor where the lessor is a potential source of patient referrals to the lessee, and consistent with the general market value of the subject transaction.

“General market value,” as used in the broad definition of fair market value, itself has two definitions. For purchases of assets, general market value is the price that an asset would bring on the date of acquisition of the asset as the result of bona fide bargaining between a well-informed buyer and seller that are not otherwise in a position to generate business for each other. For compensation for services, general market value is the compensation that would be paid at the time the parties enter into the service arrangement as the result of bona fide bargaining between well-informed parties that are not otherwise in a position to generate business for each other.

CMS’s various changes to the Stark Law exceptions that are most directly pertinent to medtech entered effect on January 19, 2021.

And even though the Stark Law focuses on physician activities, it also bears directly on you—indeed, on your very prospects of Medicare and other federal healthcare program reimbursement. You cannot rely on physicians—regardless of their clinical skill or personal experience—to navigate this area on your behalf.

Melissa Hudzik and Jeff Weinstein are attorneys in the healthcare practice of the Washington, DC office of Wilson Sonsini Goodrich & Rosati.

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