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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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