CMS Proposes Changes to the Stark Regulations in the Medicare Physician Fee Schedule Rule

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.