CMS Issues Favorable Advisory Opinion, Clarifying the “Single Legal Entity” Requirement - McDermott Will & Emery

CMS Issues Favorable Advisory Opinion, Clarifying the “Single Legal Entity” Requirement


In June 2021, the Centers for Medicare & Medicaid Services (CMS) published a favorable advisory opinion (AO), indicating that a physician practice could qualify as a “group practice” under the physician self-referral law (the Stark Law) if it furnishes designated health services (DHS) through a wholly-owned subsidiary entity that is a physician practice. This AO clarifies that a physician practice that otherwise qualifies as a “group practice” may operate, furnish and bill for DHS through a wholly-owned subsidiary entity that is a physician practice but does not itself qualify as a “group practice.”

In Depth


Generally, the Stark Law prohibits a “physician” from “referring” Medicare beneficiaries to an “entity” for the furnishing of DHS if the physician (or one of their immediate family members) has a “financial relationship” with the entity (DHS Entity)—unless a statutory or regulatory exception applies (the Stark Law’s “referral prohibition”). The Stark Law also prohibits the DHS Entity from billing Medicare or any other person or entity for improperly referred DHS (the Stark Law’s “billing prohibition”). DHS includes 10 categories of services, including clinical laboratory services, radiology and other imaging services.

One of the most frequently used exceptions for physician practices is for in-office ancillary services (IOAS Exception). The IOAS Exception generally is available to a physician practice consisting of two or more physicians only if the physician practice qualifies as a “group practice.” A “group practice” must consist of a “single legal entity” operating primarily for the purpose of being a physician group practice. The group practice definition further stipulates that the single legal entity may be organized or owned by another medical practice, provided that the other medical practice is not an operating physician practice (regardless of whether the medical practices meets the conditions of being a group practice). The regulations also state that a group practice that is otherwise a single legal entity may itself own subsidiary entities but do not specify whether the subsidiary may be a medical practice. Prior to this AO, CMS specifically referenced the ability of a group practice to own and operate other legal entities—such as a laboratory—for purposes of providing services to the group practice but had not opined as to whether such a subsidiary entity could itself be enrolled as an operating physician practice.


The request for an AO was submitted by a group practice (Group) that owned and operated separately-enrolled Medicare physician practices (Subsidiaries) located in separate states. CMS provided a favorable AO indicating that furnishing DHS through the Subsidiaries—each enrolled as a physician practice—would not prevent the Group from qualifying as a “group practice.”

The Group certified that all clinical employees and contractors of the Subsidiaries would be employed or contracted by the Group and assigned to work at the Subsidiaries. The favorable AO permits each Subsidiary of the Group to remain a Medicare-enrolled practice and maintain its existing contracts with payors and health plans, including billing Medicare for DHS. The Group also certified that all revenues and expenses of the Subsidiaries would be treated as revenue and expenses of the Group, and patients seen by the Subsidiaries would be considered patients of the Group.

CMS emphasized that the requirement for a “group practice” to be a “single legal entity” expressly permits a group practice to own subsidiaries and, although CMS previously provided only the example of a laboratory wholly-owned by a group practice, this does not prevent a group practice from furnishing other services—including physicians’ professional services to its patients through other types of wholly-owned subsidiaries.

In dicta, CMS noted that a group practice must “primarily provide services of the type provided by a supplier that is enrolled in Medicare as a clinic/group practice.” This language serves to highlight that, although a group practice may own and operate subsidiary entities to furnish services to its patients, the group must remain, at its core, a physician practice, and cannot utilize the IOAS Exception to circumvent the referral prohibition of the Stark Law by establishing subsidiary entities that are not central to group practice’s services to patients.


For purposes of physician practice acquisitions, the AO clarifies that an existing physician practice platform that is acquiring a physician practice may maintain the existing practice legal entity of the acquisition target, significantly easing the burden of transferring payor contracts and provider credentialing from the acquired practice to the acquirer. This AO provides clear guidance surrounding an additional pathway to structure physician practice acquisitions. The structure contemplated by this AO may be particularly useful when a physician practice is acquiring a practice in a new state in which the acquirer does not have existing payor contracts. This eases one of the most significant burdens in the physician practice industry: The operational and payor disruption that accompanies combining physician practice operations into one taxpayer identification number (TIN), which has long been the industry practice for purposes of meeting the definition of a “group practice.”

Although CMS provided a favorable opinion surrounding satisfaction of the single legal entity prong of the group practice definition, all other elements of the “group practice” definition must still be met for the relevant group practice to satisfy the IOAS Exception. In particular, a physician practice must operate as a “unified business” with centralized decision-making, consolidated billing, accounting and financial reporting. When structuring a group practice that intends to rely on subsidiary entities, extra care should be taken to ensure the “unified business” requirement is satisfied by the physician practice for purposes of Stark Law compliance.