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The Final Stark II Regulations - Finally

By Robert G. Homchick
[January 2001]

On January 4, 2001, the Health Care Financing Administration (HCFA) issued "Phase I" of the final regulations interpreting the federal physician self-referral or "Stark II" statute. Phase I includes the agency's interpretation of the basic self-referral prohibition, the so-called global exceptions (including the in-office ancillary services and prepaid plan exceptions) and the statutory definitions. Selected compensation arrangement exceptions are also addressed. Phase II of the regulations, which HCFA intends to publish "shortly," will address the ownership and investment interest exceptions, the remaining compensation arrangement exceptions, reporting requirements and sanctions.

The bifurcation of the final regulations makes it difficult to assess their overall impact. That stated, Phase I of the final regulations includes a number of noteworthy developments, including:

• Clarification of the criteria for qualifying as a group practice under Stark as well as the requirements of the in-office ancillary services exception.
  
• Revision of the designated health services' definitions. Notably, the definitions of physical therapy and radiology services are now tied to specifically identified CPT codes.
  
• Narrowing the definition of "referral" to exclude services personally performed by a referring physician.
  
• Creation of new exceptions for indirect financial relationships, academic medical centers and risk sharing arrangements.
  
• Calling into question the practice of paying physicians based on a percentage of revenues, collections or expenses.
  
• Limiting physician groups' ability to provide in-office ancillaries at remote locations on a part-time basis.
  
• Establishing that group practices may use mobile units to provide in-office ancillaries only if the unit is operated exclusively by the group.
  
• Confirmation that lithotripsy services, when billed by a hospital, are considered designated health services by HCFA.
  
• Phase I of the final Stark II regulations is labeled an Interim Final Rule with a 90 day comment period. Comments on the Rule should be submitted to HFCF on or before April 4, 2001.

To give the industry time to adjust existing business relationships that would not previously have triggered the referral prohibition, the vast majority of the regulations will not be effective until one year from the date of publication: January 4, 2002. The phasing of the final regulations combined with the delayed effective date, however, create confusion as to what provisions govern during what time period.

A Brief Overview of Stark

In 1989 Congress passed "Stark I," a statute prohibiting a physician from referring Medicare patients to an entity for clinical laboratory services if the physician (or an immediate family member of the physician) has a financial relationship with that entity. In the Omnibus Reconciliation Act of 1993, Congress enacted "Stark II," which expands the federal self-referral ban to include certain designated health services provided to Medicare patients. Stark II also extended the referral prohibition to the Medicaid program by denying federal financial participation for certain Medicaid services provided pursuant to a tainted referral.

The designated health services identified in Stark II are:

• Clinical laboratory services;
  
• Physical therapy services;
  
• Occupational therapy services;
  
• Radiology services, including ultrasound, MRI and CT scans;
  
• Radiation therapy services;
  
• Durable medical equipment;
  
• Perenteral and enteral nutrients, equipment and supplies;
  
• Prosthetics, orthodics and prosthetic devices;
  
• Home health services;
  
• Outpatient prescription drugs;
  
• Inpatient and outpatient hospital services.
  
• Sanctions for violating Stark include denial of payment, mandatory refunds, civil money penalties and/or exclusion from the Medicare program. Medicaid referrals that fall within the prohibition, however, are subject to only whatever sanctions the particular state has adopted.

In August of 1995, HCFA published final regulations interpreting the Stark prohibition as applied to clinical laboratory services. In January 1998, HCFA released proposed regulations interpreting Stark II. Three years later, HCFA has finally published a portion of the final Stark II regulations.

With each set of Stark regulations HCFA's interpretation of the statute has evolved. This has resulted in considerable confusion concerning the scope of the referral prohibition and the various exceptions. Phase I of the final Stark II regulations attempts to address several of the ambiguities created by the language of the statute and its evolving administrative interpretation.

Prohibition and Definitions

Stark prohibits a physician from making a referral to an entity for the furnishing of designated health services for which Medicare would otherwise pay, if the physician (or immediate family member) has a financial relationship with that entity. This basic Stark prohibition contains a number of terms requiring definition. Phase I of the Stark II final regulations modify or clarify several of these definitions.

Referral. The statute defines referral very broadly to include the request by a physician for an item or service for which payment may be made under Medicare Part B or the establishment of a plan of care. The proposed Stark II regulations clarified that the statutory prohibition applies only to referrals for "designated health services," covered by Medicare. The final regulations further modify the definition of referral by excluding any designated health service personally performed or provided by the referring physician. Thus, a physician does not make a referral when he or she personally performs a service. However, the regulations indicate that a service is not personally performed if it is provided by any other person, including but not limited to, the referring physician's employees, independent contractors or group practice members.

Designated Health Services. The proposed Stark II regulations created considerable confusion concerning the definitions of the 11 designated health services listed in the statute. In Phase I of the final Stark II regulations, HCFA attempts to clarify these definitions. Certain designated health services (clinical lab, physical therapy, occupational therapy, radiology, and radiation therapy services) are defined by specifically identified procedure codes (CPT or HCPCS codes). With respect to other designated health services (durable medical equipment, parenteral and enteral nutrients equipment and supplies, prosthetics, orthotics and prosthetic devices, home health services, outpatient prescription drugs or in-patient out-patient hospital services) HCFA revised the definitions in Phase I of the final regulations in an attempt to create "bright line" rules.

In another change from the proposed regulations, the final Stark II regulations provide that services that would otherwise constitute designated health services, but are paid by Medicare as part of a composite payment for a separate benefit are not designated health services. Thus, designated health services provided in an ASC and bundled into the ASC payment are not designated health services. Designated health services bundled and billed as a hospital or home health service, however, would still be designated health services because hospital services and home health services are themselves designated health services.

Financial Relationship. Stark prohibits referrals only if the physician has a financial relationship with the entity to which the referral is made. A financial relationship may consist of either an ownership/investment interest or compensation arrangement. The financial relationship does not need to involve designated health services or the Medicare/Medicaid patients. A referral alone, however, does not create a financial relationship.

Indirect Ownership. An ownership interest or compensation arrangement can be direct or indirect. An indirect ownership interest may pierce through several "holding companies" or layers of ownership. The final regulations clarify, however, that an indirect ownership interest will trigger Stark sanctions only if the entity furnishing the designated health services has actual knowledge of or acts in reckless disregard or deliberate ignorance of the fact that the referring physician (or an immediate family member) has some ownership or investment interest in the entity.

Indirect Compensation. The final regulations also (1) articulate a test for determining when an indirect compensation arrangement will trigger the Stark referral prohibition; and (2) create a new exception for indirect compensation arrangements. The new exception may apply when the compensation received by the referring physician from an intermediate entity with which the physician has a direct financial relationship is consistent with fair market value and does not vary based on the volume or value of the physician's referrals to the entity providing designated health services.

Group Practice and In-office Ancillary Services Exception

The final Stark II regulations clarify the criteria medical groups must satisfy to qualify as a "group practice" under Stark. In general, HCFA has attempted to be more flexible in its approach. Nonetheless, groups must still meet specific operational and organizational standards relating to their level of integration, compensation systems and the provision of patient care services.

With respect to the in-office ancillary services exception, HCFA has articulated more flexible standards for both the level of required physician supervision as well as who is eligible to supervise such services. More specifically, the final regulations interpret the requirement that in-office ancillaries be "directly supervised" to mean supervision sufficient to satisfy the requirements of the Medicare/Medicaid payment or coverage rules. The regulations further provide that supervision of in-office ancillaries can be provided by group practice owners, employees or independent contractors who qualify as "physicians in the group."

With respect to the locational requirements of the in-office ancillary services exception, HCFA took a more restrictive approach. The final regulations preclude groups from establishing part time remote locations for the "centralized" provision of designated health services. Thus, if a group were to rent an MRI facility one day per week, that location would not be considered a centralized location for designated health services. HCFA also took a dim view of mobile units, suggesting that these units could meet the locational requirements only if the unit is operated exclusively by the group practice (7 days a week, 24 hours a day for a least six months).

Other Exceptions

The final Stark II regulations also established new exceptions to the referral prohibition, including:

Risk Sharing Arrangements. Compensation pursuant to a risk sharing arrangement (including withholds, bonuses and risk pools) between a managed care organization and a physician for services provided to enrollees of a health plan will not trigger the referral prohibition provided the arrangement meets specific criteria and does not violate the anti-kickback statute or any law or regulation governing billing or claim submission.

Academic Medical Centers. Payments to physician members of a faculty practice plan from the components of an academic medical center may qualify for a new Stark exception so long as the payments support the institution's mission. This exception generally applies to physicians who provide substantial academic or clinical teaching services. The total compensation from all academic medical center components to the referring physician must be set in advance, not exceed fair market value and not be determined a manner that takes into account the volume or value of any referrals or other business generated by the referring physician within the academic medical center.

Fair Market Value Compensation. The fair market value compensation exception, first articulated in the proposed Stark II regulations, is clarified and finalized in the final regulations.

Medical Staff Incidental Benefits. Non-cash compensation from a hospital to a member of its medical staff will not trigger the referral prohibition if, inter alia, the compensation is offered to all members of the medical staff without regard to the volume or value of referrals, the compensation is provided by and used by the hospital's medical staff members only on the hospital's campus and, the compensation is consistent with the benefits offered to medical staff members by other hospitals in the region.

Conclusion

Phase I of the final Stark II regulations will affect the organization and operation of physician groups, hospital-physician relationships and a host of other arrangements. The regulations are daunting in their complexity and will need to be carefully analyzed when assessing existing or proposed financial arrangements involving physicians.

For more information about the final Stark II regulations contact Bob Homchick (phone (206) 628-7676 or email roberthomchick@dwt.com) or your usual Davis Wright Tremaine attorney.

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