The long-awaited third and final phase of the rulemaking that amends the Stark regulations (Stark) was released by the Centers for Medicare and Medicaid Services (CMS) on August 27, 2007. The phase III final rule (Phase III) will be effective December 4, 2007. Although CMS states that Phase III is flexible and favorable to the health care industry, Phase III is not the last piece of the puzzle addressing changes to Stark. That is, recently there have been significant proposals, pending legislation, and a CMS mandate regarding disclosures of hospital-physician financial relationships, all of which may lead to more changes to Stark and may have a profound impact on the health care industry. This article will: (1) address the highlights of the Phase III final rule; and (2) identify potential future changes to Stark which may impact common health care arrangements.
As a starting point, Stark prohibits physicians from referring Medicare beneficiaries to an entity in which they (or an immediate family member) have a direct or indirect financial relationship for DHS. DHS include: clinical lab; physical therapy; occupational therapy; radiology, including MRI, CT scans, and ultrasound; radiation therapy and supplies; DME and supplies; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics, and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospitalization services.
Stark even applies to referrals of DHS within a group practice. For example, if a group provides services such as x-rays, labs, ultrasound or physical therapy within the practice, Stark will be implicated. Once the prohibition is triggered, the physician’s relationship must fit within a Stark exception. There are exceptions in Stark that apply to both compensation and ownership/investment relationships, exceptions that apply only to ownership/investment relationships, and exceptions that apply only to compensation arrangements.
Now that the Stark regulations have finally been promulgated, physicians involved in financial relationships that implicate Stark, should have a health care attorney conduct a “Stark audit” to ensure compliance with the final regulations. Financial relationships that can trigger Stark include, but are not limited to physician relationships with:
• Hospitals (e.g., leases, personal services, employment, medical directorships and recruitment agreements);
• Suppliers of service (e.g., mobile ultrasound suppliers, DME companies, home health agencies);
• Group practices (e.g., to evaluate compliance to perform ancillary services and to evaluate compensation arrangements within the group practice);
• Independent contractor physicians (e.g., to evaluate agreements for reading and interpretation services).
Highlights of Phase III
Safe harbor for fair market value is eliminated. As part of Phase II, CMS created a voluntary fair market value “safe harbor” provision applicable to hourly payments to physicians for their personal services. Due to numerous commenters’ concerns that the “safe harbor” was impractical and infeasible, Phase III eliminates the “safe harbor”. CMS emphasizes, however, that it will continue to scrutinize the fair market value of arrangements. Parties to a transaction may calculate fair market value using any commercially reasonable methodology that is appropriate under the circumstances and otherwise fits within the definition of fair market value.
A physician in the group practice must have a direct relationship with the group and provide services in the group’s facilities. CMS has modified the definition of “physician in the group practice” to make clear that an independent contractor physician must furnish patient care services for the group practice under a direct contractual arrangement with the group, and not between the group practice and other entity, such as a staffing entity. CMS also reiterated its position that an independent contractor physician must provide patient care services in the group’s facilities to ensure there is a true nexus with the group’s medical practice. For example, when a group of orthopedic surgeons independently contracts with a radiologist to perform the reading and interpretation of the group’s imaging services, the radiologist must provide such services in the group’s facilities, not at some off-site location.
Definition of referral- CMS clarifies the few, if any, situations in which a physician would personally furnish DME. If a physician personally performs a service it is not considered a referral for purposes of the Stark physician self-referral prohibition. In Phase III, CMS notes that there are few, if any, situations in which a referring physician could personally furnish durable medical equipment (DME), because doing so would require the physician to be enrolled in Medicare as a DME supplier and personally perform all of the duties of a supplier. CMS believes that it is highly unlikely that a referring physician would meet the criteria for personally performed services when dispensing DME, including continuous positive airway pressure equipment (CPAP). CMS also notes that CPAP is DME that does not qualify for the in-office ancillary services exception. Accordingly, physicians cannot furnish and bill for DME in their offices.
CMS makes changes to the group practice definition making clear that productivity bonuses can be based directly on “incident to” services but upon further reflection, CMS now states that overall profit shares cannot relate directly to “incident to” services. In Phase III, in the group practice setting, CMS makes clear that productivity bonuses can be based directly on “incident to” services that are incidental to the physician’s personally performed services, even if those “incident to” services are otherwise designated health service (DHS) referrals. For example, a physician can be paid a productivity bonus based directly on physical therapy services provided “incident to” his or her services. However, the productivity bonus cannot be directly related to any other DHS referrals, such as diagnostic tests. Further, although in Phase II CMS stated that overall profit shares could relate directly to “incident to” services, upon further reflection, CMS now states that its previous interpretation is inconsistent with the statutory language, which includes “incident to” services only in the context of productivity bonuses. Accordingly, under Phase III, profits of the group must be allocated in a manner that does not directly relate to DHS referrals, including any DHS billed as an “incident to” service.
Physicians “stand in the shoes” of their group practices. Phase III includes new provisions addressing compensation arrangements in which a group practice (or other “physician organization” as newly defined in Phase III) is directly linked to the physician in a chain of financial relationships between the referring physician and a DHS entity. For purposes of determining whether a physician has a direct or indirect financial relationship with a DHS entity to which the physician refers, under Phase III, the physician will “stand in the shoes” of his or her group. For example, under this new “stand in the shoes” doctrine, a contract between a group practice and a hospital must now be structured to meet a direct Stark exception.
Physicians can have a security interest in equipment that was sold to a hospital. CMS revises the regulations so that a security interest held by a physician in equipment sold by the physician to a hospital and financed through a loan from the physician to the hospital will not be considered an ownership interest in the hospital. In the past, this security interest would have created an ownership interest in part of a hospital, and thus would have been considered a prohibited financial relationship. Under Phase III, this security interest will be considered a compensation arrangement between the physician and hospital.
In-office ancillary shared services arrangements must be carefully structured and operated to satisfy the in-office ancillary services exception. In Phase III, CMS states that physicians sharing a DHS facility (e.g., imaging lab) in the same building must control the facility and the staffing at the time the DHS is furnished to the patient. As a practical matter, CMS points out that this necessitates a block lease for the space and equipment used to provide the DHS. CMS also notes that common per-use or per-click fee arrangements may implicate the anti-kickback statute. Further, CMS opines that part-time, shared, off-site facilities (such as “condo” pathology laboratories) are readily subject to abuse. CMS will be addressing this potential for abuse in a separate rulemaking. In the meantime, however, CMS cautions parties involved in shared arrangements in the same building and in off-site buildings that the arrangements must fully comply with the in-office ancillary services exception in operation, not just on paper.
Intra-family rural referrals exception modified to include an alternative distance test. There is an exception under Stark for certain referrals from a referring physician to his or her immediate family member or to a DHS entity with which the physician’s immediate family member has a financial relationship. In part, the exception requires that the patient reside in a rural area and that there is no other person or entity available to furnish the referred DHS in a timely manner, at the patient’s residence, or within 25 miles of the patient’s residence. Phase III modifies the exception to include an alternative distance test based on transportation time (45 minutes) from the patient’s residence.
Holdovers now permitted in personal service arrangements. Phase III modifies the personal service arrangements exception to include a provision which permits a holdover personal service arrangement (services provided after the term of the contract expires) for up to six months for personal service arrangements that otherwise meet the requirements of the personal services exception. This new holdover concept is similar to the holdover provisions which are permitted in the exceptions for office space and equipment leases.
Physician recruitment exception relaxed. The physician recruitment exception is designed to protect certain remuneration that is provided by a hospital to a physician as an inducement for the physician to relocate his or her medical practice into the “geographic area served by the hospital”. The most significant changes to the Stark regulations contained in Phase III are changes to the physician recruitment exception. Phase III makes a number of changes that relax the exception. Group practices involved in physician recruitment relationships are afforded relief under Phase III as follows:
CMS modifies the exception to allow group practices to impose practice restrictions if they do not “unreasonably restrict” the recruited physician’s ability to practice in the “geographic area served by the hospital”. Notably, in Phase III, CMS states that restrictions on moonlighting; prohibitions on soliciting patients, or employees; requiring the recruited physician to repay losses of his or her practice absorbed by the physician practice; and requiring liquidated damages if the physician leaves the practice and remains in the community, are all restrictions and prohibitions that CMS does not consider to have a substantial effect on the physician’s ability to remain in the hospital’s geographic service area. CMS does state, however, that a liquidated damages clause which provides for a significant or unreasonable payment may have a substantial effect on the physician’s ability to remain in the service area.
CMS also clarifies that the provisions of the recruitment exception that apply to recruitment arrangements involving physicians who join an existing practice do not apply when the recruited physician is just co-locating or sharing space with an existing practice and does not join the practice.
Inadvertent excess nonmonetary compensation can now be cured. In Phase I of the rulemaking, CMS established an exception to protect non-monetary compensation provided to physicians up to $300 (adjusted annually for inflation). Phase III makes two substantive changes to the exception by: (1) allowing physicians to repay certain excess nonmonetary compensation within the same calendar year to preserve compliance with the exception; and (2) allowing entities without regard to the $300 dollar limit to provide one medical staff appreciation function (such as a party) for the entire medical staff per year.
Fair market value exception expanded to cover compensation from a physician. Phase III amends the exception for fair market value to permit application of the exception to arrangements involving fair market value compensation to physicians from DHS entities, as well as to arrangements involving fair market value compensation to DHS entities from physicians. In the past, parties could not utilize the exception unless the arrangement involved compensation to a physician from an entity.
Compliance training exception expanded. Phase III amends the compliance training exception to cover compliance training programs that involve CME credit so long as the compliance training is the primary purpose.
Professional courtesy exception revised to delete notification requirement. Phase III modifies the professional courtesy exception by deleting the requirement that an entity notify an insurer when the professional courtesy involves the whole or partial reduction of any coinsurance obligation. Phase III also modifies the exception to clarify that it applies only to hospitals and other providers with formal medical staffs (including group practices), and not to suppliers, such as laboratories or DME companies.
Retention payments in underserved areas exception modified in several respects. Phase III modifies the exception for retention payments in underserved areas in several respects, including expanding the exception by permitting certain retention payments in the absence of a written recruitment offer, by adding flexibility for retention payments to physicians who serve underserved areas and populations, and by allowing rural health care clinics to make retention payments.
Other Recent Proposals on the Stark Horizon
The Stark Phase III Final Rule comes out amidst a flurry of other current activity outside of the Stark regulatory final rulemaking which could have a significant impact on Stark. In July of 2007, CMS proposed several significant proposals in the 2008 Medicare Proposed Physician Fee Schedule (MPPFS), which would amend the Stark regulations. These MPPFS proposals are separate from, and in addition to, the revisions in the Phase III Final Rule. Although these proposals do not promulgate any final regulations, they are noteworthy in that they contain discussions by CMS of its concern regarding many common health care structures. If adopted, the MPPFS proposals could be effective as early as January 1, 2008 and have a significant impact on many common health care arrangements. A few of the highlights of the MPPFS proposals are briefly summarized below.
No Marking Up Purchased or Reassigned Technical and Professional Services. CMS has long expressed its concerns regarding certain health care structures such as pathology pod labs involving the shared use of equipment, technologists, and pathologists between physician practices and pathology labs. CMS also believes that certain diagnostic testing arrangements between physician practices and diagnostic testing suppliers raise potential fraud and abuse concerns. In order to address its concerns, CMS proposed prohibiting physicians and practices from marking up the outside supplier’s net charge for the diagnostic test to the Medicare program. Notably, this anti-markup prohibition applies regardless of whether the diagnostic test is purchased outright from the supplier or whether the practice is billing Medicare pursuant to a reassignment from the supplier. The proposed rule applies to both the professional component and the technical component of the services. The only exception to this anti-markup rule is for full-time employees.
If finalized, essentially this proposal will remove all economic incentives for physician practices to bill Medicare for the professional component of diagnostic tests not performed by full-time employees of the practice (which is commonly done through the use of the Stark physician services exception). Under the proposal, the practice will not be able to recover from Medicare the overhead practice expense of interpretations performed in the practices facilities by part-time or independent contractor physicians. Consequently, for example, practices that currently utilize part-time or independent contractor radiologists for the interpretation of diagnostic imaging services may decide to discontinue billing Medicare for such interpretation services or employ, if feasible, a radiologist on a full-time basis.
Narrowing of the Stark In-Office Ancillary Services Exception. The in-office ancillary services exception is arguably the single most important exception to the Stark law, which allows physicians to furnish ancillary services (e.g., x-ray, lab, ultrasound, physical therapy) in their practices. In the proposed MPPFS, CMS expressed its concern that this exception is being inappropriately used for services that are not closely connected to the physician’s practice. CMS solicited public comment as to whether the exception should be narrowed or limited to some extent.
Limitations on Per-Click Leases for Space and Equipment. Presently per-click lease payments are generally permitted under the Stark law if the per-click payment is fair market value. In the proposals, CMS is now reconsidering its position stating that it considers certain per-click payment arrangements to be susceptible to abuse. Thus, CMS has proposed to prohibit the use of per click-lease payments involving space and/or equipment leases in those situations where an entity owned by a physician leases space and/or equipment to another entity and the physician subsequently refers patients to that other entity for services. For example, the proposal would prohibit a cardiologist from leasing a CT scanner to the hospital on a per-click basis if that cardiologist will be referring patients to the hospital for cardiac CTA services. CMS is also considering whether it should prohibit per-click payments by a physician to an entity from which the physician leases space or equipment if that entity refers patients to the leasing physician.
Prohibition on Percentage Leases with Referrals Sources. Many of the current Stark exceptions allow percentage compensation arrangements such as the space and equipment lease exceptions, the personal service exception and the fair market value exception. CMS is now proposing that percentage based compensation can only be used when paying for personally performed physician services and that the percentage must be based on the revenues directly resulting from the physician services. If finalized, this proposal would prohibit many common compensation arrangements involving the use of percentage based rental and management fees.
“Under Arrangements” Under Attack. Pursuant to the current Stark regulations, an entity is not considered a designated health services (DHS) entity unless it is the entity that is paid by Medicare for the DHS. The current definition of DHS entity permits certain joint venture arrangements between hospitals and referring physicians in which the physicians are providing services to the hospital “under arrangements”. In the MPPFS, CMS expressed its concerns with “under arrangements” ventures between hospitals and physicians that appear to be designed to enable the physician-investors to profit from referrals to the hospital and proposes to revise Stark so that the definition of DHS entity is either the entity that submits a claim to Medicare for the DHS, or the entity that performed the DHS. If CMS’ proposal were finalized, it would essentially bar referring physicians from participating in joint ventures that provide services “under arrangements” to hospitals or other providers. Given that hospital-physician “under arrangements” joint ventures are commonplace, this proposal would require the restructuring of a significant amount of arrangements that currently comply with the law.
Ownership or Investment in Retirement Plans. Current Stark regulations provide that a physician does not have an ownership or investment interest in an entity that furnishes DHS solely by having an interest in that entity’s retirement plan. CMS learned that physicians are attempting to abuse this exception by using their retirement plans to purchase entities that provide DHS and to which the physician refers patients. For example, a group of physicians participates in a retirement plan and that plan invests its funds by purchasing an MRI center. The physicians will then refer their patients to the MRI center without violating Stark because they claim they have an investment in the retirement plan, not the MRI center. In an attempt to close this loophole, in the MPPFS, CMS proposes to apply the ownership or investment exception only to investment interests in legitimate employer-sponsored retirement plans.
Independent Diagnostic Testing Facility (IDTF) Issues. In a related matter, the MPPFS also provides some significant revisions, additions, and clarifications to the existing IDTF performance standards. Of significant importance is CMS’ controversial standard that would significantly impact block leasing and other shared imaging arrangements involving IDTFs and physicians. This new standard would prohibit a fixed site IDTF from sharing space, equipment, or staff, or from subleasing its operations to another individual or organization. If this proposal were adopted, it would eliminate the ability of an IDTF to enter into any type of sublease arrangement with a physician practice, hospital, or other individual or entity.
In addition to the MPPFS proposals, on August 1, 2007 the U.S. House of Representatives passed a bill, which would have a significant impact on the permissible legal structures of physician owned hospitals. The house-passed bill would amend the Stark whole hospital exception as follows: (1) eliminate the whole hospital exception so that physicians cannot self-refer to hospitals (not just specialty hospitals); (2) grandfather hospitals that were in operation with Medicare provider agreements as of July 24, 2007; and (3) require grandfathered hospitals to meet certain standards (including limiting physician ownership to an aggregate of 40% and no more than 2% individually).
CMS has also recently announced its intention to mandate Medicare-participating hospitals to report to CMS details of their financial relationships with their referring physicians. Commencing September 2007, CMS has initially selected 500 hospitals that will be required to report financial information. CMS can request among other information, the name and unique physician identification number) with a reportable financial relationship, the covered services furnished by the entitynumber or national provider number of each physician (and any immediate family me, and the nature of the financial relationship.
This article is intended to highlight key aspects of the Stark Phase III Final Rule and to identify other proposals that may impact the Stark regulations in the future. Physicians and other health care providers should undertake a “Stark audit” and have their relationships analyzed in light of these recent Stark developments.
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