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Health Law Advisory Bulletin
CMS Proposes Changes to the Stark
Regulations in the Medicare Physician Fee Schedule Rule
By
Robert
G. Homchick and Jill
H. Gordon
[July 2007]
On July 2, the Centers for Medicare and Medicaid Services (CMS)
issued the Medicare Physician Fee Schedule (MPFS) Proposed Rule.
This Proposed Rule included a number of significant revisions to
both the purchased diagnostic test rule and the Stark regulations.
Although considerable uncertainty remains, adoption of the changes
CMS proposes could disrupt a large number of arrangements structured
to comply with the existing regulations. Specific arrangements affected
by the proposed changes include shared laboratory and imaging facilities,
per click leasing arrangements, percentage compensation provisions,
and under arrangements services contracts.
Comments on the Proposed Rule must be submitted to CMS by Aug.
31, 2007.
Procedural Status
It is noteworthy that CMS opted to use the MPFS Proposed Rule (not
the Stark III regulations) to address a number of Stark Law issues.
The long-awaited Stark III Rule is currently under review at the
Office of Management and Budget and will likely be issued later
this summer. Stark III will finalize the existing regulations and
address changes to the regulations that the agency has already proposed.
The MPFS Proposed Rule breaks new ground. The agency proposes new
regulatory changes and is soliciting comments on several issues
of concern. The earliest CMS could make the MPFS proposals final
is this fall when it publishes the final Fee Schedule Rule. Along
with the new Physician Fee Schedule, any regulatory changes would
go into effect Jan. 1, 2008. However, given the complex nature and
potentially broad impact of many of the proposed revisions to the
Stark regulations, it seems unlikely that any new changes would
be made by Jan. 1, 2008.
Reassignment/Purchased Diagnostic Rules
CMS proposes to expand the scope of the purchased diagnostic test
rule so that its anti-mark up provision covers both the professional
and technical components of diagnostic tests billed by a physician
or medical group but performed by someone other than a full-time
employee. More specifically, the anti-mark up provision would
apply to both components of those diagnostic tests covered by what
would become a unified purchased diagnostics rule whenever such
component is performed by an outside supplier regardless of whether
the billing physician purchases the component or the right to payment
for the component is reassigned to the billing physician.
To tighten the rule further, the payment limitation would be the
supplier’s charges net any equipment or space rental amounts
paid by the supplier to or through the billing physician or entity
(e.g., if a radiology group leases an MRI from a physician group
and the physician group purchases imaging studies from the radiologists
the amount the physician group may charge Medicare for the studies
is the amount it paid the radiologists less the amount of any rent
received from the radiologists).
CMS is proposing not to apply the anti-mark up provision when the
professional component is ordered by independent laboratories. CMS
believes that such arrangements pose minimal risk of program abuse
since independent laboratories do not order the technical component.
The implications of these changes are significant. Many physician
groups use independent contractors or part-time employees to perform
the professional component of diagnostic tests. Under the proposed
rule, the physician groups could not charge Medicare more for the
professional component than the group paid the independent contractor
or part-time employee physician.
In-Office Ancillary Services Exception
One of the most important and widely-relied upon exceptions to
the Stark Law is the in-office ancillary services exception. Although
no changes to the exception are proposed in the MPFS Rule, CMS suggests
possible restrictions on the scope of services covered by the exception
and tightening the definitions of “same building” and
“centralized location.”
Unit-of-Service (Per Click) Payments in Space
and Equipment Leases
CMS proposes to revise the Stark space and equipment lease exceptions
by prohibiting per-click rent payments to physician lessors when
a designated health services (DHS) entity lessee uses the space
or equipment to furnish services to patients referred by the physician
lessor.
This revision would have a significant effect on the equipment
rental arrangements directly between physicians and hospitals, imaging
centers, clinical laboratories and other DHS providers. The revision
as proposed by CMS, however, would not affect most equipment leasing
companies because they are typically independent legal entities
and therefore subject to the indirect compensation arrangement analysis.
Percentage-Based Compensation
A number of Stark Law exceptions require that compensation be "set
in advance.” CMS has gone back and forth on whether percentage-based
compensation satisfies the set in advance requirement. In the MPFS
Proposed Rule, CMS suggests that percentage- based compensation
would satisfy the set in advance requirement only when the compensation
is based on revenues derived from services personally performed
by the compensated physician.
Although this would permit the most common form of percentage-based
compensation to individual physicians, there are many other payment
arrangements, including some with no obvious potential for abuse,
that may be adversely affected by the proposed change. For example,
leases that require lessees to pay a percentage of operating or
overhead expenses (taxes, insurance, etc.) as a part of the rent
would not qualify under the proposed definition of “set in
advance.”
Services Furnished "Under Arrangements"
CMS expressed serious concerns about physicians and physician organizations
providing services under arrangements to hospitals. To address the
perceived abuses, CMS proposes to revise the definition of an "entity"
under the Stark regulations so that it includes the person or entity
that presents claims to Medicare for DHS (as in the current definition),
and the person or entity that either provides the DHS or
“causes a claim to be presented” for the DHS.
This revision would virtually eliminate under arrangements service
contracts with physicians or physician groups potentially disrupting
access and prompting duplication of investment in facilities and
equipment. The challenges associated with this proposed change in
the definition of entity are exacerbated by the ambiguity of the
proposed language. Most importantly, it is unclear under what circumstances
an under arrangement service provider would be deemed to be “causing
a claim to be presented” by the hospital to Medicare. For
example an imaging service may be provided as a part of an inpatient
stay. The hospital will bill Medicare for that patient’s stay,
and its DRG payment will not likely be affected by the imaging service.
In this example it seems unlikely that the under arrangement service
provider is causing a claim for DHS to be presented but the language
in the proposed regulation is unclear.
It is also unclear how CMS would address services that are not
DHS when directly furnished (such as most cardiac catheterization
procedures, endoscopy or lithotripsy), but become DHS hospital services
when furnished under arrangements.
“Stand in the Shoes”
CMS has long struggled with indirect financial relationships. The
agency’s previous efforts to address “indirect”
compensation have focused on relationships where compensation flows
from a DHS entity to a physician-owned entity and then to an individual
physician. This approach led CMS to adopt a fairly complex definition
for “indirect compensation arrangements” and a corresponding
exception.
In the MPFS Proposed Rule, CMS turns its focus to “indirect”
relationships involving DHS entities. CMS notes that simply inserting
an entity or contract “into the chain” between a DSH
entity and its referring physicians could lead to abuse. To address
this issue, CMS proposes that the DSH entity be viewed as “standing
in the shoes” of any DSH entity it owns or controls. This
could, for example, result in the application of Stark’s direct
compensation rules to a hospital that owns a medical foundation
(such as where a hospital is the sole member of a nonprofit corporation),
or a “captive” medical group, which contracts with physicians
who refer patients to the hospital.
CMS’s choice to focus solely on DHS entities in its “stand
in the shoes” analysis is somewhat puzzling. To be sure, “DHS
entity owned by a DHS entity”—is a relationship where
an indirect compensation arrangement could arise. However, there
are a host of other indirect arrangements—many of which would
appear to present a greater potential for abuse that the agency
does not address.
Alternative Method for Satisfying Stark Exceptions
Although no new exception is proposed, CMS asks for input on how
to structure an “alternative method for compliance.”
This new provision might address technical violations resulting
from innocent mistakes, e.g., failure to obtain a necessary signature
on a written agreement. The commentary to the MPFS Proposed Rule
makes clear that this new provision would complement and not replace
the existing temporary non-compliance exception.
CMS’s approach in identifying an alternative method of compliance
is quite rigid. For example, CMS seems willing to consider an alternative
method for compliance only if it would have sole discretion (not
subject to any type of administrative or judicial review) to determine
whether an arrangement qualifies. CMS does not want time limits
placed on its determinations and, in fact, insists on the option
of simply declining to make a determination.
Period of Disallowance for Noncompliant Financial
Relationships
The Stark Law and its corresponding regulations have never defined
the duration of the prohibition on referrals once a physician has
a financial relationship with a DHS provider that does not fit within
an exception. CMS formally solicits public comment on how to define
the “period of disallowance.” CMS notes that where it
is clear when the financial relationship begins and ends, the prohibition
should end when the relationship ends. When a hospital pays too
much or a physician pays too little, however, it may not be clear
when the impermissible financial relationship begins and ends. On
that issue, CMS provides little guidance.
Ownership or Investment Interest in Retirement
Plans
The current Stark regulations provide that ownership and investment
interests do not include, among other things, “an interest
in a retirement plan.” Apparently CMS has received reports
that some physicians are using retirement plans to purchase DHS
entities to which they then refer patients.
In the MPFS Proposed Rule, CMS proposes to amend the definition
of an ownership or investment interest to include an interest in
a DHS entity that results from a physician’s (or family member’s)
participation in a retirement plan that purchases an interest in
that DHS entity.
Burden of Proof
The Stark regulations do not address who bears the burden of proving
that a prohibited referral has occurred. CMS proposes to clarify
that the entity submitting the claim for payment would bear the
burden of establishing that the service was not furnished as a result
of a prohibited referral.
Obstetrical Malpractice Insurance Subsidies
The current Stark exception for obstetrical malpractice insurance
subsidies requires that the subsidy fit within the Anti-Kickback
obstetrical malpractice insurance subsidies safe harbor. CMS is
concerned that this exception may be too restrictive in light of
the sharp increases in obstetrical malpractice insurance premiums
in certain states. Consequently, the MPFS Proposed Rule solicits
comments on how this exception might be broadened.
Practical Advice
As described above, many of the changes to existing Stark regulations
now proposed by CMS have been raised before and later withdrawn.
Further, many of the proposals in the MPFS Rule have not been fully
articulated and, if implemented, will not necessarily address CMS’s
core concerns. Consequently, we expect these proposals to significantly
evolve before any final regulations are adopted.
At this point, we recommend close study of the proposed rules
and their potential application (both literally and conceptually)
to existing and future business transactions. However, it is far
too early to determine to what extent these proposals will ultimately
be incorporated into the regulations. As a proactive measure, providers
should understand the potential impact of the proposed rules on
their arrangements, and craft contingency plans if the need arises
to restructure in the future. For those providers currently negotiating
transactions and who plan to enter into deals during the pendency
of the proposed regulations, it is important to note that the existing
Stark Law and regulations have not changed. Therefore, deals must
comply with the existing rules. The parties, however, should contemplate
the impact on the deal if the proposed rules are finalized in whole
or part, and determine whether the transaction should be either
restructured or abandoned in the face of any future regulatory changes.
For more information, please
contact:
Other DWT Contacts:
Ingrid
Brydolf, Portland, (503) 241-2300, ingridbrydolf@dwt.com
Dennis
Diaz, Los Angeles, (213) 633-6800, dennisdiaz@dwt.com
John
P. Krave, Los Angeles, (213) 633-6800, johnkrave@dwt.com
This 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 recent legal developments.
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. Attorney Advertising. Prior results
do not guarantee a similar outcome. Thank you.
Copyright 2007, Davis Wright Tremaine LLP.
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