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Health Law Advisory Bulletin
STARK II PHASE III: More Changes;
More Complexity
By
Robert
G. Homchick, Brent
R. Eller and Jill
H. Gordon
[September 2007]
The Stark Law continues to be a moving target. On September 5,
2007, the Centers for Medicare and Medicaid Services (CMS) published
Phase III of the final Stark Law regulations, which will become
effective 90 days thereafter. In keeping with CMS's historical practice,
Phase III tinkers with, and in some cases substantially revises,
various concepts, definitions and exceptions to the Stark Law. While
some of the Phase III changes are welcome, others are troublesome,
and the net result is a statute that is stunning in its complexity.
Phase III is a good reminder of the significant compliance challenges
created by the continually evolving parameters of the Stark referral
prohibition and its attendant exceptions.
Some of the more significant aspects of Phase III are summarized
below.
Percentage compensation
Percentage of revenues and percentage of compensation methodologies
have been the subjects of considerable controversy throughout the
long history of the Stark regulations. At one point CMS proposed
to interpret the “set in advance” requirement to exclude
percentage arrangements only to change its mind in response to industry
objections. In Phase III, CMS attacks percentage arrangements again,
this time by suggesting that they will often fail to meet the requirement
that compensation not be based on the volume or value of referrals.1
What is most troublesome about this change is that the agency does
not even characterize it as a change. Although the propriety of
percentage compensation methodologies has been the subject of considerable
discussion, not until this issuance of Phase III was CMS explicit
about its views (which it makes known through the commentary, not
in any actual change to the regulations). In fact, the agency’s
historical about-face with respect to percentage compensation and
set in advance, combined with the explicit approval of time-based
and per-unit of service payments, led many to conclude that percentage
payments should not be interpreted to be based on the volume or
value of referrals. It now appears that CMS makes a definite distinction
between percentage compensation and time-based and per-unit-of-service
payments. Providers should review their contractual arrangements
and confer with counsel as to how to address any percentage payment
arrangements.
Shared space and equipment requirements
Another surprising change, which is not specifically characterized
as such, is CMS’s position that physicians in more than one
medical group may not share space or equipment. For the first time,
CMS clearly articulates that a physician sharing a DHS facility
in the same building must control the facility and the staffing
(e.g., the supervision of services) at the time the designated health
service is furnished to the patient. CMS therefore concludes that
as a practical matter, the parties may be required to enter into
block-leasing arrangements, and that any shared-facility arrangements
must be carefully structured and operated. Finally, CMS notes that
common per-use fee arrangements are unlikely to satisfy the supervision
requirements of the in-office ancillary services exception and may
implicate the anti-kickback statute.
“Stand in the shoes”
CMS revises the definition of "indirect compensation arrangements"
in Phase III, so that a physician is now deemed to "stand in
the shoes" of his/her group practice and have a direct compensation
arrangement with an entity providing “designated health services”
(“DHS”) that contracts with his/her group. Because the
compensation relationship is deemed to be directly with the physician,
it must comply with a direct compensation exception. This revision
will require hospitals and other DHS providers to review and possibly
amend agreements with group practices that either were structured
to comply with the indirect compensation arrangements exception
or simply did not create an indirect compensation arrangement under
the current definition.
Arrangements that comply with the indirect compensation arrangement
exception that were entered into prior to the publication date of
the Phase III regulations may continue to rely upon that exception
for the duration of the original term or the current renewal term
of the arrangement. Thereafter, these grandfathered arrangements
must be restructured to comply with a direct compensation arrangement
exception. Unfortunately, CMS does nothing to address arrangements
in which a group practice was structured in a manner that did not
create an indirect financial relationship under the Stark Law definition
and, therefore, did not need to fit within an exception. Apparently,
these arrangements must be analyzed and restructured to fit within
a direct compensation exception by the effective date of Phase III.
It should be noted that the indirect compensation arrangement exception
will remain applicable to all arrangements involving an intervening
entity other than a physician organization (i.e., a group practice,
professional corporation or physician practice). Thus, many indirect
financial arrangements with physician-owned entities, such as equipment
leasing companies, will continue to be analyzed as indirect arrangements
and are not likely to require restructuring.
Physician recruitment
An excellent example of the complexity of the Stark Law is the
physician recruitment exception. In Phase III, CMS makes some helpful
revisions to the exception, but in the process makes the exception
even more difficult to parse. More specifically, Phase III alters
the requirements of the physician recruitment exception by:
- Modifying the definition of "geographic area served by
the hospital" to give rural hospitals greater flexibility,
and other hospitals a clearer definition.
- Clarifying that a physician recruit who is subject to the practice
relocation requirement must move his/her practice from outside
the hospital's geographic area into such area and either (i) move
the site of his/her practice at least 25 miles; or (ii) derive
at least 75 percent of his/her practice's revenues from services
provided to new patients.
- Providing that the practice relocation requirement does not
apply to a physician employed by the federal or state bureau of
prisons, the Department of Defense or Veterans Affairs, or facilities
of the Indian Health Service on a full-time basis for at least
the two years immediately preceding the recruitment arrangement,
as long as the physician did not also maintain a private practice
during that period.
- Clarifying that a physician recruit cannot be an existing member
of the hospital’s medical staff and that the hospital, the
recruit and the practice the recruit is joining must all sign
the same agreement.
- Relaxing, under certain circumstances, the requirement that
a group practice allocate to a recruited physician only the additional,
incremental costs attributable to him/her. Under the new rule,
when the recruit is replacing a deceased, retired or relocated
physician and the recruit's practice is in a rural area or HPSA,
the group may instead allocate its overhead expenses among physicians
on a per capita basis provided the percentage of costs allocated
to the newly recruited physician does not exceed 20 percent of
the group's aggregate expenses.
- Relaxing the requirement that physician practices that are parties
to a hospital recruitment agreement not impose practice restrictions
on recruited physicians.
Fair market value safe harbor
Phase II of the final Stark regulations included a safe harbor
definition for fair market value of physician compensation based
upon data obtained from specific physician compensation surveys.
Citing various critical comments regarding the impracticality of
the methodology and the unintended effects of the safe harbor, Phase
III eliminates it.
Fair market value exception
The fair market value exception is modified so that it applies
to arrangements in which an entity is providing items or services
to a physician as well as when a physician provides items or services
to an entity. The practical effect of this change may be to limit
the use of the "payments by a physician" exception, which
CMS maintains is only available when no other exception applies
to an arrangement.
“Physician in the group practice”
Many group practices rely upon independent contractor relationships
with other physicians for the provision of various ancillary and
physician services billed by the groups. Such relationships are
typically structured in a manner that allows the group to comply
with the physician services and in-office ancillary services exceptions.
Compliance with these exceptions requires, among other things, that
the contracted physician qualify as a "physician in the group."
In Phase III, CMS clarifies that for an independent contractor
to qualify as a "physician in the group practice," the
group's contract must be with the individual physician, not a separate
legal entity (such as a staffing company or another physician practice).
In addition, the preamble discussion indicates that leased physician
employees do not qualify as "physicians in the group"
because, according to CMS, there is an insufficient nexus between
the leased employee and the group. Also in the preamble, CMS makes
clear for the first time that all arrangements must comply with
the Stark Law and the rules related to reassignment and
purchased diagnostic tests. This requirement may further restrict
the ability of groups to use independent contractor physicians and
to bill for their services. In light of these changes and CMS’s
comments in connection with shared-space and equipment arrangements
discussed above, space and equipment leasing arrangements for DHS
should be reviewed with counsel in order to ensure continued compliance.
Group practices
Productivity bonuses. Phase III clarifies
that productivity bonuses may be directly related to the volume
or value of DHS personally performed by the physician or to referrals
by the physician for DHS services and supplies “incident to”
the physician’s personally performed services. CMS clarifies
in the preamble that services that have their own benefit category
cannot be billed as incident to services, except as otherwise expressly
permitted by statute (e.g., incident-to billing of physical therapy
services). CMS also clarifies that "incident to services"
include both services and supplies (such as drugs).
Share of Profits. Phase III clarifies
that the allocation of profits among physicians is subject to different
rules than those that apply to productivity bonuses. As CMS states
in the preamble, “profits must be allocated in a manner that
does not relate directly to DHS referrals, including any DHS that
is billed as an incident to service."
Durable medical equipment as “personally
performed” DHS
Phase III reiterates that when a DHS is “personally performed”
by the referring physician, there is no "referral" of
DHS and, thus, the Stark Law is not implicated. However, in the
Phase III preamble, CMS attempts to cure the confusion it created
in the Phase II regulations by noting that it is highly unlikely
that a physician could personally furnish and supply DME to a patient
in a manner such that there is no referral.
Record-keeping
At many points in the Phase III preamble, CMS highlights the importance
of proper record-keeping with regard to physician financial relationships.
Record-keeping is necessary to enable DHS entities to comply with
a number of Stark Law exceptions, such as the nonmonetary compensation
and physician recruitment exceptions. In addition, CMS has finally
started to make use of the mandatory reporting requirements contained
in the regulations,2
which further emphasizes the need for adequate, readily accessible
records of financial relationships. Under the reporting requirements,
DHS entities may be given as little as 30 days to provide the required
information, and late responses are subject to civil money penalties
of up to $10,000 per day.
New flexibility
Phase III modifies the exception for personal services arrangements
by permitting an agreement that satisfies the conditions of the
exception to continue for a holdover period of up to six months
after expiration of the agreement, so long as the holdover arrangement
is on the same terms and conditions as the preceding agreement.
Phase III also makes the nonmonetary compensation exception more
flexible by allowing a physician to repay compensation in excess
of the calendar year maximums, provided the excess does not exceed
50 percent of the calendar year limit and is repaid within the earlier
of (1) the end of the calendar year in which it was received or
(2) 180 days from the date the excess was received. This repayment
provision may be used by an entity only once every three calendar
years with respect to the same physician. Phase III also modifies
the nonmonetary compensation exception to allow for the provision
of an annual, local social event for the entire medical staff in
addition to the maximum nonmonetary compensation limit.
Stay tuned
The Phase III preamble includes a number of provocative statements
concerning issues of concern to CMS and potential changes to the
Stark regulations that the agency is contemplating. As foreshadowed
in the sections of the 2008 Medicare Physician Fee Schedule Proposed
Rule addressing Stark, CMS is exploring a number of issues, including
changes to the indirect compensation definition and exception, physician-owned
leasing, management and service companies and the scope of the in-office
ancillary services exception. Congress is also contemplating changes
to the Stark Law definition of “whole hospital." It appears
that beyond death and taxes, the only thing certain in this life
is that the Stark Law will grow more complicated.
Footnotes
1
CMS is attacking percentage arrangements
in other ways as well. As we noted in a recent
advisory bulletin, in the Medicare Physician Fee Schedule Proposed
Rule issued July 2, 2007, 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. This change, if implemented, could
adversely affect a number of payment arrangements, including many
with no obvious potential for abuse.
2
As we noted in a recent advisory bulletin,
CMS has begun a survey process that will require 500 hospitals to
provide a broad range of detailed information about their financial
relationships with physicians, including copies of documents that
define these relationships. See “The
Specter of Mandatory Stark Reporting Rears its Head (Again).”
For more information, please
contact:
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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