Stark Phase II Final Regulations: The Rest of the Story

By Robert G. Homchick
[March 2004]

The Centers for Medicare and Medicaid Services (CMS) recently issued the second phase of its final regulations addressing the federal physician self referral ban more commonly known as the Stark Law. The Stark Law prohibits a physician from referring Medicare patients for certain "designated health services" (DHS) to entities which the physician (or a member of the physician’s immediate family) has a financial relationship, unless an exception applies. The law also prohibits an entity from billing for services provided as a result of a prohibited referral.

The road to the final Stark regulations has been torturous. The original version of the Stark Law was passed more than 10 years ago and CMS published regulations in 1993, 1995, 1998 and 2001. With each set of regulations the agency’s interpretation of the statute has evolved. As a result, ambiguities in the statute and the uncertainty surrounding several of its key provisions have plagued both providers and their lawyers for many years.

In January 2001, CMS published Phase I of the final Stark regulations. More than three years later, on March 26, 2004, CMS published Phase II. The Phase II regulations respond to the comments CMS received on Phase I, address the statutory exceptions not covered in Phase I and create several new exceptions to the self referral prohibition.

The Evolution of Phase I

In responding to comments on Phase I, CMS made a number of noteworthy changes, including permitting percentage-based compensation arrangements, increasing the flexibility of the academic medical center exception and clarifying the analysis of indirect financial relationships and the indirect compensation arrangement exception.
CMS also revisited the group practice definition and in office ancillary services exception. With respect to the locational requirement of the in office services exception, CMS developed three tests, only one of which must be satisfied to meet the “same building” definition – that is, to assess whether physician services unrelated to DHS are furnished in the “same building.”

Phase II: Existing Exceptions

The Phase II regulations interpret the public company, rural provider and isolated transaction exceptions as well as the exceptions for space and equipment rentals, employment relationships, personal service arrangements and physician recruitment.
Overall, Phase II provides a number of welcome changes that address practical problems the industry identified in earlier comments. For example, isolated transactions no longer require that the purchase price be paid in a lump sum, provided certain safeguards are met. Likewise, the physician recruitment exception now permits hospitals to compensate the group the recruited physician is joining provided specific safeguards are in place.

The revisions to the personal service arrangement exception, however, may prove troublesome for many. To qualify under this exception, the written agreement must either cross reference all other service contracts between the designated health service provider and the referring physician or reference a master list maintained by the DHS entity. The maintenance of such a list will be an ongoing compliance challenge. CMS also interpreted the personal service arrangement exception to permit physicians to hire employees to perform the contracted services but not independent contractors. The use of independent contractors by physicians is common in many contexts and this provision may require a number of contracts to be restructured or revised.

Phase II: New Exceptions

Phase II regulations create new exceptions for Medicare managed care plans, professional courtesy arrangements, certain inadvertent and temporary lapses in compliance with an existing exception, charitable contributions by physicians, selected physician retention payments and technologies or services furnished to physicians to enable their participation in a community wide health information system.
These new exceptions also reflect CMS' effort to be responsive to industry feedback. It is important, however, to embrace these changes carefully. The professional courtesy exception, for example, is narrowly drawn. To the extent a provider wishes to adopt such a practice, it would be well advised to read the fine print of the Phase II regulations.

Reporting

The Stark law requires entities that provide designated health services to report information concerning their financial relationships with physicians. The Phase II regulations, however, specify that such information need not be reported on a regular basis. Instead CMS only requires providers to make the information available "upon request." This approach significantly reduces the administrative burden on both the agency and the provider community. It will be quite burdensome, however, for those unlucky few who receive a request for "all information concerning their financial relationships with physicians."

Medicaid

The Phase II regulations do not address the Stark Laws' application to state Medicaid programs. Under the statute, while Stark applies directly to Medicare, its application to Medicaid is more circuitous. The law provides that CMS may deny state Medicaid programs their federal financial participation for services provided pursuant to a referral that would have been prohibited if the services had been provided to a Medicare beneficiary. For guidance as to exactly how the Stark prohibition will be applied to Medicaid we will have to wait until the agency publishes the "Phase III" regulations.

Comments

The Phase II regulations were issued as an interim final rule with comment. CMS will accept comments between now and June 24, 2004. The Phase II regulations will go into effect on July 24, 2004.

Conclusion

The Stark Law was initially trumpeted as a straightforward means of policing utilization—one that avoided the ambiguities and intent issues associated with the Anti-kickback statute. Unfortunately, the legitimate relationships among physicians and providers of designated health services have proven too complex for the Stark Law to fulfill its campaign promise.

The Phase II final regulations reflect a good faith effort on the part of CMS to listen to providers and to implement the Stark Law in a realistic manner. Despite this effort, the Stark Law remains daunting in both its breadth and complexity. Although the Phase II regulations give providers more flexibility in certain areas, the path to compliance remains treacherous.

Any questions about this Advisory should be directed to:

Robert G. Homchick, Seattle, (206) 628-7676, roberthomchick@dwt.com
Thomas E. Jeffry, Jr., Los Angeles, (213) 633-6882, tomjeffry@dwt.com
Kathleen Drummy, Los Angeles, (213) 633-6870, kathydrummy@dwt.com
Richard L. Cys, Washington, D.C., (202) 508-6617, rickcys@dwt.com
Kent B. Thurber, Portland, (503) 778-5202, berniethurber@dwt.com
Ingrid Brydolf, Portland, (503) 276-5804, ingridbrydolf@dwt.com
M. Steven Lipton, San Francisco, (415) 276-6550, stevelipton@dwt.com
Paul T. Smith, San Francisco, (415) 276-6532, paulsmith@dwt.com

This Health Law Advisory is a publication of the Health Law Group of Davis Wright Tremaine LLP. Our purpose in publishing this Advisory is to inform our clients and friends of developments in health care law. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

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