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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 facility that provides "designated health services"
("DHS") in the same building must control the facility
and the staffing (e.g., the supervision of services) at the
time the DHS are 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”
Phase III revises the definition of "indirect compensation
arrangements," so that a physician is now deemed to "stand
in the shoes" of his/her group practice and have a direct
compensation arrangement with a DHS entity 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 physician 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.
Copyright 2007, Davis Wright Tremaine
LLP.
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