STARK II PHASE III: More Changes; More Complexity

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).”