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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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