Imminent Group Practice Profit Allocation Changes

Monday, August 23, 2021

Be sure to prepare for what’s in store for physician practices


Kyle Sutliff

We are quickly approaching the January 1, 2022 effective date for the group practice “overall profits” definition revisions from the Centers for Medicare & Medicaid Services (CMS) final rule. Since physician practices need to qualify as a group practice in order to rely on the In-Office Ancillary Services exception (IOASE) set forth in the Physician-Self Referral Law (Stark Law), prudent groups are advised to review their current compensation models and ensure they are in compliance with the updated regulation.

In summary, unless a specific exception applies, the Stark Law prohibits physicians from referring designated health services (DHS) payable by Medicare to entities with which the physician has a financial relationship. These “financial relationships” generally include employers, affiliated hospitals or a practice in which such physician is an owner. The IOASE provides an authorized exception for internal referrals within the physician’s “group practice” for services performed or supervised by another physician of such group practice, in the same building, and billed by the group practice. A group practice exists when it:

  • Consists of a single legal entity and unified business having centralized decision-making, control over the group’s assets and liabilities, consolidated accounting and financial reporting, and operating primarily for the purpose of being a physician group practice
  • Consists of at least two physicians who substantially provide the full range of their patient care services through the joint use of shared office space, facilities, equipment and personnel
  • Substantially Bills all (at least 75%) patient care services furnished through the group
  • Conforms to specific compensation distribution limitations discussed in more detail below

Physicians in a group practice may be paid “a share of overall profits of the group” provided the share is not determined in any manner that is directly related to the volume or value of referrals of DHS by the physician. Prior to the clarifications set forth in the final rule, “overall profits” was defined to mean either all DHS revenue of the group or, “the profits derived from DHS payable by Medicare or Medicaid of any component of the group practice that consists of at least five physicians.” This language created some ambiguity and confusion in smaller groups or those that provided multiple forms of DHS and gave rise to the question of whether DHS could be allocated on a service-by-service basis.

To address those issues, the new provisions on “overall profits” require all DHS, whether allocated to the group as a whole or a pod of five or more physicians, to be aggregated before distribution. This clarified that service-by-service distribution is prohibited and that group practices of less than five physicians cannot separately allocate DHS revenue to different subgroups within the practice.

Fortunately, the final rule also clarifies that some of the previously existing examples of permissible DHS distributions for a group practice (five-physician pod) continues to be deemed not directly related to the volume or value of referrals if:

  • They are divided per capita
  • They are distributed based on the group’s revenues from services that are not DHS

OR:

  • If DHS constitutes less than 5% of the group’s total revenue AND the portion of DHS distributed to any given physician constitutes less than 5% of such physician’s total compensation.

However, these advised allocations do not preclude the provision of a productivity component if it is based on services personally performed by the physician or “incident to” such personally performed services, and calculated in a reasonable and verifiable manner.

The final rule provides additional guidance regarding these productivity-based distributions by stating that in addition to the profit distribution methods mentioned above, a productivity bonus is not related to the volume or value of referrals when based on total patient encounters or relative value units (RVUs), provided each are personally performed by the physician.

Group practices should take this opportunity to review their DHS allocation formulae to ensure continued compliance with the new clarifications and also take full advantage of more customizable productivity options.


Kyle Sutliff is an associate at CCBLaw, a boutique law firm focused on providing counsel to physicians and other healthcare professionals. He can be reached at 315-477-6261 or ksutliff@ccblaw.com.