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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.
Copyright 2007, Davis Wright Tremaine
LLP.
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