Applying Directed Referral Requirements in Physician Compensation Plans
Over the last decade, the primary objective of larger integrated health systems has shifted. While previously focused on building and scaling the physician enterprise, these organizations are now concentrating on achieving optimal value from their employed and affiliated provider networks. To do so, health system leaders must maximize the referral capture of in-network patient care services. This means capturing all relevant service volumes and associated revenue for patients receiving care within the health system, a feat that requires proper investment in a system-supported physician enterprise.
Further, CMS aims to shift reimbursement from fee-for-service to value-based care (VBC) models by 2030. If organizations don’t have successful referral capture of patients under these VBC arrangements, they risk losing patients (and revenue) to other providers.
In combination with operational improvements, culture-driven tactics, and the payer shift toward VBC models, incorporating directed referral requirement provisions into provider compensation plans can effectively improve meaningful in-network referral capture.
Physician Self-Referral (Stark) Law Rules on Directed Referral Requirements
Under the original Stark law Phase I regulations implemented in 1998, healthcare organizations are permitted to require physicians to refer patients to particular providers or patient care service suppliers as a condition of their employment or independent contractor arrangement, provided certain exceptions are fully complied with.
In 2021, CMS refined the rules with two clarifications:
- Neither the existence of the compensation arrangement nor the amount of the compensation can be contingent on the volume or value of the physician’s referral to a particular provider or care supplier. Instead, a percentage or ratio may be used.
- Expansion of the number of Stark law exceptions that require compliance with the directed referral provisions include academic medical centers, physician incentive plans, group practice arrangements with hospitals, fair market value (FMV) compensation, indirect compensation arrangements, and limited remuneration to a physician.
While the 2021 Stark law rule revisions provide greater clarity on how health systems can remain compliant when designing and administering directed referral requirement components in their physician contracts and compensation plans, it is important to consult with legal counsel to ensure compliance.
Key Considerations for Adopting Directed Referral Requirement Compensation Provisions
Is the inclusion of a directed referral requirement right for your organization? The answer is complex and requires thoughtful system-level decision-making, compensation design planning, and consideration of operational preparedness and change management capabilities.
Below are some important considerations when deciding to adopt a directed referral requirement in your provider agreements.
Organizational Need and Strategic Risk Tolerance
- Determine whether your physician network has an in-network referral capture problem.
- Assess whether referral capture issues are driven by physicians’ choice of referred-to provider.
- Explore the historical use of directed referral requirement components in physician agreements.
- Evaluate the willingness of your organization to pursue the inclusion of a referral-based component in its physician compensation and incentive plans
Physician Compensation Design and Compliance
- Determine the compatibility for adding a directed referral requirement compensation component be incorporated into the health system’s existing physician compensation plan methodology.
- Decide if a directed referral requirement ratio or percentage should be included in the physician compensation plan.
- Explore an incentive for meeting metric targets and/or a penalty if levels are not met.
- Identify the percentage of a physician’s overall compensation associated with a directed referral requirement provision.
- Ensure FMV compliance when compensation plans include a directed referral requirement incentive bonus.
Eligible Directed Referrals
- Determine what referral types qualify as eligible directed referrals.
- Identify specialist or ancillary service referrals that should be excluded based on your health system’s network of healthcare services.
- Investigate why providers might not select an in-network service provider for an eligible referral.
- Determine the group of providers and/or service locations considered in network.
Physician Documentation and Metric Tracking
- Redesign the referral order entry process to properly track all eligible referrals.
- Develop workflows for how providers will document the reasons or rationale for not selecting an in-network service provider for an eligible referral.
- Evaluate eligibility reasons or out-of-network provider rationales that would disqualify a referral from being included in directed referral requirement metrics.
- Plan for how directed referral requirement measures will be tracked and reported.
Change Management and Communications
- Determine the transition plan for how the directed referral requirement component will be phased into practice.
- Identify the governance, compliance, and legal groups that should be included in the planning, and review any new provider compensation plan that incorporates a directed referral requirement component.
- Proactively design communications and messaging tactics used to mitigate the risk of misconstrued interpretations or negative reactions related to the inclusion of a directed referral requirement component in the provider compensation plan.
An efficiently designed, well-executed directed referral requirement provision can serve as an effective means for improving health system referral capture and network integrity. If you have questions about the directed referral requirement rules in Stark law or how your organization could benefit from adding a directed referral requirement component to provider compensation plans, please contact ECG’s compensation planning experts.
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Edited by Emily Johnson
